Business Governing Document (Bylaws or Operating Agreement)

General Information

A business’ governing document provides basic rules which govern both the internal and external activities of the business. It provides a set of guidelines for the management of the business’ affairs and the regulation of its owners and managers. The particular business governing document depends on the business entity type:

  • Corporation – Bylaws
  • Limited Liability Company (LLC) – Operating Agreement
  • General Partnership, Limited Liability Partnership (LLP), Limited Partnership, Limited Liability Limited Partnership (LLLP) – Partnership Agreement

The best business governing document for a particular business incorporates features which address the special characteristics of the business and anticipates and resolves potential problems among owners and managers in advance. The document serves as an agreement among the business participants with regard to several key issues, among them:

  1. How the business will be managed and how much control each owner/manager has
  2. The amount and nature of the contribution expected of each participant
  3. How profits and losses will be split
  4. How ownership interests may be transferred
  5. What might cause the business to terminate its existence

Purpose/Necessity

Under Kentucky law, a corporation is required to have Bylaws. This is true whether the corporation is for-profit or non-profit. See KRS 271B.2-060(1) and KRS 273.191, respectively. There is no comparable statutory requirement to adopt an Operating Agreement or a Partnership Agreement. But while LLC’s and partnerships are not legally bound, they can significantly benefit from adopting such a document to memorialize the mutual rights, duties, and obligations among the business participants.

Other reasons for adopting a business governing document:

  1. Often required to establish a business bank account
  2. Provides a written record of the day-to-day operating rules of the company, thereby reducing the likelihood of conflict and litigation among business participants
  3. Answers contingencies in advance, such as:
    • What happens if there is a disagreement among the owners or managers
    • What rights co-owners have if a particular co-owner quits performing, engages in misconduct, etc.
    • How assets are distributed if the business dissolves or goes bankrupt
    • If an owner dies, whether his or her ownership interest reverts to the business, to his or her heirs, or some other arrangement
  4. May be necessary to prove the validity of a business action taken to lenders, creditors, litigants, or other third parties with whom the business deals. The document can show that certain actions were authorized and thereby provide a model for future actions that third parties can rely upon.
  5. When drafted to meet the particular needs or goals of the business and its participants, a business governing document helps the business avoid a piercing of the corporate veil

Frequently Asked Questions

  • What rules affect the management or governance of a business entity?
    • A business will be bound to follow its formation document, its governing document, the organic act (statutory law) applicable to its entity type, and any internal policies and procedures adopted by the business. For example, an LLC must follow the provisions in its Articles of Organization, its Operating Agreement, the Kentucky Limited Liability Company Act, and any resolutions adopted by its members.
  • What happens if a business does not have a governing document?
    • The business will be subject to the default rules set forth in the Kentucky statutes for the particular entity type. Many statutes contain language to the effect of “unless the bylaws require otherwise”, followed by a default rule. See, e.g., KRS 271B.7-050(5).In many cases, the default rule is not ideal. To prevent the default rules from becoming binding, it is important to adopt a governing document specifically tailored to the particular business and the wishes of its participants.
  • Does the business governing document have to be filed or recorded?
    • No. Such requirements exist to benefit external parties, but the business governing document is primarily for the benefit of the business itself and its active participants. Because the document is intended to concern the internal management of the business, it need not be made publicly available through filing or recording.
  • May the business governing document be amended?
    • Yes. While it is best to draft the ideal version of the business governing document initially, the document may be later amended as desired by the business owners. Because it need not be filed or recorded, there is no fee to provide official evidence of such an amendment.
  • Can a business modify the statements in its business formation document with appropriate provisions in its business governing document?
    • No. A business governing document is an additional source of the business’ operating rules, but it is not meant to conflict with or supersede the business formation document in any way.Because the business formation document (corporate Articles of Incorporation, LLC Articles of Organization, etc.) is publically filed and recorded, it puts third parties on notice as to its contents. If there happens to be a conflict, the provision in the business formation document will control as to dealings with the state and third parties. See, e.g., KRS 273.247(4) and KRS 362.2-201(4).
  • Why shouldn’t I just use Bylaws/an Operating Agreement/a Partnership Agreement I find on the internet?
    • Such a document is rarely drafted with Kentucky law in mind. Consequently, in many cases it will not act to supersede Kentucky default rules when this may be preferred. It may also contain provisions disallowed by Kentucky law. See KRS 271B.2-060(2) and KRS 273.171(12).Such a document may contain antiquated provisions that will bind the business in undesirable ways. For example, many widely available governing documents require notices to be delivered by postal mail sent to the last address of the recipient as listed in the business’ internal records. In many cases, other forms of notice (email, text, etc.) would be preferred, but adopting such a document as is will then mandate use of inefficient postal mail.Such a document may be better suited for a much larger (or in some cases, much smaller) business. For instance, the corporate statutes govern the relations of large, publically-held corporations as well as those owned by only a handful of participants. Generic bylaws meant for large companies may contain extensive shareholder and distribution rights provisions that are out of touch with the needs of a smaller operation. Again, if such a document was adopted as written, it would force the business to comply with disfavored procedures.
  • Why have your firm draft my company’s business governing document?
    • Personalization and Conformity with Kentucky Law – The document will be personalized to your business, in accordance with Kentucky law. We offer legal advice as to certain provisions that may be beneficial for your business. Certain rights, duties, or obligations available for your particular business entity type may be expanded or restricted, as appropriate for your situation. This should provide greater protection and usefulness than what you get by using boilerplate forms.Attorney Review and Revisions – After you submit your information to us, we draft your document in accordance with your goals and Kentucky law. We then provide you with our draft of the document so that you may ensure it meets your needs. If you would like any changes made, we will provide one set of revisions at no extra charge.Accuracy and Consistency – If other business services are purchased, such as through a business formation package, the document will be consistent with these other related documents, filings, etc.

