Bylaws and operating agreements are similar in that both set forth how the business entity will be operated. These are the core internal documents that explain the day-to-day operations of the business. Though they are not required, our business attorneys strongly recommend that all of our clients have bylaws or an operating agreement because of the important functions they serve.
Businesses generally wish to opt out of default rules by tailoring their bylaws or operating agreements to meet their needs. For example, bylaws can set forth defined roles for officer positions, compensation for directors and officers, rules for calling meetings between the shareholders, rules regarding mediation between the shareholders in the event of a dispute, rules relating to shareholder rights, etc. Similarly, operating agreements allow members to designate ownership percentages, management rights and responsibilities, and how to allocate profits and losses.
There are legal liability protections provided by establishing a corporation or LLC. Strong bylaws and operating agreements help preserve a business entity’s legal protections. By having rules in place, including the scope of the corporation's or LLC's business activities, and the officer's and the board's (or manager's and member's) duties, the business entity should feel confident in relying on their internal documents to preserve their protections.
Directors and officers of corporations, as well as managers and members of LLCs, should prepare for death and divorce. Allocating membership interests, salary, management, and other issues should be properly dealt with in bylaws and operating agreements to protect the individual and her family.