Choosing the Right Business Structure: The Importance of Operating Agreements & Corporate Charters
Starting a business is an exciting venture, but choosing the right legal structure can significantly impact your liability, taxes, and operational flexibility. Whether you're launching a small business or scaling an existing one, properly structuring your entity and drafting key governing documents—like operating agreements and corporate charters—are crucial to protecting your interests.
Why Entity Formation Matters
Selecting the right business entity affects:
Liability protection – Shields personal assets from business debts and lawsuits.
Taxation – Determines how income is taxed and whether you can take advantage of deductions.
Ownership and management – Defines who controls the business and how decisions are made.
Investment and growth – Impacts the ability to raise capital or sell shares.
Common Business Structures
There are several common business structures, each with different legal and tax implications:
Sole Proprietorship – The simplest structure, but the owner is personally liable for all debts and lawsuits. Income is taxed as personal income. Best for solo entrepreneurs who don’t need liability protection.
Partnership (General or Limited) – In a general partnership, all partners share liability. In a limited partnership, only general partners are liable while limited partners have protection. Income is taxed on each partner’s personal return. Best for businesses with multiple owners.
Limited Liability Company (LLC) – Provides personal asset protection while allowing flexible taxation options (can be taxed as a sole proprietorship, partnership, or corporation). Best for small to medium businesses wanting liability protection and tax flexibility.
Corporation (S or C Corp) – Offers the strongest liability protection. S-Corps have pass-through taxation, while C-Corps are subject to double taxation (corporate tax plus individual tax on dividends). Best for businesses seeking investment or growth.
The Importance of an Operating Agreement (LLCs) & Corporate Charter (Corporations)
Many small business owners assume that forming an LLC or corporation is enough to protect them, but without a properly drafted operating agreement (for LLCs) or corporate charter and bylaws (for corporations), your business may lack clear rules on governance, ownership rights, and dispute resolution.
Operating Agreements (For LLCs)
An operating agreement is a legally binding document that governs an LLC's operations and member relationships. Many states, including Georgia, don’t legally require an operating agreement, but not having one can create serious risks, including:
Default state laws controlling your business – If you don't define rules in an operating agreement, Georgia's LLC laws will apply, often in ways that don't align with your intentions.
Ownership disputes – If members disagree on profit distribution, decision-making, or dissolution, the absence of an agreement makes resolving conflicts harder.
Piercing the corporate veil – Without formal operating procedures, courts may disregard liability protection, exposing personal assets to business debts.
What Should an Operating Agreement Include?
Ownership structure – Percentage of ownership for each member.
Management and voting – Member-managed vs. manager-managed and how decisions are made.
Profit and loss distribution – How and when profits/losses are shared among members.
Capital contributions – Initial and future financial contributions from members.
Exit strategies – What happens if a member wants to leave, dies, or becomes incapacitated?
Dissolution process – How the LLC will be dissolved if necessary.
Corporate Charters & Bylaws (For Corporations)
A corporate charter (also called Articles of Incorporation) is the foundational legal document filed with the state to create a corporation. However, bylaws are equally important—they dictate how the corporation is run and prevent costly internal disputes.
Why Corporate Bylaws Are Essential
Defines decision-making authority – Establishes how directors, officers, and shareholders interact.
Prevents shareholder disputes – Outlines voting rights, dividend distribution, and stock transfers.
Supports liability protection – Demonstrates corporate formalities to prevent piercing the corporate veil.
What Should Corporate Bylaws Include?
Board structure and roles – Number of directors, officer responsibilities, and election procedures.
Shareholder rights and voting – How shares are issued, transferred, and voted on.
Meetings and record-keeping – Requirements for board and shareholder meetings.
Profit distribution – Dividend policies and stock buybacks.
Dissolution and succession – How the corporation can be sold, merged, or closed.
Don’t Overlook the Nuances of Corporate Charters
When drafting your Articles of Incorporation, one of the most critical yet misunderstood elements is the concept of authorized shares. Many business owners mistakenly issue all authorized shares upfront, which can lead to significant problems down the road, such as difficulties raising capital or disputes with investors.
Here’s why getting it right the first time is crucial:
Amending articles is difficult – Once your Articles of Incorporation are filed, making changes requires approval and can be a complex, time-consuming process. It’s far easier to draft them correctly from the start than to amend them later.
Unauthorized shares can void transactions – Under Delaware law (a common jurisdiction for corporations), selling shares without proper authorization can render those shares void. This can lead to lawsuits, investors pulling out, or even the collapse of funding rounds.
Cap tables and shareholder agreements – Understanding the nuances of capitalization tables (cap tables) and shareholder agreements is essential for maintaining control and avoiding costly mistakes. These documents dictate how ownership is structured and how shares are distributed, so getting them wrong can have long-term consequences.
Don’t Rely on Generic Templates—Protect Your Business the Right Way
Many business owners use generic online templates, but these often fail to account for state-specific laws, industry nuances, or unique business needs. A poorly drafted agreement or missing bylaws could leave your business vulnerable to:
Internal disputes among owners or investors.
Legal challenges that pierce liability protections.
Costly litigation over unclear decision-making authority.
Get the Right Legal Protection from the Start
Whether you're forming an LLC or a corporation, investing in a custom-drafted operating agreement or corporate charter is a small upfront cost that prevents major legal headaches down the road. Understanding the intricacies of authorized shares, cap tables, and shareholder agreements is not something you should tackle alone—getting an attorney involved early can save you significant time, money, and stress in the long run.
If you're serious about protecting your business, contact us today to discuss the best structure and governance documents for your company.