Legal Services Offered and Cost

Drafting of For-Profit Corporate Bylaws
Legal fees: $300 flat fee*
Filing fees and other costs: none
This includes:

  1. Review of client’s information to ensure legal requirements are fulfilled
  2. Answer client questions, make corrections, and obtain additional information as needed
  3. Drafting of Bylaws for the corporation
  4. Email first draft of Bylaws to client
  5. One set of revisions to Bylaws, if requested by client
  6. Email final version of personalized Bylaws to client

If you are ready to get started, please CLICK HERE to enter basic information using our secure online form.

 

Drafting of Non-Profit Corporate Bylaws
Legal fees: $300 flat fee*
Filing fees and other costs: none
This includes:

  1. Review of client’s information to ensure legal requirements are fulfilled
  2. Answer client questions, make corrections, and obtain additional information as needed
  3. Drafting of Bylaws for the corporation
  4. Email first draft of Bylaws to client
  5. One set of revisions to Bylaws, if requested by client
  6. Email final version of personalized Bylaws to client

If you are ready to get started, please CLICK HERE to enter basic information using our secure online form.

 

Drafting of LLC Operating Agreement (For-Profit or Non-Profit)
Legal fees: $300 flat fee*
Filing fees and other costs: none

This includes:

  1. Review of client’s information to ensure legal requirements are fulfilled
  2. Answer client questions, make corrections, and obtain additional information as needed
  3. Drafting of Operating Agreement for the LLC
  4. Email first draft of Operating Agreement to client
  5. One set of revisions to Operating Agreement, if requested by client
  6. Email final version of personalized Operating Agreement to client

If you are ready to get started, please CLICK HERE to enter basic information using our secure online form.

 

Drafting of Partnership Agreement
Legal fees: $300 flat fee*
Filing fees and other costs: none

This includes:

  1. Review of client’s information to ensure legal requirements are fulfilled
  2. Answer client questions, make corrections, and obtain additional information as needed
  3. Drafting of Partnership Agreement for the partnership
  4. Email first draft of Partnership Agreement to client
  5. One set of revisions to Partnership Agreement, if requested by client
  6. Email final version of personalized Partnership Agreement to client

If you are ready to get started, please CLICK HERE to enter basic information using our secure online form.
*Legal fee listed applies to most cases but may be higher depending on size of business and complexity of the document’s provisions.

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