Do LLC's Have Bylaws or Operating Agreements?

By Eric Novinson

The founders of a corporation must create bylaws to govern it. An operating agreement governs an LLC -- not bylaws. According to Dartmouth University, many states do not require an LLC to have an operating agreement to register and do business in the state. However, it is still advisable for the owners, known as members, of an LLC to create an operating agreement because it helps guard the LLC's limited liability protection and prevent financial and management misunderstandings.

The founders of a corporation must create bylaws to govern it. An operating agreement governs an LLC -- not bylaws. According to Dartmouth University, many states do not require an LLC to have an operating agreement to register and do business in the state. However, it is still advisable for the owners, known as members, of an LLC to create an operating agreement because it helps guard the LLC's limited liability protection and prevent financial and management misunderstandings.

Jurisdiction

A LLC does not have to file its operating agreement with the secretary of state; however, it must still conform specifically to the state's laws. According to Harvard University, some LLC operating agreements state that all court cases involving the LLC are under the jurisdiction of a specific state. The Delaware Court of Chancery has upheld this requirement when it appeared in LLC operating agreements.

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Share Sales

The operating agreement of an LLC may provide members' rights that state law does not grant. In the state of Florida, members may not be able to sell their shares in the LLC unless the operating agreement specifically allows them to sell their shares. The members will not be able to get their investment capital back from the LLC without completely disbanding it if this option is not available.

Default Contract

When a state does not require an LLC to provide an operating agreement, the LLC still has rules that govern it: each state has laws that set basic default rules that govern sales of shares, establish the liability of each member and define the members' rights to approve new members. According to Dartmouth University, when LLC members create their own operating agreement, it has priority over the state's default rules.

Single Member

The operating agreement usually outlines the financial and working relationships of the members of the LLC. In the case of a single member LLC, this member can still create an operating agreement. According to Dartmouth University, when an individual who has sole ownership in an LLC writes an operating agreement, this helps ensure that courts do not view the company as a sole proprietorship.

Management

The LLC operating agreement can determine which members have management responsibilities for the company. The default rule in Florida is that an LLC is member managed, so each member has management rights. According to Nova Southeastern University, the LLC operating agreement is necessary in Florida if the members want to assign management rights only to specific members.

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How to Omit a Member of an LLC

References

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One of the key features in an LLC's operating agreement is an explanation of the voting rights of the owners, who are known as members. With most corporations, this is not an addressable issue, since stockholders are owners and can vote in proportion to their ownership percentage. However, LLCs function more like partnerships with ownership voting rights that should be clearly stated. For example, a member might own 45 percent of an LLC yet have not voting rights for company business decisions.

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The existing members of a LLC have great flexibility to establish the procedures for the admittance of new members. As long as the LLC operating agreement doesn´t prohibit it, new members can join the LLC on the basis of "sweat equity," rather than having to contribute cash or property to the business. This means that a new member promises to perform services in exchange for an ownership interest in the LLC.

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