Governance Documents
Governance Documents
Governance documents are the internal rulebooks that determine how a business or organization runs day to day — who has authority to make decisions, how disputes get resolved, and what happens when circumstances change. The applicable document depends on entity type.
Operating Agreements (LLCs)
An operating agreement is the governance document used by limited liability companies. It typically addresses ownership percentages among members, how the LLC will be managed (member-managed or manager-managed), voting rights and procedures, how profits and losses are allocated, and the process for admitting or removing members.
Kentucky law does not require LLCs to have a written operating agreement, and it isn't filed with the state — it stays in the LLC's internal records. Without one, the LLC is governed by Kentucky's default LLC statute, meaning the state's general rules apply rather than rules tailored to the business. An operating agreement also documents that the LLC is a separate legal entity from its owners, which relates to the liability protection an LLC structure provides, and banks and lenders may request one before opening a business account or extending credit.
Bylaws (Corporations, Including Nonprofits)
Bylaws serve the equivalent function for corporations. Unlike LLC operating agreements, bylaws are required by Kentucky law for every corporation — both for-profit and nonprofit. Bylaws are not filed with the state; like operating agreements, they're kept as part of the corporation's internal records.
Bylaws typically cover the number of board members, how and when board and shareholder meetings are held, how directors and officers are elected or removed, voting and quorum requirements, and other corporate formalities.
Nonprofit bylaws generally cover the same ground but are shaped by the nonprofit's specific governance structure — for example, addressing the board's role since there are no shareholders, and the process for filling board vacancies. If the organization applies for federal 501(c)(3) tax-exempt status, the IRS requires that the bylaws be adopted (along with a separate conflict-of-interest policy) by the board before the exemption application is submitted, and a copy of the bylaws is generally required as part of that application.
Other Agreements
Shareholder agreements are used by corporations alongside bylaws, but address matters among the shareholders themselves rather than the corporation's internal operations — for example, restrictions on transferring shares, rights of first refusal, voting agreements among shareholders, and procedures for resolving deadlocks. Kentucky law does not require a shareholder agreement, and it is not filed with the state.
Partnership agreements serve a similar role for general and limited partnerships, addressing how profits, losses, and management responsibilities are shared among partners. They are not required by Kentucky law; without one, a partnership is governed by Kentucky's general partnership statute.
Buy-sell agreements (sometimes incorporated into an operating agreement, bylaws, or a shareholder agreement, or kept as a separate document) address what happens if an owner leaves, passes away, or becomes incapacitated — for example, how their ownership stake is valued and transferred.
Conflict of interest policies are adopted alongside nonprofit bylaws specifically because the IRS requires nonprofits to have one in place before applying for 501(c)(3) status.
Engaging Legal Counsel
While templates and sample agreements are widely available online, business owners should be cautious about using them without legal review. A governance document drafted without legal counsel can create problems that aren't apparent until a dispute, audit, or transaction brings them to light. Some reasons to involve an attorney:
Generic templates don't account for your specific situation. A template is built to apply broadly, not to reflect your business's ownership structure, industry, capital contributions, or the specific concerns of your particular owners or members. Provisions that work for one business may create unintended consequences for another.
Templates can conflict with, or fail to account for, Kentucky law. Governance documents interact with state statutes in ways that aren't always obvious — for example, how default rules apply when a document is silent on an issue, or how certain provisions can or cannot be limited under Kentucky's LLC or corporation statutes. A document written for another state, or written generically, may not align with Kentucky's specific requirements.
Tax and entity classification consequences can be significant. Provisions addressing profit allocation, distributions, or member contributions can affect how an entity is taxed, and errors here can be costly to unwind later.
Outdated or boilerplate language can create ambiguity. Free templates aren't always updated to reflect current law, and generic language can leave important scenarios unaddressed — such as what happens if an owner wants to leave, becomes incapacitated, or passes away, or how disputes between owners get resolved.
These documents are difficult to enforce if poorly drafted. A governance document is only useful in a dispute if its terms are clear and enforceable. Vague or contradictory provisions can undermine the very protection the document was meant to provide.
Banks, investors, and other third parties may scrutinize these documents. Lenders, investors, and other counterparties often review governance documents closely, and a poorly drafted document can create friction or delay in transactions where it matters most.
For these reasons, business owners are encouraged to have an attorney draft or review governance documents before adopting them, even when starting from a template.