Business Law 101 / Operating Agreements vs Bylaws/Shareholder’s Agreements

By Albert L Kelley, Esq.

If you have formed a corporation or LLC, you need to consider how they will be managed or run.  Running a company is different than running a business, which means if you have formed a company to run your business, you will have twice the work.  Organizing the company starts with planning (Again). For a corporation this is done through Bylaws and Shareholder Agreements. For LLC’s it is through the Operating Agreement.  These documents are way too long to cover in full in 700 words, but I will try to cover the contents.

The Florida Statutes give little instruction for bylaws.  All it states is that the bylaws may contain any provision for managing the business and regulating the affairs of the corporation that is not inconsistent with law or the articles of incorporation.  Usually, they will contain provisions for scheduling meetings, voting rights, duties of directors and officers, shareholder status, and maintenance of the corporation. They are generally fairly short, so they are often supplemented with a Shareholders Agreement.  A Shareholders Agreement sets out the rights of shareholders to buy and sell their shares of the company, and can include things such as valuation, and can even discuss issues such as continuing shareholder obligations.

For an LLC, the Operating Agreement essentially does the job of both the Bylaws and the Shareholders Agreement.  The statutes give more instruction for Operating Agreements than Bylaws. Before 2014, written Operating Agreements were mandatory, however the law has been changed to state that while an LLC must have an operating agreement, it may be verbal, written or implied. The Operating Agreement is to include discussions of the relation between members as to each other and the LLC, the rights and duties of the manager; the activities and affairs of the company and the conduct of those activities and affairs; and the means and conditions for amending the operating agreement. It may not do any of the following: Vary a limited liability company’s capacity to sue and be sued in its own name; Vary the governing law over the LLC; vary the requirement, procedure, or other provisions pertaining to registered agents; eliminate the duty of loyalty or the duty of care; eliminate the obligation of good faith and fair dealing; relieve or exonerate a person from liability for conduct involving bad faith, willful or intentional misconduct, or a knowing violation of law; unreasonably restrict the duties and rights regarding availability of records by members and managers; vary the grounds for dissolution; vary the requirement to wind up the company’s business, activities, unreasonably restrict the right of a member to maintain a derivative action against the company, vary the right of a member to approve a merger, interest exchange, or conversion, vary the required contents of plan of merger, or provide for indemnification for a member or manager for any of the following: Conduct involving bad faith, willful or intentional misconduct, or a knowing violation of law, A transaction from which the member or manager derived an improper personal benefit, liability for an improper distribution, or a breach of duties loyalty and care.  The Operating Agreement may also specify penalties for members and managers who fail to comply with the terms of the Operating Agreement.

These documents are the controlling records for the company. If drafted too tightly or too loosely, they can lead to unwanted litigation.  For this reason, it is not recommended that they be drafted without the help of an attorney well versed in business law.

Al Kelley is a Florida business law attorney located in Key West and previously taught business law, personnel law and labor law at St. Leo University.  He is also the author of “Basics of Business Law” “Basics of Florida’s Small Claims Court” and “Basics of Florida’s Landlord-Tenant Law” (Absolutely Amazing e-Books). This article is being offered as a public service and is not intended to provide specific legal advice.  If you have any questions about legal issues, you should confer with a licensed Florida attorney.

[livemarket market_name="KONK Life LiveMarket" limit=3 category=“” show_signup=0 show_more=0]