A Practical Guide to Operating Agreements and Corporate Bylaws in Somerville
Operating agreements and corporate bylaws are foundational governance documents that define how a business is run, how decisions are made, and how ownership changes are handled. For companies in Somerville and across Fayette County, having clear written rules reduces uncertainty among owners, clarifies financial rights and duties, and helps protect the business during growth, investment, or transition. Jay Johnson Law Firm assists local businesses with creating documents tailored to their structure and goals. We explain the differences between LLC operating agreements and corporate bylaws, and ensure documents reflect Tennessee law while addressing common challenges owners face in small to mid-sized companies.
Many business owners assume a generic template will suffice, but even modest differences in ownership, capital contributions, or management preferences can cause costly disputes later. Our approach begins with listening to your objectives, mapping your ownership and governance needs, and drafting clear provisions for decision-making, profit distributions, transfers of interest, and dispute resolution. We work with entrepreneurs, family businesses, partnerships, and boards to produce durable documents that align with both practical operations and the legal framework in Tennessee. If you are forming a new entity, reorganizing ownership, or preparing for outside investment, starting with sound governing documents matters.
Why Well-Structured Operating Agreements and Bylaws Matter for Your Business
Clear operating agreements and bylaws provide reliable guidance for daily management and protect owners during times of change. They set expectations around voting, distributions, capital calls, and transfer restrictions so that all parties understand their rights and obligations. In addition to preventing misunderstandings, thoughtful governance documents make it simpler to onboard new investors, transfer ownership when needed, and demonstrate organized governance to lenders or partners. For businesses in Somerville and surrounding areas, these documents also help ensure compliance with Tennessee statutes while preserving flexibility for local operational practices and future planning.
About Jay Johnson Law Firm and Our Business Law Practice
Jay Johnson Law Firm serves business clients across Tennessee with a practical, client-focused approach to business and corporate matters. Our team handles formation, governance documents, ownership transitions, and related transactional work for small and mid-size businesses. We prioritize clear communication, timely drafting, and strategies that align with each client’s commercial goals. Because our practice serves Somerville and Fayette County, we are familiar with the local business environment and common regional needs, including family-owned enterprises and close partnerships that benefit from well-tailored governance provisions.
Understanding Operating Agreements and Corporate Bylaws
Operating agreements govern limited liability companies and set out the relationship among members, management structure, voting procedures, allocation of profits and losses, and rules for transfers of membership interests. Corporate bylaws perform a similar role for corporations, establishing procedures for board meetings, officer roles, shareholder votes, and other internal governance mechanisms. Both documents are internal rules that complement state statutory requirements and the entity’s formation filings. While not always filed with the state, these documents are legally important because they evidence the internal rules the owners have agreed to follow and can be enforced when disputes arise.
Drafting governance documents requires attention to how the business actually operates and intends to operate in the future. Provisions should address capital contributions, distributions, management authority, dispute resolution, deadlock mechanisms, buy-sell provisions, and amendment procedures. The right balance between flexibility and predictability depends on factors such as the number of owners, the nature of the business, plans for outside investment, and succession goals. For Somerville businesses, local norms including family succession planning and close partner relationships often shape the terms owners prefer and the protections they want in writing.
Defining Operating Agreements and Bylaws in Plain Terms
An operating agreement is a contract among the members of an LLC that governs internal operations and financial arrangements, while corporate bylaws are rules adopted by a corporation to govern directors, officers, and shareholders. Both documents translate high-level ownership agreements into operational details: who decides, how votes are counted, how money flows, and how changes are made. Well-drafted documents reduce ambiguity by explaining procedures for meetings, notice requirements, quorum thresholds, and the mechanics for transferring ownership. They also document protections for minority owners and provide mechanisms to address disputes without resorting immediately to litigation.
