Corporate bylaws are the most important document in a corporation’s records, as this document outlines many crucial aspects of how your corporation will operate.
That said, bylaws themselves can seem overwhelming if you’re unfamiliar with them.
This guide will cover what bylaws are, why you need them, and what to include.
What Are Corporate Bylaws?
Corporations need road maps that plan out the rules they will abide by — without rules to guide how the business operates, day-to-day affairs fall apart into an “anything goes” mentality. That’s where bylaws come in. Bylaws are the operating manual that dictates how the corporation will be run.
Your bylaws dictate how the board of directors operates, what happens when there are disputes among members, how stock exchanges work, and much more.
Why Do I Need Corporate Bylaws?
You need to draft bylaws for your corporation for several reasons.
First (and most importantly), bylaws are required by most states, and even if your state does not require them, you should consider drafting them anyway. That said, no states require you to actually file your bylaws with the Secretary of State’s office — simply having them within your corporate record is sufficient.
Potential investors may also want to see a copy of your bylaws. The bylaws will give these investors a good picture of how the business will be run and what risks exist. In addition, a few banks might require a copy of the bylaws to issue business bank accounts. Having a business bank account is a must for a corporation, so you’ll want to be able to provide that copy if requested.
Finally, bylaws can help resolve conflict within your corporation. If a dispute occurs between members, the bylaws should be consulted. Since the bylaws prescribe how the corporate affairs ought to go, they can help resolve the conflict fairly, quickly, and easily.
What Should My Bylaws Include?
There is a wide variety of information you should include in your bylaws. This list will not be comprehensive, but this section outlines some of the essential elements of corporate bylaws.
Basic information about your business
It may seem obvious, but your bylaws should include identifying information about your business, including your name, location, and your industry. You should also add a statement about your corporation’s purpose — write out a description of your company’s mission and how you intend to accomplish that mission.
Provisions on membership
Your bylaws should include guidelines about how membership within your corporation works. For example, your bylaws dictate who can become a member by buying stock, what happens when a member leaves or dies, how many shares one person can own, and a member’s rights to sell their stock.
You’ll also want to cover when your annual meeting will occur and how members will be informed about that meeting. The bylaws should describe the voting rights that each share carries, and also dictate the types of stock a corporation can issue, along with what dividend payouts accompany those stocks.
Since the sale of stock is the primary influence on membership in a corporation, your bylaws should give detailed instructions about stocks. For example, one provision you may want to make is granting rights of first refusal. If a member wants to sell his or her shares, these rights give the existing members, or the corporation itself, the opportunity to buy those shares first.
Establish functions of the board of directors
Since the board of directors serves a vital role in the governance of the corporation, it’s important to lay out exactly how the board will function.
Your bylaws should dictate how many directors the board will have, and how long the term is for each director. Other important guidelines include what would happen when a board member resigns, dies, or is dismissed from the corporation.
The bylaws should also describe the board’s meetings, including when, where, and how often the meetings occur. You may also want to provide guidance for emergency meetings. In addition, you’ll need rules on voting. For example, the bylaws will state how many members must be present for a quorum, and whether or not a board member can use a proxy if absent from a meeting.
Describe your annual shareholder meetings
Much like you should set guidelines for the board’s meetings, your bylaws should provide a picture of how your annual shareholder meetings will function. These guidelines need to comply with your state’s requirements.
On one hand, your bylaws will schedule the annual meeting, but the first meeting may be different. For example, the first shareholder meeting should occur within 18 months of your initial incorporation. You’ll also need to notify your shareholders when the meeting will occur, and you must give them at least three weeks’ notice.
Each meeting’s agenda should review the corporation’s progress and financial records. Then, if there is a vacancy on the board, the shareholders will elect any new directors. Similarly, shareholders can amend and confirm bylaws at this meeting. The bylaws will set out how these voting processes occur, including how many members must be present to have a quorum.
Make rules for how to appoint officers
One of the most unique features of a corporation is its management structure. Shareholders appoint the directors, who in turn appoint the officers of the corporation, and those officers handle the day-to-day management of the corporation. These officers include the CEO, CFO, treasurer, secretary, and more.
In some states, members of the board can also be appointed as officers, which may be especially favorable for smaller corporations. Bigger, more formal corporations such as for-profit education groups might prefer the separation between the directors and officers.
Your bylaws should establish the guidelines for how an officer can be appointed. The bylaws will also establish the responsibilities of each officer, and how they can be replaced if they resign or are dismissed. These rules will enable your board of directors to appoint officers fairly and efficiently.
Write a conflict of interest statement
In many corporations, it is not uncommon for the directors to serve on the board while also having a different job or business of their own.
After all, the directors usually are not employees of the corporation. Even officers and employees could have other pursuits outside of the corporation that could intersect or conflict with the company’s goals.
A conflict of interest statement puts procedural safeguards in place to prevent abuses of conflicting interests. For example, let’s say a doctor serves on the board of directors of a corporation that develops medical technology. Because of the conflict of interest bylaw, the doctor cannot use the knowledge or resources of the corporation to benefit his own practice, if doing so harms the corporation.
Allow for amendments to bylaws
As the “rules of the game” for your corporation, your bylaws are extremely important. That said, a time may come when your rules become out of date, because what works today for your corporation may not work ten years from now.
That’s why your bylaws should also include an explanation of how they can be changed. For instance, you may decide that your board of directors can propose amendments to bylaws, and then the shareholders vote to make those amendments official. Your bylaws should include this procedure.
The exact procedure you choose is not as important as the simple act of putting one in place. That way, when a change needs to be made, the corporation will go through the proper channels to do so. These procedures reduce the risk of spur-of-the-moment or emotionally driven changes to your bylaws.
Add in procedures which are unique to your business
No two corporations are exactly alike. The items we’ve listed above address the typical management structure of a corporation, but there may be other features of your business that you think should be written in the bylaws.
There are no legal limits on how long or short your bylaws need to be, so you have plenty of liberty to include as many procedures as you need to make your business run smoothly.
The bylaws are the most important document within a corporation, so it’s important to write them well. Unfortunately, they can be complicated.
To make things easier, you can use a template — there are many templates available through online services that incorporate businesses which you can customize to fit your needs.
You can also enlist professional, personal help in the form of an attorney. A business corporation lawyer can help you write up bylaws that will fit your company’s unique needs, although as you’re probably already aware, attorney fees can be quite expensive.
Still, hiring a lawyer to help you write your bylaws is the safest bet, so if you have room in your budget, this is our recommended avenue.