When starting a business, you may have heard of two terms: bylaws and operating agreement. While they both refer to important legal documents that outline the rules and regulations of a company, they are not interchangeable. In this article, we will explore the differences between bylaws and operating agreements.
Bylaws are a set of rules that govern how a corporation operates. They are legally binding and outline the structure, purpose, procedures, and responsibilities of a corporation. Bylaws are typically adopted by the board of directors or the shareholders and are a requirement for corporations as outlined in state law. They typically cover topics such as how the board of directors is selected, the roles of officers, and procedures for shareholder meetings.
On the other hand, an operating agreement is a legal document that outlines the responsibilities, ownership, and distributions of an LLC (Limited Liability Company). Unlike bylaws, an operating agreement is not required by all states. However, it is recommended that all LLCs have one in place to help avoid future disputes and protect the members` interests. An operating agreement typically covers issues such as member voting rights, allocation of profits and losses, and management structure.
One of the main differences between bylaws and operating agreements is the type of business entity they apply to. Bylaws are for corporations, and operating agreements are for LLCs. The purpose and scope of these legal documents also differ, as bylaws focus on the internal operation of a corporation, while operating agreements are specific to an LLC’s management and ownership structure.
Another difference is the level of detail covered by these documents. Bylaws are often more complex and detailed, as they are required by state law and must cover all aspects of a corporation’s governance. In contrast, operating agreements tend to be more flexible and adaptable, as they are not always required by law and can be tailored to fit the specific needs of an LLC.
In conclusion, while both bylaws and operating agreements are important legal documents for businesses, they serve different purposes and apply to different business entities. Bylaws are for corporations and cover internal governance, while operating agreements are for LLCs and cover management and ownership structure. Understanding the differences between these documents can help ensure your business is legally compliant and operating smoothly.