Most states require businesses to create and maintain corporate bylaws. Even if your state does not require bylaws, having a copy of the bylaws on hand is crucial for the internal processes of the business.
The bylaws essentially set forth the basic rules and procedures for how the business will operate and the rights and duties of its owners and managers. Keeping your bylaws updated will help to resolve potential disputes within the business long before serious problems arise.
Corporate bylaws are an essential tool for every corporation and define how the corporation will operate as well as its rules for governance. The following information outlines important considerations when creating this document.
First, you will choose the entity type for your bylaws. Bylaws are the internal corporate governance documents for both for-profit and nonprofit corporations. However, there are important differences between how for-profit and nonprofit corporations are structured.
A for-profit corporation is registered with a particular state of your choice to engage in commercial activity for a profit. You can check with your Secretary of State to confirm your company's for-profit status.
Although both nonprofit and for-profit corporations are registered with a particular state-level agency, a nonprofit corporation must engage in activities and purposes specifically approved by the Internal Revenue Code (IRC) as exempt from federal and state taxes. Although there are many different IRC tax exemptions, the most well known is Section 501(c)(3) for nonprofit corporations. 501(c)(3) nonprofit corporations may be established only for the following purposes:
If your organization is established for one or more of the purposes listed in Section 501(c)(3) of the Internal Revenue Code, then it's considered tax exempt. You can check the IRS' website to confirm your tax exemption status. NOTE: LegalNature's document is only apt for 501(c)(3) tax-exempt corporations. It is not suitable for any other 501(c) tax exemption statuses.
Enter the corporation's name and address exactly as it appears on the corporation's articles of incorporation.
(Note, this section applies to nonprofits only.)
When specifying the specific purpose of your 501(c)(3) nonprofit corporation, it's important to provide a general description of what the company seeks to accomplish through its operations. For example, a charity established to help the homeless might write, "The specific purpose of the corporation is to help the homeless." Alternatively, the charity could include more details such as, "The specific purposes of the corporation are 1) to recruit and train volunteers; 2) to solicit and accept donations to be distributed to the homeless in Fresno, California; and 3) to exercise any and all powers suitable, proper, and in furtherance of the nonprofit's purposes." It is a good idea to keep your purposes broad enough so as to avoid the need to amend the bylaws each time the organization expands its operations.
You may choose for your nonprofit to have voting members that oversee the board of directors. More often than not, nonprofits do not have voting members. Either way, you must select the membership description that best matches your nonprofit's structure.
Next, you will specify the number of directors for the corporation. The board of directors oversees the activities of the corporation and may be otherwise known as the "board of governors," the "board of managers," the "board of regents," the "board of trustees," or simply as the "board." The directors' duties generally include establishing broad policies and objectives, selecting and reviewing the performance of the company officers who run the day-to-day operations, and approving annual budgets.
When considering the size of your board of directors, remember that different board sizes may have a direct impact on its effectiveness. For example, a board with too few directors may not have sufficiently diverse expertise for the corporation's needs. On the other hand, a board with too many directors may have so many diverse opinions that the decision-making process could become unnecessarily difficult.
In the particular case of California and Utah, the number of directors a for-profit corporation may have depends on the total number of its shareholders.
On the other hand, if your 501(c)(3) nonprofit corporation is organized and registered in Idaho, Louisiana, or Oregon AND has voting members, then you will need to select the number of members first because state law specifies the number of directors you may have depending on the number of voting members.
The corporation may choose to pay the directors a reasonable compensation for the services and duties they perform for the corporation. The corporation may also choose to reimburse the directors and committee members for expenses incurred in the performance of their corporate duties.
This section addresses when a corporate director, officer, employee, or other company representative is sued personally by an outside party for their role or affiliation with the corporation. For example, a director or employee of the corporation may be sued along with the corporation by an unsatisfied customer, or an employee may be sued along with the corporation for being involved in a car accident while traveling for work.
Naturally, there will be costs associated with being named in a lawsuit, whether the lawsuit has merit or not. In light of this, the corporation can specify in its bylaws whether or not it will automatically indemnify and compensate the sued directors, officers, employees, or other company representatives for costs incurred under certain circumstances. For example:
Annual Meeting and Fiscal Year (For-Profit)
This section deals with two important dates for the corporation.
First, shareholders are required to hold an annual meeting of shareholders once a year to vote on the board of directors and conduct other permissible business. This date may be changed by board resolution to suit the corporation's needs.
Second, the corporation needs to select a fiscal year for tax purposes. The fiscal year is a period of 12 consecutive months ending on the last day of the month of your choice. If you choose to end the fiscal year in December, then your fiscal year will align with the normal calendar year. Corporations may choose different months for the end of their fiscal year depending on what works best for their payroll, business cycle, and tax situation.
