By-Laws and Operating Agreements

When operating a business entity, it is important to know precisely how the business runs, who has the authority to make certain decisions, and how money is allocated and taxed.

In order to ensure their smooth operation, business entities should have governing documents that set out the authority of those responsible for running the organization. For a Corporation, this is achieved through the Articles of Incorporation and By-Laws. For an LLC it is set out in the Certificate of Organization and Operating Agreement. Generally, the Articles or Certificate set out the broad framework, and the By-Laws and Operating Agreement fill in the details.

Corporations usually have three levels of management. First, the Shareholders elect the Board of Directors. Then the Board of Directors elects the Officers (President, Secretary, Treasurer, etc.). The Officers are responsible for the day to day operations of the corporation, while the Directors have some oversight, but are less involved. Shareholders have the least amount of involvement, but because they own the company, they choose the Directors.

Limited Liability Companies have more flexibility in management. Some use a system of Members, Managers, and Officers similar to a Corporation. Others provide that the Members are directly responsible for all aspects of running the company.

Important considerations include: what authority should require Director or Shareholder approval, whether decisions require a simple majority or supermajority vote, whether the Corporation will have voting and non-voting shares, and how income and deductions should be allocated among Members of an LLC.