Understanding Operating Agreements and Bylaws
When you form an LLC or corporation, these documents establish the framework for how you business operates, makes decision and resolves internal matters. It provides the "Rules" by which to keep the business running smoothly and safeguard its future.
What Are They?
- Operating Agreement: For LLCs, this document defines member roles, management structure, ownership percentages, voting rights, profit distributions, and key operational procedures. It may also describe what happens if a member leaves the business or if the business dissolves. Many lenders will require an operating agreement even for single member LLCs
- Bylaws: For corporations, bylaws serve as the internal rulebook. They outline governance policies, the responsibilities and authority of directors and officers, meeting protocols, voting procedures, and processes for appointing or removing leadership. Bylaws can also define how shares are issued and transferred.
Why They Matter
- Help prevent disputes among owners by setting clear expectations and processes
- Establish clear decision-making, management, and operational guidelines that reduce ambiguity
- Strengthen legal protections, demonstrate professionalism, and ensure compliance with state and federal requirements
- Include provisions for how the business will handle situations when things go poorly between members or owners, such as dispute resolution processes, buyout options, and terms for dissolving the business
- Bylaws and operating agreements can also make your business more attractive to lenders, investors, and potential partners by showing that your business is well-organized and prepared.
Getting Started
- Start with reputable templates or trusted legal resources as a starting point, but understand that templates are no substitute for a document tailored to your business
- Basic operating agreements for LLCs can be created on the Wisconsin website when registering your LLC
- Customize documents to align with your business’s structure, ownership, and goals; what works for one company may not fit another
- Investing in qualified legal counsel to draft or review these documents is a prudent upfront expense that provides long-term protection, helps prevent costly disputes, and ensures your agreements are enforceable and comprehensive
- Discuss these documents openly with all members or shareholders to ensure alignment and mutual understanding before finalizing and signing
Final Thought
Strong operating agreements and bylaws are not just paperwork—they are vital tools for keeping your business organized, resilient, and ready for growth. Prioritizing these foundational documents helps lay the groundwork for long-term success, stability, and professionalism.