Key Elements and Typical Steps in Drafting Governance Documents
Key elements include definitions of ownership interest, voting rights, management authority, financial contributions and distributions, buy-sell terms, transfer restrictions, procedures for admitting new owners, and amendment provisions. The drafting process often begins with a thorough information gathering session to identify owner priorities and potential friction points, followed by tailored drafting, review sessions, and revisions that reflect negotiated terms. Documents should also include procedures for meetings and recordkeeping, as well as dispute resolution mechanisms such as mediation or buyout formulas. Proper execution and consistent recordkeeping after adoption are important to maintain legal protections.
Key Terms and Glossary for Operating Agreements and Bylaws
This glossary explains common terms used in governance documents to help owners understand the concepts that will appear in their agreement. Familiarity with terms like membership interest, voting threshold, quorum, capital contribution, distributions, buy-sell provision, and amendment clause makes it easier to evaluate draft language and make informed choices. Reviewing these definitions before signing helps ensure that business owners in Somerville and surrounding areas make decisions that reflect their expectations for control, financial entitlements, and the process for resolving disagreements or changing ownership over time.
Operating Agreement
An operating agreement is the written contract among LLC members that sets out governance rules, ownership percentages, capital contributions, profit and loss allocations, and procedures for admitting new members or transferring interests. It may also specify management duties, voting procedures, meeting requirements, and dispute resolution methods. For many small businesses, this document clarifies what happens when an owner leaves, becomes incapacitated, or dies, and it can include formulas for valuing interests. Having clear terms reduces uncertainty and makes decision-making smoother, particularly when owners have different expectations or long-term goals.
Corporate Bylaws
Corporate bylaws are the internal rules a corporation adopts to govern how the board of directors and officers operate, how shareholders vote, and how meetings are conducted. Bylaws typically address board composition, officer roles and duties, notice and quorum requirements for meetings, stock transfer restrictions, and procedures for electing directors. They work together with the corporation’s articles of incorporation and state law to provide a framework for corporate governance, protecting both the business and its owners by documenting agreed procedures and expectations for corporate decision-making.
Member vs. Shareholder
The term member refers to owners of an LLC, while shareholder or stockholder refers to owners of a corporation. Members often have more flexibility to define their rights and management structure through an operating agreement, whereas shareholder rights are governed by bylaws and state corporate law. Differences can include voting rules, profit distribution methods, and transfer restrictions. Understanding the distinction helps owners choose the entity type and governance provisions that match their goals, whether that means more informal management among members or formal, shareholder-driven governance with a board and officers.
Voting Rights and Ownership Percentages
Voting rights determine how major decisions are made and are often tied to ownership percentages but can be structured differently by agreement. Documents specify whether decisions require a simple majority, supermajority, or unanimous consent, and whether voting power is proportional to capital contributions or otherwise allocated. Clarifying voting thresholds for ordinary and extraordinary actions prevents disputes and guides owners through changes such as admitting new members, approving mergers, or selling substantial assets. Clear rules help owners plan for governance outcomes and avoid deadlock or uncertainty in key business moments.
Comparing Template, Limited, and Comprehensive Legal Options
Business owners commonly choose between quick template documents, a limited tailored approach, or a comprehensive drafting service. Templates can be low-cost and fast but often lack provisions responsive to specific owner needs or local law nuances. A limited approach customizes a few key provisions and may suit low-risk, single-owner ventures. Comprehensive drafting creates a full governance package that anticipates future scenarios, supports investor relations, and establishes robust procedures for disputes and transfers. Selecting the right path depends on business size, ownership complexity, funding plans, and tolerance for risk.
When a Limited or Template Approach May Be Sufficient:
Low-Risk Single Owner or Sole Proprietor Transitions
For sole owners or simple ventures with limited outside investment and straightforward operations, a focused or template-based agreement can provide basic protections and clarify internal procedures. If there are no partners to negotiate with and the business is unlikely to take on external capital soon, streamlining governance with clear but simple provisions may be appropriate. Even in these cases, it is helpful to ensure that basic elements like ownership documentation, authority over accounts, and succession preferences are recorded to avoid confusion if plans change or new stakeholders appear.
