Bylaws and Operating Agreements
An Owner's Manual For Business Owners
In addition to filing the necessary formation documents and keeping them up to date, the other vital part of organizing your business is to create and maintain an agreement between the business owners and officers. In a corporation, this agreement is known as the “bylaws,” and in an LLC, it is known as an “Operating Agreement.” Arizona corporations are required by statute to adopt bylaws, though they are not filed with the Corporation Commission. Arizona law does not actually require a Limited Liability Company to create an operating agreement, but it is strongly encouraged. Among other reasons, as of September 1, 2020, Arizona’s new Limited Liability Company Act will go into effect for all Arizona LLCs, and the Act will apply default rules to all LLCs that do not have an operating agreement. Importantly, the new default rules will apply to all participants in a Limited Liability Company, whether they specifically agree to them or not, so any LLC without an operating agreement is, in effect, having one written for it by the State of Arizona.
While the specific terms vary from business to business, most bylaws and operating agreements will address at least these topics:
1) Organization: How is the business structured? If it is an LLC, will it be managed by the members or by one or more managers? If the business is a corporation, will it be run by a Board of Directors, and how will that board be set up?
2) Contributions: What is each person who is part of the business expected to contribute to the business? This may take the form of cash, material assets, labor, or a combination.
3) Profits and Losses: How are the business owners going to allocate and share profits, and what responsibility (if any) do they have for losses? It may also be a good idea to define in advance how profits and losses will be calculated, and whether any participants in the business will be paid a salary.
4) Management: What rules and procedures should the people in charge of the business follow? What business decisions should require a general vote of the business owners, and what are the rules for that vote? Many businesses find it useful for the people in charge of the business to nominate agents or proxies to take over in the case that an officer is temporarily or permanently unable to carry out their usual duties for the business.
5) Changes in Ownership: What requirements should apply to people who want to join the business? Should the current business owners be able to trade or sell their ownership in the business whenever and to whomever they want, or should there be restrictions, or possibly an option for the business or the other owners to purchase the interest of an owner who is departing the business before that interest is made available to a stranger?
6) Dissolution: In the past, business structures like corporations were issued charters from the state that authorized the business to exist in a particular structure for a fixed period of time. Modern Arizona corporations and LLCs are allowed to exist indefinitely, but since the people who make up the business are still human, it’s a good idea to plan ahead for what would happen if the business had to shut down.
