Operating Agreements, Bylaws and Shareholder Agreements

By Paul S. Rafelson, Founder, Rafelson Law PLLC

What should an operating agreement cover?

• Intellectual property and the brand. The company, not an individual owner, owns the brand, the listings and the accounts, with owner-contributed IP assigned in writing. Buyers often walk away from deals where the trademark or the Amazon account sits in a founder’s name.
• Ownership and capital. Who owns what, what each owner contributed and what happens if more capital is needed.
• Management. Whether the LLC is member-managed or manager-managed, which decisions need a vote and who can sign contracts and move money.
• Distributions and taxes. When profits are distributed, how tax liability on allocated income is handled and who serves as the partnership representative for IRS audits of a multi-member LLC (26 U.S.C. § 6223), a choice the company confirms on each year’s Form 1065.
• Transfers. Restrictions on selling or pledging an interest, rights of first refusal and tag-along and drag-along rights.
• Exit and disputes. Buy-sell terms after death, disability, divorce or departure, deadlock procedures and dissolution.

When an LLC has no agreement, or the agreement is silent, the default rules in the state’s LLC statute fill the gap. Delaware gives owners broad freedom to set their own terms by contract (6 Del. C. § 18-1101(b)). Florida does the same, with a short list of terms an agreement cannot change, such as the duty of loyalty, access to records and the right to seek judicial dissolution (Fla. Stat. § 605.0105(3)). In both states the written agreement is the main source of the rules.

When does an agreement need to be amended or restated?

An agreement should be revisited when an owner joins or leaves, an investor comes in, the business changes how it is managed, ownership percentages shift or the company plans a sale. Amendments change specific terms. A restated agreement replaces the whole document so the company has one current version. Amendments fail when owners skip the vote or signature the existing agreement requires, and a failed amendment surfaces in a dispute or a sale. Electronic signatures are valid (15 U.S.C. § 7001). We check the clause and paper the change so it holds.

What changes with investors or additional owners?

Investor and multi-member agreements add preferred economics, information rights, protective provisions, transfer limits and sometimes board or manager seats. They also affect a later sale, because buyers and their counsel read the owners’ agreement during diligence to see who must approve a sale and who has rights of first refusal. Negotiate those terms with the sale in mind. For the sale side, see buying or selling an Amazon business.

What are the corporate equivalents?

• Bylaws set internal governance: meetings, officers, the board and how decisions are made.
• A shareholders’ or stockholders’ agreement covers transfer restrictions, voting arrangements, buy-sell terms and exit rights among the owners.
• Capitalization: classes of stock, vesting and any equity or option plan for employees and advisers. Document equity before you promise it. An undocumented promise is a dispute waiting for the first exit, and a late grant carries tax cost.

What do owners most often get wrong?

• Operating without a signed agreement. Oral and implied terms count as an operating agreement in most states, so without a signed document a court reconstructs the deal from emails and conduct.
• Leaving out exit terms until the first disagreement.
• Making informal promises of equity that are never documented.
• Holding the brand or the marketplace account in an individual’s name rather than the company’s.
• Amending by email without following the amendment clause.

How do I get started?

Contact us. Tell us the entity, the owners and what has changed or is about to change, and we will tell you whether we can help.

Paul Rafelson is admitted in Florida and New Jersey. Katie Dariano is admitted in New York. For a matter governed by another state’s law, or in another state’s courts, we bring in local counsel or seek admission as the rules require.

Frequently asked questions

Related pages

Sources and notes

• State LLC and corporation statutes, including 6 Del. C. § 18-1101(b) and Fla. Stat. § 605.0105(3); 15 U.S.C. § 7001 (E-SIGN Act); 26 U.S.C. § 6223.