Short-Term Projects or Single-Deal Collaborations
When the venture is a defined, short-term project or a single collaboration among known parties with limited liabilities, a concise agreement addressing the project scope, cost sharing, responsibilities, and exit terms can be adequate. These limited arrangements work best where both parties are aligned and there is a clear end date or completion objective. Even so, including provisions for dispute resolution, intellectual property ownership, and distribution of proceeds reduces the risk of disagreements that could derail the project or create delays in completing deliverables.
Why a Comprehensive Agreements Package Is Often Recommended:
Multiple Owners or Complex Capital Structures
When a business has multiple owners, varying capital contributions, or plans for multiple funding rounds, comprehensive governance documents help balance rights and responsibilities while providing mechanisms for future change. Detailed provisions on transfer restrictions, buy-sell triggers, valuation methods, and voting thresholds reduce uncertainty and guide owners through transitions. Comprehensive drafting anticipates potential conflicts and sets out clear procedures for resolving them, which can help maintain operational continuity and preserve relationships among owners even during difficult decisions.
Preparing for Outside Investment, Sale, or Succession
If owners plan to seek outside investors, sell the business, or implement family succession plans, detailed agreements and bylaws become essential to protect value and create predictable processes. Investors and buyers look for transparent governance that reduces transaction risk and demonstrates orderly management. Well-crafted documents specify approval rights, preemptive rights, drag-along and tag-along provisions, and methods for valuing ownership interests. This clarity can speed due diligence and negotiations and make the business more attractive to potential partners or acquirers.
Advantages of a Comprehensive Governance Approach
A comprehensive approach reduces ambiguity by laying out detailed rules for governance, finances, and ownership changes. This reduces the likelihood of internal disputes, accelerates decision-making, and helps owners coordinate as the business grows. Comprehensive documents can address tax considerations, protect minority interests, and provide predictable mechanisms for transfers or buyouts. For businesses expecting growth, outside funding, or management transitions, investing time upfront to establish robust governance can reduce long-term costs and disruptions.
Comprehensive governance also supports regulatory compliance and provides a record of agreed practices that can be important during audits, lender reviews, or legal scrutiny. It helps owners align on strategy and delegate authority clearly so managers and officers operate within defined boundaries. When controversies arise, the presence of detailed governing documents often leads to quicker, less costly resolutions because parties can rely on established procedures and valuation methods rather than arguing over unwritten expectations.
Reducing the Risk of Internal Disputes
Detailed provisions for decision-making, dispute resolution, and buy-sell procedures help prevent disputes from escalating. By specifying how votes are counted, what constitutes a quorum, and the methods used to value and transfer ownership interests, agreements create a roadmap for resolving common sources of conflict. Including mediation or defined buyout mechanisms can preserve business continuity and relationships while providing fair outcomes when disagreements arise. This clarity is especially valuable for closely held companies where interpersonal dynamics have a significant operational impact.
Protecting Business Value and Attracting Investors
Investors and buyers look for predictability in governance because it lowers risk. Documents that clearly articulate ownership rights, approval thresholds, and exit mechanics make the company more transparent to third parties and can simplify negotiations. Provisions for admitting new investors, protecting existing owners’ interests, and defining paths for eventual sale or merger help preserve and enhance enterprise value. Careful drafting also ensures that future transactions proceed smoothly and that ownership transitions do not undermine business operations or stakeholder relationships.
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Practical Tips for Managing Operating Agreements and Bylaws
Put Governance in Writing Early
Documenting governance arrangements early prevents misunderstandings and preserves relationships among owners. Even simple clear provisions on ownership percentages, voting rights, contributions, and distribution methods can avoid disputes later. Early documentation also clarifies who has authority to sign contracts, access accounts, and hire personnel. As the business grows, the initial document can be amended to reflect new realities, but starting with a written foundation gives owners a shared reference point that makes future decisions less contentious and more efficient.
Keep Records and Hold Regular Meetings
Review Documents Before Major Transactions
Before accepting outside investment, selling the business, or making large asset transfers, review governing documents to confirm approval thresholds and transfer restrictions. Many transactions trigger shareholder or member votes, rights of first refusal, or mandatory buy-sell processes. Early review identifies steps required to obtain necessary consents or to amend provisions in advance, reducing the risk of delayed or invalidated transactions. Preparing ahead helps ensure a transaction proceeds smoothly and protects the interests of all parties involved.
