Operating Agreement Vs. Bylaws

When forming a business, one of the most important steps is creating the internal documents that govern how your company will operate. Two of these governance documents are the Operating Agreement and the Bylaws. While they serve a similar purpose, they apply to different types of entities and outline slightly different rules. Understanding the difference is key to keeping your business compliant and well-organized.

An Operating Agreement is used by Limited Liability Companies (LLCs). It sets the rules for how the LLC is managed, how profits and losses are distributed, how decisions are made, and what happens if an owner leaves or the company dissolves. This agreement is typically signed by all members of the LLC and acts as a contract between them. Even in states where it's not legally required, having one can help prevent disputes and protect the limited liability status of the business.

Bylaws, on the other hand, are created for corporations. They are an internal set of rules adopted by the board of directors after the corporation is formed. Bylaws outline the structure of the corporation, including the roles of officers and directors, how meetings are conducted, voting procedures, and how records are maintained. Unlike an operating agreement, bylaws are not typically signed by shareholders but are kept as part of the corporate record.

In short, Operating Agreements = LLCs and Bylaws = Corporations. Both are essential tools for internal governance and legal protection. They ensure your business runs according to agreed-upon rules and help demonstrate that your company is a legitimate, separate legal entity, a critical point if you’re ever involved in a lawsuit or tax audit.

Maintaining and following these governing documents is one of the simplest ways to protect your business, minimize internal disputes, and preserve your limited liability. If you need help drafting or reviewing your Operating Agreement or Bylaws, contact The Center for Financial, Legal, and Tax Planning, P.C. at (618) 997-3436.