Annual Meeting and Fiscal Year (Nonprofit)
This section deals with two important dates that every nonprofit with voting members must choose.
First, if there are members, they are required to hold an annual meeting of members once a year to vote on the board of directors and conduct other permissible business. This date may be changed by board resolution to suit the nonprofit's needs.
Second, the nonprofit needs to select a fiscal year for tax purposes. The fiscal year is a period of 12 consecutive months ending on the last day of the month of your choice. If you choose to end the fiscal year in December, then your fiscal year will align with the normal calendar year. Nonprofits may choose different months for the end of their fiscal year depending on their tax situation and what works best for their payroll, fundraising cycle, and donation cycle.
Bylaws can be adopted for official use by the corporation either by the incorporator(s) or by the board of directors. An incorporator is an individual or entity that initiates the incorporation process for the corporation and files the formation documents with the state. Generally, the incorporator(s) may adopt the bylaws for a newly formed corporation if the first board of directors has not been appointed or elected. Otherwise, any board of directors can adopt bylaws by majority vote or unanimous written consent.
If the incorporators are adopting the bylaws, then enter the names of each incorporator and the applicable adoption date. If adoption is by the board of directors, then enter the secretary's name and the applicable adoption date.
If the bylaws are being adopted by incorporator(s), then they should draft and execute a document titled "Adoption by Incorporator". If the board is adopting the bylaws, the secretary should sign the certificate confirming and recording that the board of directors adopted the bylaws for official use. The incorporator(s) or secretary may have the certificate notarized using the notary acknowledgment page. Using a notary is optional unless required by a bank or other entity requesting a copy of the bylaws.
The original or a copy of the corporate bylaws along with the signed Adoption by Incorporator should be stored and maintained by the secretary at the corporation's principal executive office or such other place as the board may decide.
As you complete your corporate bylaws, you will need to provide certain relevant information. This includes director compensation and the company's fiscal year.
Use the information you collected to complete the bylaws. We make this easy by guiding you each step of the way and helping you to customize your document to match your specific needs. The questions and information we present to you dynamically change depending on your answers and the state selected. Click below to get started.
It is always important to read your document thoroughly to ensure it matches your needs and is free of errors and omissions. After completing the questionnaire, you can make textual changes to your document by downloading it in Microsoft Word. If no changes are needed, you can simply download the PDF version and sign. These downloads are available by navigating to the Documents section of your account dashboard.
While there is no need to sign the bylaws, they need to be formally adopted by passing a resolution at a board meeting. The secretary should sign the Certificate of Adoption confirming and recording that the board of directors adopted the bylaws for official use. The secretary may have this page notarized using the Notary Acknowledgment page to confirm the validity of the signature.
Once your bylaws have been adopted, you should store your approved bylaws in your corporate records book. Be sure that you store your records in a safe location. It is a good idea to keep both physical and electronic copies. The following documents should be stored in your corporate records book:
It is easy to forget the ins and outs of your bylaws. Periodically reviewing it will help you stay familiar with any responsibilities or requirements so that you can determine when it needs changes or additions.
As your policies change or new laws pass, you will need to update your bylaws. Typically, companies do this every two or three years to ensure compliance.
Every company with more than one shareholder should have a shareholder agreement to ensure that all shareholders are treated fairly and are aware of each other's management authority as well as rights, duties, and responsibilities toward the corporation and toward each other. Shareholder agreements work in conjunction with your articles of incorporation but provide many important additional protections. Despite your good intentions, it is all too common for conflicts to arise down the road when no agreement is in place. What happens with the shares when one shareholder dies or when shareholders want to sell their shares? These and a multitude of other potential issues can be cleanly resolved and clarified by having a shareholder agreement securely in place.
Your company will also need to use corporate resolutions and meeting minutes to document its board meetings. Board of directors' or shareholders' meetings are where fundamental decisions about the corporation are made. For example, this is where the bylaws are formally adopted; officers may be appointed; tax selection of the corporation may be approved; directions may be given to directors or officers; and authority to open bank accounts, enter into contracts, or incur other expenses may be approved. Any corporate resolutions passed at the first meeting must be recorded in a corporate resolution form.
Prior to board meetings, a notice of meeting should be sent to all parties attending. If no notice for the meeting was given, a waiver of notice should be signed at the meeting. The meeting details must be documented by a party designated as the meeting secretary in the meeting minutes.
Lastly, if a resolution to issue stock was passed at the first meeting, you will need a stock certificate to formally issue the stocks and a stock transfer ledger to record the transactions for corporate records.