Governing documents consist of shareholders agreements and bylaws for corporations, operating agreements for limited liability companies (LLCs), limited partnership agreements for limited partnerships (LPs) and partnership agreements for partnerships.
They are super important. There is a world of difference between good ones and bad ones. Good ones will address a handful of important things: ownership, meetings of shareholders, management, meetings of management, transfers of interests, allocations of profits and losses, allocations of distributions, dissolution and liquidation, and rights and remedies of shareholders and management.
In spirit they are all very similar, but each differs greatly depending on the type of entity and the specifics of the deal terms involved. Below we’re going to go into more detail about different types of governing documents, then zoom in on the governing documents for an LLC in Florida.
Governing Documents: An Overview
First, take a look at this video for an overview of governing documents and what they do in general.
Hi. This is Barry Haimo. Thanks for tuning in to another dose of Bite-Sized Bits of Knowledge, where we give you meaningful information in a short amount of time.
By now we’ve now covered the formation of business entities and the mechanics of how they work. So the next step is to jump into the governing documents of each of these types of entities.
For that, I’d recommend that we revisit the names of them so we can be on the same page. So for corporations, whether it’s C or S doesn’t matter. You have shareholders and you have bylaws. For a general partnership, you have a general partnership agreement. For LLCs, you have an operating agreement. For limited partnerships, you have a limited partnership agreement.
So just call them governing documents. They’re very similar. They’re going to include all the same provisions in spirit, but there’s also going to be some differences. Because some of them are different tax consequences, they have to have a lot of different implications, and we’ll talk about that again later.
So what they have in common are, I would say, about a handful of things. Ownership, meetings of the shareholders, members, partners, limited partners. Again, we’ll call them partners – meetings of the partners. They’re going to have meetings of the management as well. Transfers of interest, management and control, admitting new partners, allocations of profits and losses, allocations of distributions of available cash, and dissolving and liquidating the business.
There’s a lot of other things that will be in there, but those are the kind of the highlight material terms that you’ll find in all of these agreements in spirit. What you’ll not find is usually like the partners’ obligations to contribute services. And what that means – is it full time employment, part time, are they IT, are they VP, are they marketing? What does that look like? What are the job descriptions? Those will be typically in an employment or independent contractor agreement that is in harmony with the governing document.
So I recommend doing it that way. It’s much cleaner and avoids problems. So, this is a highlight video of an outline of what we’re going to cover in the next few videos. The next video we’re going to talk about ownership.
So thank you for stopping by. Stay tuned for more and of course, don’t forget to download our free business planning stress tests. The link is below in the description. Thank you.
Now we’re going to dive into more specifics on the purpose of some of the most important of these documents.
Breaking Down Bylaws and a Plethora of Agreements
Every company is a little bit different in terms of the documents they use to frame how the business works. That being said, there only a few true “governing” documents used by the vast majority. These include:
These are the rules that govern the operation of your corporation. In Florida, they are legally required for corporations. What do bylaws do?
- Create and outline your organizational structure
- Detail what policies you will use for things such as:
- Appointing officers
- Appointing directors
- Holding board meetings
- Holding shareholder meetings
- Dealing with conflicts of interest
Essentially, your shareholders agreement is a document that covers both the rules by which the organization must be operated as well as what rights – and obligations – company shareholders have. Generally, this includes things like:
- Regulations pertaining to how the company will be managed
- Shareholders’ relationship to the company
- How ownership of shares works
- What protections shareholders have
- What privileges shareholders enjoy
General Partnership Agreement
This agreement details the basic shape of how the partnership will be run. Specifically, it covers what each partner’s role and interest in the business is, as well as spelling out things such as:
- Each partner’s initial capital contribution
- How an ownership interest can be sold
- How a partner can leave the partnership
LLC Operating Agreement
What do you need in an LLC operating agreement? This document:
- Identifies the business
- Lists the owners
- Details the duties of members
- Covers other structural features
- Explains how the company has elected to be treated for tax purposes
- Breaks down how to handle certain key procedures
Typically, these agreements do not need to be filed.
Limited Partnership Agreement
This agreement covers the specific agreements in place between the Limited Partnership itself, the general partner, and the limited partners. It names which entity or person is the general partner and details:
- Any special rights the general partner and limited partners have
- The profit percentage interest
- The ownership interests
Next, let’s zoom in on the governing documents required for a particular type of business structure – an LLC.
What Are the Governing Documents for an LLC?
If you already have or want to create an LLC, you should know that Florida has laws for these types of business ventures regarding LLC governing documents. What kinds of documents do you need?
To be recognized as an LLC by the state, a registrant must file Articles of Organization with the Florida Division of Corporations. The default rules apply if there is no operating agreement. While an operating agreement is not required, it is strongly recommended. And this is especially true if more than one person is involved in creating the LLC.
Below, we’re going to go over both types of documents.
Articles of Organization
This is a document that lists all of the basic (but important) information that creates your LLC. Articles of Organization include the following:
- Company Name
- Statement of Purpose/Mission Statement
- Duration (perpetual or otherwise)
- Place of Business (location of headquarters)
- Registered Agent
- Management (whether the LLC is member-managed or manager-managed)
It is always helpful to have an experienced lawyer draft Articles of Organization or at least take a look before you submit them to ensure there are no errors.
The operating agreement will be tailored to your business’s needs. There are boilerplate documents available, but they do not do you much good.
The operating agreement will outline each partner’s roles and responsibilities, address allocations of profits and losses and distributions to partners, managerial processes and rules, voting thresholds, transfers of interests, noncompete and non-solicitation prohibitions, and death and disability.
The basic provisions included in an operating agreement include:
- Each member’s percentage of ownership
- Each member’s voting rights (usually, but not always, determined by percentage of ownership)
- Allocation of profit and losses
- Specifics of member meetings
- Identification of manager(s)
- Roles and responsibilities of each manager
- Instructions for exiting members
- LLC procedures when a member exits
- Instructions for the dissolution of the LLC
What If There Is No Operating Agreement?
As mentioned above, operating agreements are not required by Florida law. However, they come in handy when there is an inconsistency or dispute in the way the LLC is managed. If there is no operating agreement present and a dispute arises, the Florida rules will take over.
In 2013, the Florida Legislature passed the Florida Revised Limited Liability Company Act. It went into effect at the start of the following year. The act provides “default rules” for how LLCs are run. These default rules will be used if an LLC has not written an operating agreement, if the existing operating agreement does not address the issue at hand, or if the operating agreement violates current Florida law.
How Important Are Governing Documents?
Very. It is extremely important to stay up-to-date with the limitations and policies regarding governing documents and operating agreements.
If you’re getting ready to create governing documents for your business, do not attempt to do it on your own. While there are no rules or laws about you doing this, there is a good chance that you will neglect something in the documentation that will come back to cause trouble later.
Do not make this mistake. Work with a Florida business planning attorney right from the start to make sure you have a solid foundation.
And don’t forget to download our FREE Business Planning Stress Test:
Originally published 12/30/2021. Updated 1/26/2024.
Barry E. Haimo, Esq.
Strategic Planning With Purpose®
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