Constituent Documents Explained: A Guide for Companies

What Constituent Documents Are

Constituent documents are the formal organizational documents for companies, private and public. While each jurisdiction may have their own term for constituent documents, there are three general types of constituent documents for US corporations, limited liability companies (LLCs), and limited partnerships (LPs). Corporations have articles of incorporation, LLCs have articles of organization, and LPs have certificates of limited partnership. These constituent documents are the equivalent of the company’s "birth certificate."
Jurisdictions will have their own specific requirements on what is required in the constituent documents for corporations, LLCs, and LPs, but typically the constituent documents for corporations are fairly straightforward. They usually just require the name of the corporation, the purpose for which it was organized, and the initial number of authorized shares of stock. For LPs, the certificate of limited partnership must have the name of the limited partnership , a statement of the duration of the limited partnership, the name and address of the general partner, whether the limited partners are limited to the contributions they have made and the amount of contributions, and the name and business address of the agent for service of process for the limited partnership. LLCs, on the other hand, have additional requirements, such as having the authorized person to manage the LLC, an affirmation that the LLC has only one class of members, and if the LLC is a manager-managed LLC, a statement to that effect that the LLC is a manager-managed company and the authorized managers.
The purpose of constituent documents is to give a company its legal standing, such as in the case of corporations and LLCs, or to create the more formal entity of an LP. Additionally, they create the legal structure of the company.
If a foreign company is planning to do business in another state and has to file for foreign qualification, the foreign company will need their constituent documents for the foreign filing.

Different Types of Constituent Documents

Businesses across various forms—be it corporations, LLCs, partnerships, or otherwise—will typically have constituent documents. Amongst the vast and diverse array of constituent documents, common types include articles of incorporation, bylaws, partnership agreements, etc. What is critical to the formation, operation, and success of a business will be how those constituent documents work hand-in-hand with the governing statutes of the jurisdiction in which they are formed, and practically what that means for the business.
A corporation’s articles of incorporation (also referred to as its certificate of incorporation) is the "primary document filed with a state that creates a corporation." Generally speaking, a corporation’s articles of incorporation provides fundamental information about the corporation, including its name, the number and class of shares authorized to be issued, the name and address of the registered agent, the name of the incorporator, and the duration of the corporation. Bylaws, on the other hand, provide operating information for the management and governance of a corporation—provisions regarding how meetings are called, how directors are elected, and other important day-to-day matters. Yet, corporations may adopt bylaws that differ from those typically provided in a template of bylaws, just as long as the adopted bylaws do not conflict with statutory requirements. Overall, a corporation’s articles of incorporation and bylaws work in concert with one another, and both are generally required to form and operate a corporation.
Other business entities, such as partnerships and LLCs, may have similarly required constituent documents. For example, the general partnership agreement applies to businesses organized as general partnerships (and limited partnerships applies to limited partnerships). In addition to explaining basic information about the partnership business, the general partnership agreement will typically include important management and financial provisions. An operating agreement is crucial to an LLC’s operation and management, as it governs "business activities and establishes the rights and responsibilities of its members." Legal requirements and practical restrictions will often dictate what must be included in the operating agreement, and how the agreement is interpreted and enforced. However, just as aligning the operating agreement with the governing statute is important when forming an LLC, it is equally important to ensure that changes to the operating agreement remain compliant.
Whether required or discretionary, constituent documents often contain important answers to critical questions about the business. These are questions about management, operations, finances, and other interests of the parties involved, and can only be answered once those constituent documents are created. Every business should have constituent documents, but why it does and what happens if it does not are at least two good reasons why the entities behind those businesses must carefully draft their own constituent documents.

Why Constituent Documents Matter in Business Contexts

Constituent documents serve as the legal backbone of a business, providing the structure and rules on how it will be governed, how decisions will be made, and how shareholders will exercise their rights. Essentially, they are the company’s internal operating code and establish fundamental parameters that govern the company’s interactions with the shareholders, and act as a guidepost in the event of disputes that arise with regard to the interpretation of the rights and obligations set out in the documents.
The breadth of constituent documents, and how they impact every aspect of a business from its operations to the rights of shareholders, means that businesses must scrutinize them carefully to ensure that each document is drafted in a way that is suitable to the particular circumstances of the business. A poorly drafted constituent document may be difficult to properly implement or may not enable a business to achieve its objectives. Where too few constituent documents are used, fundamental rights and obligations may not be properly established, which could lead to misunderstandings between stakeholders of the business.

How to Draft Constituent Documents

In the process of creating constituent documents, there are some things you should consider, in addition to what was described above under "General Considerations in Drafting Constituent Documents, including Bylaws." These are: Select the Best Template/Model Document. This may be a model document from a trusted legal advisor. You may also use a certified template or model document from the Secretary of State’s office in your state. In either case, you will need to adapt the template/model document to meet the needs of the company. A general rule of thumb is that the document or form provided by the Secretary of State represents the statutory minimum requirements, while a model document from a legal advisor would be considered a good starting point, which would then need to be further customized. Some states provide their own model documents and/or licensed attorney-created model documents to its residents as a public service. These documents, however, may not offer the protections which custom-drafted documents offer (discussed further below). Select Appropriate Boilerplates, Edits, and Additions. In addition to the foregoing, you may need to include clauses that allow you to operate in a state other than the one in which the company was created. Similarly, you may need to include clauses from your state or another state to facilitate a public offering under certain regulations, such as Rule 504, 505 or 506. Consult with Legal Counsel. This step would apply in preparation to the above two steps rather than concurrently. Hire a business attorney to review your constituent documents before filing with the state. This will save you time and money down the road, and can help avoid costly mistakes. Additionally, this step will help if the constituent documents have been drafted for a multi-state business. Some state’s laws on bylaws and constituent documents go beyond just "boilerplate" and affect business in numerous ways.