Why You Should Consider Professional Governance Document Drafting
Professional drafting helps tailor governance documents to the business’s specific ownership structure, goals, and future plans. Lawyers familiar with Tennessee business law can suggest provisions that address local legal requirements and common regional concerns, such as succession planning for family-owned businesses. Tailored documents prevent unintended consequences that can arise from poorly worded templates, such as ambiguous valuation methods or ineffective transfer restrictions. Clear drafting also reduces the risk of litigation by providing pre-agreed mechanisms for resolving disputes and handling ownership changes.
Even when budgets are limited, spending time on governance at the outset can save substantial legal and operational costs later. Well-drafted provisions support investor confidence, simplify future financing rounds, and provide a structured approach to decision-making. For owners planning growth, a targeted drafting effort that anticipates foreseeable scenarios can be a sound investment. Additionally, working with local counsel helps ensure documents reflect Tennessee statutory requirements and the common practices of banks, investors, and buyers in the region.
Common Situations That Lead Owners to Seek Governance Documents
Owners often seek governance documents when forming a new entity, admitting partners, preparing for investment, or planning succession. Other triggers include disputes among owners, the need to formalize management responsibilities, or a lender’s request for documentation demonstrating proper governance. Changes in ownership, significant capital transactions, or plans to expand operations also prompt a review and update of existing agreements. Addressing these situations proactively helps protect the business and ensures smooth transitions when change occurs.
New LLC Formation
When starting an LLC, an operating agreement lays out how the new company will operate and how members will share profits, losses, and management duties. Creating this document at formation clarifies expectations, documents capital contributions, and sets rules for admitting future members. It is an opportunity to set voting thresholds, decision-making processes, and buyout mechanics before disagreements can arise. For new business owners in Somerville, documenting these matters early supports orderly growth and helps avoid uncertainty later as the business expands or owners’ roles evolve.
Transitioning Ownership
When an owner plans to retire, transfer interest to family, or exit the business, governance documents with clear transfer and valuation mechanisms become essential. Buy-sell provisions, right of first refusal clauses, and detailed valuation formulas prevent disputes and provide orderly paths for ownership changes. Addressing succession matters in advance reduces the possibility of conflict, ensures continuity of operations, and helps owners capture the business value they expect. Proper documentation also informs estate planning decisions and supports a predictable transition.
Preparing for Investment or Sale
Before seeking outside investment or entering a sales process, companies should confirm that their governance documents support the transaction and do not create unintended obstacles. Investors review operating agreements and bylaws for transfer restrictions, approval rights, and provisions that could affect valuation or control. Updating or clarifying these documents ahead of time can speed due diligence, address investor concerns, and ensure owners have aligned expectations about governance and future decision-making, making the company more attractive to potential partners.
Somerville Business Governance and Legal Support
Jay Johnson Law Firm provides governance document drafting and related business services for clients in Somerville, Fayette County, and across Tennessee. We assist with operating agreements, corporate bylaws, buy-sell provisions, and governance counseling tailored to local needs. Our goal is to help business owners create clear, usable documents that support day-to-day operations and long-term plans. Clients can reach us at 731-206-9700 to schedule a consultation to discuss their entity type, ownership structure, and goals for governance and succession planning.
Why Choose Jay Johnson Law Firm for Operating Agreements and Bylaws
Clients choose our firm because we combine a practical understanding of business needs with clear, actionable drafting. We prioritize documents that owners can follow and implement rather than overly complex legalese. Our focus is to translate ownership agreements and business plans into provisions that guide governance, protect business continuity, and reflect the realities of running a company in Somerville. We also emphasize timely communication and a collaborative drafting process so owners feel confident about the choices reflected in their documents.
