The term “corporate bylaws” might sound like something that applies only to giant, multinational corporations—and not to your small business. In reality, however, any company that chooses a corporation as its form of business entity must create corporate bylaws.
Many states require corporations to create bylaws and store them at a business’s principal address. And even if your state doesn’t require bylaws, they are important to the smooth daily functioning of your corporation. Here’s how bylaws work, and why you might need them for your small business.
What Are Corporate Bylaws?
Corporate bylaws are legally binding rules that the board of directors adopts once a business incorporates. They lay out the day-to-day operating rules and procedures for a corporation. Establishing bylaws is an important task for the board of directors, helping them oversee the work and operation of the business.
In short, corporate bylaws are the rules and guidelines an incorporated company has to follow. Corporate bylaws include:
- Any rules or obligations set for the shareholders, officers, and directors
- Annual meeting rules or standards
- Removal process of officers and directors
- Stock issuance process
- Purpose of the corporation
- How business affairs are to be handled
- Duties of the managers and owners
Corporate Bylaws Example
To help visualize what corporate bylaws can look like, the following template example from Rocket Lawyer is a good example to review.
Why Corporate Bylaws Are Important
Some of the reasons why bylaws could be so important to a new business include:
- By detailing rules for business operations and defining the duties and responsibilities of the various people involved in your corporation, bylaws help your business run more smoothly on a day-to-day basis.
- As your business grows, your bylaws can prove invaluable in helping to resolve uncertainty or conflicts. Just for some examples, those bylaws can specify what will happen if one business partner wants to leave the company, if there is a disagreement among members of the corporation, or if a key member of the corporation dies.
- You’ll need to show copies of your bylaws in many situations as you grow your business. For example, you might need to show the bylaws to open a business bank account, obtain a business loan, set up a company retirement plan, or obtain government certification as a minority-owned or woman-owned business.
Another way in which corporate bylaws help is by maintaining a clear separation between the business and any personal commitments you might have. If your business is ever sued, the plaintiff’s lawyer could try to prove that your company is not a legitimate corporation. This might allow the plaintiff to pierce the corporate veil and attack your personal assets. If your business doesn’t have the proper paperwork required for a corporation—which includes corporate bylaws—you’re putting your personal assets at risk and voiding much of the reason for incorporating in the first place.
What Corporate Bylaws Should Include
Corporate bylaws serve as a complementary document to your articles of incorporation. One is often confused for the other, in fact. However, the Articles of Incorporation is a very short document—typically only a page—with basic information like the date of incorporation, the number of existing and issued shares, the names of the Board of Directors, and the names of the members of the corporation. In contrast, the corporate bylaws provide details about how the corporation will operate on a daily basis, as well as how specific situations will be handled.
Unlike articles of incorporation, which must be filed with the state as part of the incorporation process, your bylaws are primarily for internal use only—and you’re not required to file them with your state. However, that doesn’t mean they don’t matter or that you can neglect to write them. As mentioned above, attorneys, bankers, companies you’re doing business with, and your investors or stockholders might ask to see your bylaws, and when they do, you need to have the document ready.
Most states require corporations to create corporate bylaws, though the requirements for what to include vary. (For a list of which states do and do not require corporate bylaws, check out this table from RocketLawyer.) But in most cases, your bylaws should include the following information:
- Business name and address.
- Legal structure of your business.
- The responsibilities of each member of the corporation, including how members are chosen, their voting rights, and different categories of members (for example, voting and nonvoting shareholders).
- How stock is issued and distributed, including the total number of shares, how stock can be transferred or sold, and what happens to a member’s stock if he or she leaves the company.
- Organization of the board of directors, including how board members are chosen and replaced, any qualifications for being on the board, how long board members remain in the role, and any specific roles on the board (like Treasurer or Secretary).
- Who is authorized to take certain actions on behalf of the corporation, such as entering into a contract or loan.
- Procedures for corporate record-keeping.
- Identify the fiscal year and accounting method of the corporation.
- Provide information about financial audits, particularly for publicly traded corporations.
- Organization of annual meetings, such as for directors, shareholders or committees. This should cover how often meetings are held, how attendees are notified and how many members are needed to obtain a quorum — that is, the minimum number of members needed to cast a vote.
- How to handle conflicts of interest. Suppose your business is competing for a contract, and one of the people choosing the vendor is a member of your board of directors. Your bylaws should explain how to handle obvious conflicts of interest such as this.
- Provisions for amending the corporate bylaws. Bylaws may need to change as your business grows, so be sure that yours specify how revisions to the bylaws should be proposed and voted on.
Keep in mind that publicly traded corporations need to include some specific provisions in their bylaws to comply with securities and exchange laws. Bylaws for publicly traded companies are publicly available on the U.S. Securities and Exchange Commission’s EDGAR website.
How to Create Corporate Bylaws
The primary shareholders of a corporation typically draft the bylaws at the time of or shortly after the business’s founding. The board of directors, which is elected by the shareholders, will adopt the corporate bylaws at their first board meeting. Rarely, the board of directors will draft and adopt the bylaws.
If creating corporate bylaws sounds stressful, don’t worry! There are ways to make the process easier. There are plenty of resources on online legal helps sites like LegalZoom and Rocket Lawyer that can help you create bylaws by providing easy-to-use templates and tools customized for your state’s requirements. LegalZoom even has sample corporate bylaws and a template.
In some cases, your company’s requirements might be more complex than average. For example, you might have foreign investors, several classes of stock, or a high volume of corporate assets. If that’s true, then you might be better off consulting a business attorney for help. A lawyer can help you identify what to include in your bylaws and how to phrase certain language to protect your company’s legal interests.
Once you’ve adopted your bylaws, you should give a copy to every member, director, and officer of the company. After all, these bylaws affect everyone’s role in the corporate structure. By taking time to create well-thought-out corporate bylaws when you launch your business, you’ll save yourself lots of time, discussion, and stress later on. If the thought of creating bylaws from scratch is too intimidating, try LegalZoom’s step-by-step process.
The post Corporate Bylaws: What They Are and Why You Need Them appeared first on Fundera Ledger.