Pitfalls to Avoid When Drafting Constituent Documents

When preparing constituent documents, corporations often ignore legal requirements (or errantly conclude there are none). This is particularly the case for closely held corporations, where shareholders are also managers. Section 103(a)(4) of the California Corporations Code specifies information that must be contained in the articles of incorporation. If it(he or she) were to prepare articles of incorporation himself/herself without relying on an attorney, the incorporator is likely to violate §103(e) by failing to include certain language that would not occur to a layman. Most corporate forms do contain all of the necessary information, but many of them miss one important requirement: a statement of the disabling provision of §212(a). The absence of this "anti-commingling" provision can have potentially devastating consequences in a divorce case. The same problem occurs when corporations issue bylaws without definitively adopting them or obtaining and documenting approval of amendments . Most "do-it-yourself" bylaws and bylaw templates fail to include all of the mandatory provisions required by Section 212(a). Typically, bylaws do contain a quorum provision (ss. 12.1), and a "majority" (ss. 12.3) or "plurality" (ss. 12.4) voting requirement. Bylaws often contain a clause where shareholders can change their vote (ss. 12.3.2) in which a shareholder can change his or her vote "if such change is approved by the majority of shareholders". However, subsection 212(a) says that, even if a corporation places an express provision in the bylaws granting shareholders the right to amend their votes, any attempt to vote contrary to a shareholder’s prior vote results in a "pro tanto" voiding of any votes cast contrary to the prohibited vote. (Emphasis added). If the bylaws or articles of incorporation do not include the required language, then the affected shares may be subject to division in a dissolution proceeding, distribution in a divorce action or just about any other distribution of the corporation’s assets. Bylaws and articles are not a do-it-yourself project.

Updating and Reviewing Constituent Documents

A company’s constituent documents are not static, but rather dynamic documents that require regular review and maintenance. As the company evolves, its constituent documents must evolve as well to reflect changes in the law, changes in key personnel, or changes in the business (whether it be a change in location, product, capital, etc.). Failure to update your constituent documents can result in a myriad of issues in the long run, so it is best to make updating your constituent documents one of your regular annual tasks in your business.
If you are not sure where to start in determining what amendments your constituent documents need, begin with a list of your top officers and directors and confirm they are all properly listed in your company’s bylaws or limited liability company operating agreement. It is also good to confirm that your officers, directors and managers are set forth in your statements of organization for the state in which you formed your company. This identified leadership team is a good place to begin your review and can serve you as a reminder for any other changes you may desire for your company, be it a change to your location, from an LLC to a corporation, change in class of shares, etc.

Consequences of Inadequate Constituent Documents

The legal risks associated with less-than-stellar constituent documents extend beyond the curable aspects. In the court system, corporate decisions made by an inadequate entity are often ours to cure in a court process. For example, the law requires shareholders to either pay or compromise their subscription price on the share purchased: if the entity is deemed to be a corporation, we need to verify that the shareholders have satisfied this condition precedent to owning shares; if the entity is not recognized as a corporation (in these cases there is no limited liability), we cannot turn to the courts as a remedy and seek to enforce the subscription agreement against the shareholders for their payment under the entity’s basic constitutional instruments (notwithstanding any waiver of the requirement in these documents). There can be other situations where there are limitations on our ability to compel shareholders for payment in circumstances where the foundational documents deem the shares to have been paid. Rules relating to dividends and entitlements to proceeds of liquidation can also be subject to challenge or ineffective to bind shareholders and creditors without ratification by a court of the contested terms. And of course, disputes will invariably take the form of either or both of shareholder oppression in derivative actions or a plan of arrangement or compromise involving canvassing votes/court approval, particularly in small private companies where the arrangements in the articles may be unduly restrictive or not adequately supported by statute.
The legal risks do not end there though, they can also be forced upon us when less than perfect documents are relied upon to make strategic decisions. It will be very difficult for us to refuse to distribute dividends for tax purposes if the pivotal provision that permits such distribution is poorly worded or absent altogether. There are other examples. In one case I prepared and registered various continuity documents during a merger transaction involving the spin-off of two public companies. I found myself subsequently promptly preparing an exemption report and undergoing lengthy discussions with IMET regarding auditor liability , capital pool examination requirements, whether the registrants were insiders of one another and similar issues. In another instance, a very small group of owners of a company formed 20 years earlier under the Canada Business Corporations Act came to me requiring assistance to facilitate their public offering using the same name as a foreign publicly traded company that had obtained a cease trade order from the OSC. The issues of name similarity, business opportunities and derivative claims, director and officer duties and roles, and other matters all required careful consideration in the preparation and negotiation of the transaction to effect the continuance of the company, the public offering and the spin off of the operational business unit.
Tapping into the expertise and experience of experts who manage the various components in the context of the master plan is crucial to the lawyer and their client avoiding the serious pitfalls that await parties when processing corporate transactions. Any consequently incurred legal liability costs and personal liability risks inherent in a corporate environment where the corporate structure and processes have not been sufficiently dealt with can have pervasive effects even reaching the more experienced counsel. As such, you can never be over-cautious when dealing with acquisition and divestiture transactions in the context of establishing corporations, partnerships or similar type entities. You owe it to yourself, your client, and other clients who may be affected by the consequences of the transaction to be very sure that the framework of the transaction works together in a harmonious way.