We take time to understand each client’s goals and the dynamics among owners, which allows us to recommend provisions that reduce conflict and promote smooth operations. Whether the priority is protecting family business relationships, preparing for outside investment, or supporting a multi-owner enterprise, our drafting approach aligns legal terms with practical business considerations. We also help clients implement governance processes, including adoption procedures, meeting minutes, and recordkeeping practices that reinforce the effectiveness of the documents.
Our practice provides clients with clear explanations of options and likely outcomes so owners can decide with confidence. We strive to balance thoroughness with cost consciousness, offering targeted solutions for smaller ventures as well as comprehensive packages for businesses with more complex needs. By focusing on real-world solutions that reflect Tennessee law and local business practices, we assist Somerville owners in creating governance structures that support both current operations and future objectives.
Ready to Protect Your Business Governance? Contact Jay Johnson Law Firm Today
Our Process for Drafting Operating Agreements and Bylaws
Our drafting process begins with an intake and information-gathering meeting to learn about ownership, decision-making preferences, capital structure, and long-term goals. We then prepare a draft tailored to those requirements and review it with the owners, explaining the implications of key provisions and options for addressing potential disputes or transfers. After revisions are agreed, we finalize the document and assist with execution and recordkeeping. We remain available to help amend documents as the business evolves or circumstances change.
Initial Consultation and Information Gathering
In the initial meeting we collect information about the entity structure, owner relationships, capital contributions, and any existing agreements or concerns. This stage often uncovers priority areas such as decision-making authority, distribution methods, transfer restrictions, and succession planning needs. The more detail provided at this step, the better the draft will reflect owners’ expectations. We also discuss timelines, transaction goals, and any pending events that might affect drafting priorities so the final document supports immediate and future objectives.
Discuss Business Goals, Ownership, and Management Preferences
We ask about the business’s short- and long-term goals, the roles of owners and managers, and how profits and losses should be allocated. Understanding whether owners prefer centralized management, member-managed arrangements, or a board structure influences the drafting of governance provisions. We also discuss how owners want to handle hiring, contracts, and significant financial decisions. This conversation informs voting thresholds, approval procedures, and the distribution of authority so the document aligns with operational realities.
Review Existing Documents, Financial Contributions, and Potential Risks
We review any prior formation documents, investment agreements, promissory arrangements, or buy-sell terms to identify inconsistencies or gaps. Financial records and capital contribution schedules help establish ownership percentages and distribution rights. Identifying potential legal and business risks at this stage — such as unclear transfer rights or missing dispute resolution mechanisms — allows us to address weaknesses in the initial draft. Early detection of conflicts or ambiguities reduces the need for extensive revisions later and helps prioritize critical provisions.
Drafting, Negotiation, and Revision
Once goals and priorities are clear, we draft a customized operating agreement or set of bylaws tailored to the business’s needs. The draft highlights key clauses and includes explanatory notes to help owners understand options and trade-offs. We facilitate negotiation among owners, incorporate agreed revisions, and ensure provisions are internally consistent and enforceable under Tennessee law. This collaborative revision process continues until all parties are comfortable with the terms and the document reflects the agreed governance framework.
Prepare a Draft Aligned with Business Objectives and Legal Requirements
The draft addresses ownership structure, voting and control, distributions, transfer restrictions, valuation methods, and dispute resolution mechanisms. We ensure that language is clear and avoids unintended consequences. The document also includes procedures for meetings, recordkeeping, manager or director responsibilities, and amendment mechanisms. Crafting clear, practical language reduces ambiguity and makes the agreement easier to follow in the course of regular business operations.
Facilitate Negotiations and Incorporate Revisions
During negotiations we explain the impact of alternative provisions and help owners reach compromise where their interests differ. We track revisions and provide redlines so stakeholders can see changes and rationale. Our role includes identifying potential sticking points and proposing language that balances competing needs while preserving operational flexibility. After revisions are agreed, we produce a clean final draft ready for execution and advise on any ancillary documents needed to complete the governance structure.
