Even though it is possibly the most important document a company will ever put into effect, many business owners learn all too late the importance of drafting and tailoring their corporation’s bylaws, or, if establishing a limited liability company, their company’s operating agreement. While bylaws and operating agreements are private, internal documents that do not have to be filed with any state or government entity, failing to create and adopt the provisions of these documents leave businesses no choice but to follow the default rules set out by their applicable state statutes. For this reason, care and attention should be given to craft these documents to provide clear procedures to accomplish a company’s present and future objectives.
Present Goals and Relationships
One way to think of corporate bylaws and operating agreements is as constitutions and playbooks for achieving your company goals. These documents address in the beginning who will own the company and in what proportions, who will control the company, and how important business decisions will be made. Each company founder should carefully consider the value they bring to the table, have clear goals in mind for the direction of the company, and know the role they would like to play within it. After sharing this information with the other founders, a mutual understanding must be reached regarding how the company’s operations will align with each individual’s personal goals.
The founders must also discuss and agree upon a variety of governance and operational issues, including:
- Voting rights
- Whether owners will have active or passive roles within the company
- How responsibilities are to be shared or delegated to individuals within the company
- How profits and losses will be allocated
- If and when distributions will be made, and
- How taxes will be managed
When drafting bylaws or operating agreements, the goal should be to reflect the agreement reached by the founders, in writing and as accurately as possible, while also anticipating events down the road that will need a means for resolution.
Future Triumphs and Tribulations
The other side of the coin when customizing corporate bylaws and LLC operating agreements is to try to predict as many versions of a company’s future as possible, and to implement a means for dealing with every variant. Thinking optimistically, if the opportunity to merge with or be acquired by a larger company arises, how will you make the decision to accept or to decline? Can you picture a time when you sell any of your company? If so, how will that time be determined? Other considerations that must be made are, of course, less fun to think about.
Eventually a shareholder or someone in control of the company may want to leave, the other partners want to force them out, may get divorced, or may get disabled or pass away. Sometimes the company has to get dissolved solved, and quite commonly this happens when company owners wind up in a dispute over how the business should be handled. Customizing corporate bylaws or LLC operating agreements should anticipate each and every possibility, and should put mechanisms in place to help avoid internal disputes, if possible, resolve them, if necessary, to ensure the continued health of the company going forward.