The term “corporate bylaws” may sound like a fancy term that only matters to big multinational companies and not your typical small business. However, every business entity that is formed as a Corporation, must adopt a set of bylaws.
Many states require corporations to create bylaws and specify how the company is operated. And while your state may not need rules, they are essential to ensuring that your company runs smoothly. This article will give you a better understanding of what bylaws are, and why they’re important for your business.
So What Exactly Are Corporate Bylaws?
Corporate bylaws are a set of legally binding rules, which the board of directors adopts upon formation of the corporation. They establish the guidelines and practices for an organization. The establishment of these rules is an essential action for the Board of Directors and allows them to properly handle the decisions and manage the functions of the business. Briefly, bylaws are the standards that govern the management and operation of a business.
Corporate bylaws will typically govern:
- Powers and responsibilities of shareholders, officers, directors, managers, and owners.
- Procedures for annual meetings
- Removal of officers and directors
- Stock issuance
- Purpose of corporation
- Business affairs
Importance of Corporate Bylaws
Corporate bylaws are a document which describes how the business is structured and operated. Bylaws are critical for both C-corporations and S-corporations.
Here are some reasons why bylaws are crucial for new businesses:
- By explicitly laying out the duties and obligations of all of the people involved in running the corporation, you can avoid disputes about who manages what and allow the company to operate easily without issues.
- As your company expands over time, bylaws are crucial to ensuring that changes will not disrupt your business. Making the decisions in advance on what happens when a partner leaves the business, how a dispute between board members will be settled, or other issues of the sort is much easier than making those decisions after they arise, and allows the company to quickly move past any disputes or issues.
- To complete certain important functions like setting up bank accounts, obtaining a loan, setting up benefits, or receiving government certifications, you will often need to provide a copy of the company’s bylaws.
Corporate bylaws are also an excellent way to delineate between business and personal matters. Many of the benefits of forming a corporation, such as limited liability, are only available if you’ve properly followed the corporate formation process, including creating bylaws.
What should be included in Bylaws
Corporate Bylaws compliment the articles of incorporation. Sometimes one is mistaken with the other. The Articles of Incorporation are a rather brief text, usually just a page, with specific details, such as the date of incorporation, the amount of issued shares, the board of directors’ names and the names of the business owners. However, business bylaws include information about how the company works on a regular basis and how particular matters are dealt with. Bylaws are meant for internal use only, whereas articles of incorporation must be filed with the state and are typically public documents. However, just because they are not required to be filed with the state doesn’t mean they aren’t useful and important. As described above, attorneys, bankers and companies you deal with may require a copy of your bylaws. Most states require companies to adopt corporate bylaws, however the standards differ, but in general what they should include is:
- Business name and address
- Legal structure
- Obligations of each member of the corporation, including how they are chosen, voting rights and the different categories of of members (voting and non voting shareholders)
- How stock is handled, including the distribution and transfer/sale process.
- Who is authorized to take action on behalf of the corporation, such as termination of a lease, or a loan on behalf of the corporation
- Organization of the board of directors, including details of how board members are chosen, qualifications, length of term and any other details pertaining to board members
- Determine the corporation’s fiscal year and accounting process.
- Provide financial audit material, particularly for companies traded publicly.
- Company record-keeping practices
- Organization of annual meetings, such as for directors, shareholders or committees. This should include the time frame of meetings, how to notify the relevant participants, and the number required to attend, and the minimum amount required to cast a vote.
- How to resolve conflicts of interest
- Provisions on how to amend company bylaws. The needs of the business can change over time, which will sometimes require amending the bylaws, so having procedure for doing so in place before the need arises will make the process smoother. .
Remember that publicly traded companies require some clauses to conform with securities legislation and exchange laws in their bylaws. Bylaws are freely accessible for traded firms in the United States, and can be found on the U.S. Securities and Exchange Commission’s EDGAR website.
How to Create Corporate Bylaws
In general, a corporation’s primary shareholders draft the rules at or immediately after the establishment of the company. At the first board meeting, the board of directors, which get elected by the shareholders, will adopt the corporate bylaws. On rare occasions, the board of directors draft and adopt the bylaws.
Generally, you can use only resources and templates to create your company’s bylaws. In certain situations, the specifications of the business may be more complicated than normal. You might have international owners, various equity groups or a vast number of business properties. If so, it might be easier for you to meet with a corporate attorney for assistance. A lawyer will help you identify what to put in the rules and the terminology to use to defend the interests of the business.
When you have written and adopted your bylaws, each member, director and officer of the company should receive a copy. These rules, after all, govern every person that is involved in your corporation. When you start up your enterprise, you can save yourself loads of effort, debate and frustration by taking the time to assemble well thought-out bylaws.