A corporation is governed by its bylaws which you will need to customize based on the client’s needs. The bylaws are an internal document and not something that will need to be filed. 📖 Here are Alphabet, Inc.’s Bylaws. While you do not have to read the entire document, look at the topics that are covered and skim the bylaws to familiarize yourself with them. It should be obvious that this is a document that covers the governance of the company. 💡Compare the duties of Chairperson (“Chairman” in the bylaws) of the Board and the Chief Executive Officer.
Once the Articles of Incorporation are filed, there will need to be an organizational meeting of the Board of Directors (because the corporation needs to be ‘organized’) at which time minutes will need to be recorded. The tasks are approval or naming of: the officers and directors, adoption of the bylaws, authorization to issue stock, bank name, and other related business. This short article on Corporate Resources outlines what one needs to do to conduct the organizational meeting. Often an attorney helps with this process.
Partnerships and LLCs are governed by contracts: Partnership Agreement and Operating Agreement, respectively. (For some reasons they may not be considered contracts. See, Joan MacLeod Heminway, The Ties that Bind: LLC Operating Agreements as Binding Commitments, 68 SMU L. Rev. 811 (2015).) These agreements are internal documents and do not need to be filed. However, they should be written. Problems arise when LLCs attempt to operate pursuant to verbal understandings. Despite these potential problems some states permit oral operating agreements – throwbacks to partnership law and the allowance of oral understandings and default partnerships. The Delaware statute begins its definition of “limited liability company agreement” with the phrase “any agreement (whether referred to as a limited liability company agreement, operating agreement or otherwise), written, oral or implied.” Del. Code Ann. tit. 6, § 18-101(7). 💡Think about the issues that can arise when someone is using an oral understanding as their operating agreement. 📖 Read these two articles by Daniel S. Kleinberger: Like Great Britain, a Limited Liability Company May Have an Unwritten Constitution and Protecting the Sacred Writing: The Operating Agreement.
Written LLC operating agreements and Partnership Agreements are detailed and somewhat lengthy documents. They need to be customized. “With the contractual freedom granted by the LLC Act comes the duty to scriven with precision.” Willie Gary LLC v. James & Jackson, LLC, 2006 Del. Ch. LEXIS 3, at *5 (Del. Ch. Jan. 10, 2006), aff’d, 906 A.2d 76 (Del. 2006).
“Off-the-shelf and on-line operating agreements do not reflect the special needs and expectations of the LLC members forming the LLC, or who may become members thereafter. Operating agreements are complex contracts that need to be drafted to fit the expectations of the parties including to achieve desired tax and business results.” Herrick K. Lidstone and Amy Fliam, LLCs – Top Ten (or So) Mistakes, and Why They Are Important (2019).
These agreements should contain provisions that cover:
- Information that is covered in the organizational document(s) filed with the Dept. of State
- How the company will be taxed and its fiscal year
- The name of the bank and who has signatory authority
- The owners’ interests
- The owners’ initial contributions
- How profits and losses are allocated
- If it is an LLC, is it member-managed or manager-managed? (Remember that the default governance for a PA LLC is member-managed and if the LLC wants to be manager-managed, it must be stated in the Operating Agreement. For a discussion on the difference, see this article.)
- Voting – including when unanimous consent is required for certain actions.
- Waiving fiduciary duties (if permitted by statute) See, Joshua P. Fershee, An Overt Disclosure Requirement for Eliminating the Fiduciary Duty of Loyalty (2019)
- Are additional capital contributions going to be required in the future if necessary?
- What if an owner wants to leave or a new owner wants to buy in? (Buy-sell arrangements)
- Dissolution and winding up
SMLLCs should have an Operating Agreement even though it seems like they don’t need one. 💡 Given what you know from other units, can you tell why this may be important?