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Have you heard about corporate bylaws and feel a little confused about what the topic is all about?
Your corporation’s bylaws represent a legal document that regulates the company’s day-to-day functions. Use these rules to help run your business efficiently and smoothly.
In this article, you’ll find valuable information about corporate bylaws that will help you gain a full understanding of how they work.
What are Corporate Bylaws?
Replace the word “bylaws” with “rules” to help you immediately realize the purpose of corporate bylaws.
Corporate bylaws set up company rules and regulations to help all officers run the business efficiently. A corporation’s board of directors drafts and implements the bylaws.
Another way to think about your corporate bylaws is to think of them as the company’s operating manual. Bylaws lay out what the business and its officers can and can’t do. They do this by stating the roles of each officer and director, as well setting up the company’s basic standards.
Generally speaking, corporate bylaws dictate the rules around stock issuance, management structure, meeting requirements, and other vital business policies.
Components and Requirements of Corporate Bylaws
Here are ten different components to consider for your corporate bylaws. Head over to our corporate bylaws template walkthrough for some examples you can use.
Statement of Purpose
The statement of purpose puts forth your vision, why the company exists, and what you do. It needs to include information such as:
- Why did you start the business?
- Who are the company’s best clients?
- What is the company’s competitive advantage?
- How do you plan to attain the company’s goals?
- What problem do you solve for customers?
Your corporation can include members such as individuals, associations, partnerships, other corporations, or other types of entities.
This area of the corporate bylaws allows you to state rules for:
- Member types
- Member voting rights
- Procedure for adding new members
A formal membership policy should get laid out here. It will cover the rights and responsibilities of members. Use the section to create the policies that govern member qualifications, how and when to hold meetings, voting criteria, and how to conduct discipline or revoke membership.
Board of Directors
A corporation needs a board of directors that oversees the company’s officers. The board consists of non-employees who report to the company’s shareholders. Your board of directors is typically involved with the company’s planning and strategy.
Your corporate bylaws lay out everything about the board of directors such as:
- Number of people on the board
- Board member qualifications
- How to elect board members
- Length of board member terms
This item represents one of the most important parts to the company’s bylaws. Your corporation needs to hold an annual shareholders’ meeting. You can hold this meeting physically around a table, on Zoom, or even on paper if the company consists of only you or a couple of other people.
Use this part of your corporate bylaws to specify when you’ll hold the shareholders’ meeting, what order of business to follow in the meeting, voting procedures, and other similar items. You can also list out provisions for holding additional meetings throughout the year.
Pay attention to your state’s requirements around shareholders’ meetings. Several states list out specific requirements that you don’t want to violate.
What Gets Done in a Shareholders Meeting?
A company’s annual shareholders meeting usually includes the following:
- Performance review of the company
- Financial statement review
- Auditor appointments
- Auditor inspection reports
- Elect new directors or officers
- Accept, amend, or reject bylaws
When voting, each shareholder typically represents one vote unless the Articles of Incorporation express different voting rights. If a shareholder can’t make a meeting, then a proxy of their choice can usually attend the meeting on their behalf.
A corporation can create smaller committees within the board of directors circle. These committees handle specialized issues and report back to the board.
Your bylaws should express what committees to create, which board members make up each committee, how often committee members meet, how they operate the committee, and what duties they’re authorized to perform.
Committees allow for a great level of specialization based on the skills of each board member. For instance, you can put the marketing expert board member in charge of that area.
Consider creating committees around areas such as finance, compensation, fundraising, research, and ethics.
Some committees might become dissolved after solving a specific problem while other committees can run continuously without any established end date.
Establish stock certificate issuance in the bylaws. You want to explain who can receive company stock, percentages of stock issuance, and the various classes of stock.
A corporation uses shares to represent the percentage of ownership for each person receiving stock. Two types of stock generally uses are:
- Common stock
- Preferred stock
Preferred stockholders hold more power inside the company than holders of common stock. A preferred stockholder receives additional preferences such as dividends, voting rights, rights of first refusal (ability to buy additional shares first), and redemption rights (ability to sell shares back to the corporation).
Inside your corporate bylaws, list the rules for:
- Electing officers
- Specifying which officers sit on the board
- Listing each officer’s responsibilities
An officer is typically a company employee, runs the company on a daily basis, and reports back to the board of directors. The board reserves the right to remove officers whenever it believes it’s in the best interest of the company.
Officer positions include president, vice president, treasurer, chief financial officer (CFO), and chief executive officer (CEO).
Most officers and directors want some protection from liability. Include indemnification provisions in the bylaws that protect officers and directors from liability that their company association might open them up to.
Conflict of Interest
Use this area to require directors to reveal any potential or actual conflicts of interest that could cause them to act against the best interests of the corporation.
Bylaw Amendment Policy
It might become necessary to amend the bylaws at some point in the future. Include provisions that explain how to amend or change the bylaws.
Why Does Your Business Need Corporate Bylaws?
You’ll run a business more smoothly after defining the duties and responsibilities of everyone involved. It’s difficult to run any organization without rules established for its operations. The bylaws help each person involved understand their role and the roles of those around them.
You might need to show the bylaws to other entities during the course of operating the business. For instance, a bank might ask to see the bylaws document when considering the company for a loan.
Establishing bylaws helps to resolve future conflicts or uncertainties. Examples of these situations include:
- Member disagreements
- Key member death
- When partners want to leave the company
Bylaws come in handy for protecting the corporate veil. Your lawyer can help maintain the legal separation between personal and business commitments if the company ever gets sued.
How to Amend Corporate Bylaws
You’ll follow the procedure already laid out in your bylaws when you need to amend them.
Start by preparing the amendment. Indicate in writing which section of the bylaws needs an amendment.
The chairman or president should call the board of directors into a meeting according to the bylaws. Most states require this notification to all board members. The board of directors should vote on the amendment at the meeting. Typically, a majority vote wins unless the bylaws happen to lay out a different procedure.
The company’s secretary should keep minutes that include:
- The amendment
- Vote tally
- Note of approval or denial
If the amendment passes, then you’ll send a notice of the meeting to shareholders. The shareholders then hold a meeting to vote on the amendment. Keep minutes for this meeting as well.
File any approved amendments with the secretary of state. Most states have an amendment change form on their website. You may need to pay a filing fee.
Bylaws vs. Articles of Incorporation
The Articles of Incorporation document gets filed publicly with the state. This document includes your company’s basic information such as:
- Company name
- Business purposes
- Initial office and agent
- Types of stock issued
Even though most states require corporate bylaws for any corporation to exist legally, your company’s bylaws are private. The bylaws represent internal company documents. You aren’t required to share them publicly anywhere.
Corporate bylaws are far more detailed than the Articles of Incorporation. They’re your guide for operating the business on an ongoing basis. The action of writing the corporate bylaws is usually the first order of business for the board of directors.
Where You Can get a Corporate Bylaws Template
Many websites offer free copies of corporate bylaws. You can do a Google search to find these resources. Here are three to get you started:
If you use a business entity service to set up your corporation, then they’ll usually include the corporate bylaws template in your corporate kit that comes with your overall setup package.
The Last Word
Corporate bylaws can seem intimidating at first, but they are a great tool to help you effectively run your business. Take the next action step of writing the bylaws for your company.
Filed under: Advice Columns