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Bylaws & Shareholders' Agreements

Corporations are formed by filing Articles of Organization and formally adopting bylaws. As a result, corporations are legally required to enact bylaws. A shareholders' agreement is not required, but allows for agreement amongst owners with respect to the rights and obligations of minority and majority shareholders. In the case of conflict, such agreements generally take priority over company bylaws.

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Corporate Bylaws

Corporate bylaws are adopted either by organizing shareholders or the initial board of directors, and they set out comprehensive rules and regulations governing the business as well as the rights and responsibilities of the board of directors and officers.

The contents of bylaws will vary depending on the needs of the business or the type of entity. Generally, corporate bylaws will describe the classes of stock, the composition of the board of directors, and the leadership structure. Additionally, they almost always specify details regarding annual meetings, including notice, quorum and voting requirements.

Good bylaws will also cover important entity events and provide a clear statement of the purpose of the corporation and a description of its core product.

A corporation should strictly adhere to any procedures established through the bylaws in order to avoid a situation where the entity is legally disregarded. This is particularly true for smaller corporations where shareholders are active in management. To learn more about veil piercing, click here.

Shareholders' Agreements

Shareholders' agreements are optional agreements commonly used in smaller corporations, where organizing shareholders are more active in the management of the business. Such agreements help shareholders preserve involvement in management and control over ownership.

One of the ways this is done is by including buy-back provisions in shareholders' agreements, requiring shareholders who no longer wish to stay on with the corporation to sell his or her shares (or some percentage thereof) back to the corporation.

Along the same lines, shareholders' agreements may contain rights of first refusal, where a shareholder who wishes to sell or otherwise transfer his or her shares must first give the other shareholders an opportunity to purchase the shares.

Shareholders' agreements are optional agreements commonly used in smaller corporations where organizing shareholders are more active in the management of the business...

Shareholders' agreements also frequently contain buy-sell provisions, which state what should happen if a shareholder is unable to participate in management due to death, incapacity, or bankruptcy. In these ways the shareholders of smaller corporations are able to maintain greater control over their access to management and the composition of their fellow co-owners.

Although they should be drafted to be consistent with each other, shareholders' agreements generally state that they take priority over bylaws in the event of conflict. Any such conflict should be removed by amendment.

Bylaws and shareholders' agreements generally contain their own procedures for amendment or modification, and they can both be changed without filing an amendment with the Secretary of State.

If you need assistance with forming a corporation or drafting or reviewing its bylaws or a shareholders' agreement, PLF may be able to help. Reach out, Today!


Operating Agreements

Operating agreements govern the arrangements among members (i.e. "owners") of limited liability companies (LLCs), a popular new business entity in Colorado and throughout the United States.

As with partnerships, default rules will operate to fill gaps in the business arrangement where agreement is absent or silent, specifying the extent of the rights and obligations of members as well as the conditions for important business events.

Unlike corporations, LLCs are often referred to as "creatures of contract" because the terms of operating agreements are legally required to be given "maximum effect." As a result, there is even greater reason for members to draft a document to govern their relationships and business as courts are even more likely to enforce its terms.

Adopting an operating agreement allows members to come together to reach an agreement with respect to their rights and obligations and the structure of their business. As with partnership agreements, this facilitates the smooth operation of the business as well as the avoidance of conflict and other disruptions.

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Like other ownership agreements, operating agreements range from simple, informal agreements to very complex arrangements. Regardless of the size of the business, it is important to consider these matters carefully.

LLCs also benefit from having a written agreement due to the fact that a properly drafted and implemented agreement will help preserve personal liability protection.

Like partnerships where personal liability is limited, LLCs also benefit from having a written agreement due to the fact that a properly drafted and implemented agreement will help preserve personal liability protection. This is because the liability protection afforded to members may be legally disregarded according to a theory of veil piercing when, e.g., personal and business assets or accounts are commingled, or the business is used improperly or fraudulently (such that it seems unfair to shield the partners from personal liability).

Having a written agreement at the outset allows members to implement the procedures laid out in the agreement which, when properly followed, maintain separation between personal and business finances and help avoid the sort of impropriety that leads to piercing the corporate veil. To learn more about veil piercing, click here.

By default, there are restrictions on the admission of new members, even the free transfer of membership interests is also allowed. However, operating agreements help here too, allowing members to draft any limitations or restrictions according to the agreements the members.

These limitations may also be drafted so as to prevent creditors who obtain economic rights in the LLC from participating its the management or from inspecting company books and records.

LLCs are relatively new and as a result there are fewer interpretive guidelines. While all states now recognize LLCs as a legal structure, tax and liability treatment is not uniform from state to state, and may vary depending on whether the LLCs is single- or multi-member.

If you need assistance with forming an LLC or drafting or reviewing its operating agreement, PLF may be able to help. Reach out, Today!




Partnership Agreements

Partners are two or more persons operating a for-profit business together, sharing in profits and losses. As a result, they can operate their business with only an oral agreement or without any explicit agreement at all. In this situation, default rules will operate to fill gaps in the arrangement, specifying the extent of the partners' rights and obligations as well as the conditions for important business events.

These default rules may already specify terms that work best for a particular partnership. But modifications, tailored to the needs of a particular business, are common. And regardless, prudent partners should wish to understand these rules before letting them govern the foundational conditions of their partnership.

As a result, even for a general partnership, it is generally advisable to prepare a written partnership agreement that addresses the business's specific needs and purposes, describes its structure, and details the rights and obligations of the partners - as owners, managers, and agents of the partnership.

Even for a general partnership, it is generally advisable to prepare a written partnership agreement that addresses the business's specific needs and purposes...

Depending on the business, a partnership agreement may be relatively short and simple or it may be very complex and technical. Regardless of the size of the business, it is advisable to prepare a written agreement as doing so allows all partners to have a meeting of the minds as to important events and known contingencies, before any such event has occurred.

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Partners in a general partnership should also be aware that without an explicit agreement to the contrary, that the withdrawal of any partner, whether voluntary or involuntary, will cause the dissolution of the partnership. A partner may generally withdraw at any time, but may incur liability to the partnership for doing so.

Where personal liability is limited, it is even more important for partnerships to have a written partnership agreement. This is due to the fact that the limited liability afforded to the partners may be legally disregarded in part because business formalities are not followed, which is difficult in practice if not defined upfront in a written agreement. To learn more about veil piercing, click here.

Moreover, if a partnership holds real property, the partners will need to create a partnership agreement in order to file it in the county where any such property is located.

The Pote Law Firm works with small business owners to help them properly draft and review partnership agreements and other ownership agreements. If you need assistance, Reach out, Today!




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