Any company, whether a corporation or limited liability company, needs a Shareholders Agreement or an Operating Agreement setting out how the company will be managed, decision making powers, profit allocation and other important elements which can prevent future disagreements among those having an ownership interest in the company.
See our article “Should I Start a Corporation or Limited Liability Company” for the differences in the types of companies.
What is the difference between a Shareholders Agreement and Operating Agreement
A Shareholders agreement is important because it governs the rights and responsibilities of the Shareholders and the day-to-day management of the company beyond the corporate structure defined by Bylaws. According to the California Corporations Code § 186, “’Shareholders’ agreement’ means a written agreement among all of the Shareholders of a close corporation, or if a close corporation has only one shareholder between such shareholder and the corporation, as authorized by subdivision (b) of Section 300.” Ca. Corp. Code § 186. The Shareholders Agreement protects the rights of the shareholders, ensures proper governance of the entity according to state requirements, prevents disagreements between the Shareholders, and acts to keep the company organized and efficient.
An Operating Agreement is used for an LLC
A limited liability company has an operating agreement governing the rights and responsibilities of Members who own an interest in the company. An operating agreement acts as an internal contract used by businesses to outline financial and functional decisions, including rules, regulations, and provisions for the purpose of establishing the internal management of the company.
Why Have These Internal Agreements
The key components to both agreements set out how the entity is managed from start to finish. Regardless of type, these agreements indicate how the entity is established, how it is to be managed, how profits are distributed, how Shareholders or Members can join or leave the company, and how the company is terminated. Business partners who own successful business entities together for decades may have a falling out over disagreements of how one of them can retire or bring the business to an end due to not having an agreement setting out the process the parties had previously agreed to. These agreements also dictate the responsibilities and limitations for the owners of an entity. Many new entities hardly take off before they fail due to disagreements between the owners over different opinions in management rights and limitations. Setting out the limitations and governing rules of an entity both creates a dependable internal structure and is a contract to refer to if a shareholder or member acts in a way that breaches their duties and responsibilities to the company.
Shareholder’s Agreements and Operating Agreements prevent unnecessary disagreements and protects the company and company owners while also setting out a roadmap for company management, therefore your company needs a Shareholders Agreement or Operating Agreement.
The experts at Grant | Shenon APLC are here to help you draft a Shareholders Agreement or Operating Agreement. Contact us today to schedule a consultation.