Finalization, Execution, and Ongoing Maintenance
After the final document is approved, we assist with proper execution, adoption resolutions, and filing any required documents. We advise on maintaining corporate records, documenting meetings, and storing executed governance documents in a manner that supports legal protections and good corporate practice. Ongoing maintenance includes assistance with amendments when ownership changes, periods of growth, or new strategic directions arise, ensuring the governance framework remains aligned with the company’s evolving needs.
Execution, Adoption, and Recordkeeping
Proper execution typically requires signatures, adoption minutes, and an entry into the company’s records confirming the agreement has been adopted according to its terms. We provide guidance on how to memorialize adoption, prepare necessary resolutions, and maintain minutes and corporate records. These steps support the enforceability of governance provisions and demonstrate that the company followed its own procedures, which can be important if questions arise with lenders, investors, or third parties.
Ongoing Amendments, Compliance, and Periodic Review
Businesses change over time, and governance documents should be reviewed periodically to confirm they still meet owner needs and legal requirements. We advise on amendment procedures and help draft modifications to reflect ownership turnover, capital events, or new regulatory requirements. Regular reviews help identify clauses that may cause friction and allow owners to update provisions in an orderly way, reducing disruption and ensuring that governance remains effective as the company grows or its objectives shift.
Frequently Asked Questions About Operating Agreements and Bylaws
What is the difference between an operating agreement and corporate bylaws?
An operating agreement governs the internal affairs and ownership arrangements of a limited liability company, while corporate bylaws set rules for a corporation’s board, officers, and shareholders. Operating agreements typically cover member roles, profit distributions, management structure, and transfer restrictions, whereas bylaws focus on director elections, officer duties, meeting procedures, and shareholder voting. Both documents work together with the entity formation documents and state law to provide a complete governance framework that owners can rely upon.Choosing the appropriate document depends on the entity type and how the owners intend to operate. For LLCs, an operating agreement offers flexibility to adapt governance to member preferences. For corporations, bylaws formalize the governance structure expected by investors and maintain corporate formalities. In either case, drafting should reflect the owners’ commercial goals and provide clear procedures for decision-making and ownership changes.
Does my LLC or corporation need an operating agreement or bylaws in Tennessee?
Tennessee does not always require the filing of an operating agreement or bylaws with the state, but having these documents is strongly advisable because they define ownership rights and governance procedures. Without such written agreements, state default rules apply, which may not reflect the owners’ intentions and can lead to disputes. Documenting governance in writing also supports internal clarity and helps maintain the intended separation between personal and business matters.For corporations, bylaws are an expected corporate record even if not filed with the Secretary of State. Lenders, investors, and potential buyers typically request governance documentation during due diligence. For LLCs, an operating agreement is particularly important when multiple members are involved, when there are outside investors, or when succession and transfer issues might arise. A written agreement helps ensure predictability and legal protection for the business.
How much does it typically cost to draft an operating agreement or bylaws?
Costs vary depending on the complexity of the ownership structure and the level of customization required. A simple template review or limited customization may be relatively affordable, while drafting a comprehensive package that includes buy-sell provisions, investor protections, and multi-owner valuation mechanisms will cost more. Attorneys typically base fees on the time required, complexity, and the need for negotiation among owners or investors.It is often worth discussing budget and priorities up front so that drafting can be scoped to what owners need most. For smaller businesses, a targeted approach addressing the most important risk areas can be cost-effective, while growing companies or those seeking outside capital typically benefit from a more thorough drafting process to avoid higher costs later from disputes or transaction delays.
Can an operating agreement or bylaws prevent disputes between owners?
Well-drafted governance documents cannot eliminate all disputes, but they significantly reduce the likelihood of disagreements escalating by providing clear rules and procedures. When expectations around voting, distributions, transfers, and management are written down, owners have a shared reference point to resolve disagreements. Including dispute resolution mechanisms such as buyout provisions or mediation options can also provide structured paths to resolve conflicts without prolonged litigation.Clarity in language, realistic valuation methods, and agreed procedures for decision-making help avoid surprises that often lead to conflict. Regular communication and adherence to recordkeeping and meeting protocols further reduce friction and make governance structures more effective in practice, helping owners address issues before they become intractable.
How do buy-sell provisions work in ownership agreements?
Buy-sell provisions define what happens when an owner wants to leave, becomes incapacitated, dies, or when other triggering events occur. These clauses typically set out who may buy the departing owner’s interest, how the price will be determined, and the timeline for completing the transfer. Common approaches include right of first refusal for remaining owners, mandatory buyouts at a formula price, or negotiated sales subject to approval thresholds.Including clear buy-sell terms prevents forced sales to outsiders and provides a predictable method for transferring ownership that preserves business continuity. Valuation methods can be formula-based, appraisal-based, or negotiated, and choosing the right method depends on the business’s nature and owner preferences. Well-drafted provisions balance fairness to the departing owner with the need to protect the ongoing business and remaining owners.
What happens if an owner wants to transfer their ownership interest?
Transferability depends on the restrictions set out in the operating agreement or bylaws. Many documents limit transfers to prevent unwanted third parties from acquiring ownership without existing owners’ consent, often including rights of first refusal or approval requirements. If transfers are allowed, the agreement will usually specify the process, notice requirements, and any conditions such as payment terms or buyout provisions.When an owner intends to transfer interest, following the agreement’s procedures and documentation requirements is important to ensure the transfer is valid and enforceable. In some cases, transfers to family members for succession can be structured differently than transfers to third parties, and the agreement may provide preferred mechanisms for such scenarios to preserve continuity and protect the company’s operations.
How often should governance documents be reviewed or updated?
Governance documents should be reviewed periodically and whenever significant events occur, such as new investors, ownership changes, major capital transactions, or shifts in business strategy. Regular reviews ensure provisions remain aligned with current operations and legal requirements. Companies that evolve without updating their governing documents can face conflicts or transaction delays when old provisions no longer reflect reality.A review every one to three years is a common practice for growing businesses, while mature companies may choose reviews tied to major milestones. Consulting with counsel when contemplating financing, sale, or succession events lets owners address necessary amendments proactively and avoid last-minute disputes or complications during negotiations.
Will investors require specific provisions in my operating agreement or bylaws?
Investors often require provisions that protect their interests, such as preemptive rights to maintain ownership percentage, approval rights for certain actions, and clear exit mechanics. Venture investors or outside capital providers typically request terms that clarify how shares or membership interests can be transferred, how distributions are handled, and what approvals are needed for major transactions. These provisions help investors manage risk and align incentives between founders and new capital providers.When planning to seek investment, owners should review their operating agreement or bylaws with these expectations in mind so necessary adjustments can be made in advance. Addressing investor requirements early streamlines due diligence and avoids renegotiation that could delay or jeopardize a funding round.
Are operating agreements and bylaws filed with the state of Tennessee?
Operating agreements and bylaws are generally internal documents and are not filed with the Tennessee Secretary of State as part of the formation process, though the articles of organization or incorporation are filed. Despite not being filed, these documents are important records that should be maintained in the company’s files and referenced for governance and legal purposes. Properly executed documents with corresponding adoption records strengthen the company’s internal governance and legal posture.Keeping copies of executed agreements, adoption minutes, and related resolutions in a secure, accessible location is recommended. Lenders, investors, and potential buyers will often ask to review governance documents during due diligence, so having complete, clear records makes external transactions smoother and demonstrates that the business follows established procedures.
How do we adopt and properly document the approval of an operating agreement or bylaws?
Adoption typically involves a formal approval process consistent with the entity’s formation documents and any interim agreements. For corporations, the board of directors usually adopts bylaws by resolution and records the action in the minutes. For LLCs, members adopt the operating agreement according to the procedures set out in any initial operating documents or by unanimous consent. Proper documentation of adoption, including signatures and minutes, helps demonstrate that the agreement is binding and was implemented according to the agreed procedures.After adoption, the company should keep executed copies in its corporate records and follow the meeting and recordkeeping practices specified in the governance documents. This includes recording minutes, resolutions, and any subsequent amendments to demonstrate ongoing compliance with the adopted governance framework and to preserve protections for the business and its owners.