Corporate bylaws are a detailed set of rules adopted by a corporation's board of directors after the company has been incorporated. They are an important legal document for a corporation to have in place as they specify its internal management structure and how it will be run. In short, corporate bylaws are the internal operating manual for a corporation.
Unlike the articles of incorporation, which are public and must be filed with the secretary of state, your corporation’s bylaws is a private, internal document that does not have to be filed with the state or any government entity.
On the other hand, even though you are not required to submit your corporate bylaws to the state, your corporation may not legally exist until its board of directors has formally adopted bylaws, or has addressed how the company will be run.
Some states require corporations to have bylaws in place and others do not—check with the Secretary of State where your company is incorporated to find out if your corporation is required to adopt bylaws in order to receive legal recognition.
Carefully constructed corporate bylaws can help a corporation function effectively by:
If your company does not have bylaws in place, state legal statutes will provide a set of default rules by which your corporation should be operated. These will include some provisions that are mandatory, some that are optional, and others that can be altered. Your bylaws provide a vehicle for you to tailor some of these default rules to fit the specific needs of your company.
Furthermore, corporate bylaws can be very effective at helping a corporation resolve internal disputes. In the absence of guidelines on how disputes should be resolved, a dispute between a board member and an executive, for example, can spread and infect the entire corporation. Having a good setup of bylaws can help resolve these disputes in an expedient and amicable manner and before tempers and passions threaten your corporation with litigation.
In addition, if you want to open a corporate bank account, most banks will require you to provide a copy of your corporate bylaws. Moreover, your insurance provider may require your corporation to provide them with a copy of its bylaws before underwriting certain types of insurance policies.
Your corporate bylaws will typically be the biggest document in your corporate record book. If you are a single shareholder entity, then they will tend to be fairly straightforward since there won’t be any potential disputes to resolve. However, if there are two or more shareholders or members, your corporate bylaws will be more complex and may contain any number of provisions.
Most states make forming a corporation fairly easy by providing forms for nearly everything, but they rarely provide a form for your bylaws. Nevertheless, how you format your bylaws is not as important as making sure that they address the right issues. That being said, here's is a list of the top 10 provisions that you should include in your corporation's bylaws:
Your statement of purpose should reflect every facet of your corporation and its particular niche. It should fundamentally provide the following information:
Essentially, your statement of purpose describes the reason for what you do and the motivation behind it. This can be extremely important if you are a nonprofit corporation because what you write in your statement of purpose can determine whether or not your corporation qualifies for 501(c)(3) or 501(c)(4) status and are approved by the IRS as a tax-exempt organization.
The federal government does not require any specific language to be used in your statement of purpose in order to qualify for tax exempt status, but there is certain language that they look for. So, be sure to do some research when writing your statement of purpose if you are looking to ensure 501(c)(3) or 501(c)(4) status for your corporation.
This provision addresses the types of members your corporation has, their voting rights, and the procedures for adding new members, if applicable. Some corporations have members, others do not.
If you have members, then your corporation should have a formal membership policy. This policy should specify:
Unless otherwise specified in your bylaws, a member of a corporation can be an individual, a corporation, a general or limited partnership, an association, or any other entity. Members of your corporation may participate in meetings of the members by either being physically present at such meeting or by means of a conference call, video call, or any other means of communicating by which all persons participating can hear each other at the same time.
Corporate bylaws commonly include information that specifies, for example, the number of directors the corporation has, how they will be elected, their qualification, and the length of their terms. It can also specify when, where, and how your board of directors can call and conduct meetings, and voting requirements.
A corporation’s board of directors plays an important role in corporate governance. They oversee all of the officers of the company and will often be involved in discussing strategy and planning for a corporation. Directors, unlike the officers of a corporation, are usually not employees and report only to the shareholders.
Your corporation's initial directors, who may or may not be members, will typically be named in your articles of incorporation and will usually only hold office until the first annual meeting of shareholders when new directors will be appointed.
Alternatively, individuals may be appointed or elected to your board of directors by members of your corporation. Likewise, any director elected by these members may also be removed, with or without cause, by the members of your corporation.
This provision should also specify the number of directors needed to constitute a quorum (the number of directors that have to be present to vote on an issue) and how your board of directors can take action.
Typically, any majority of directors will constitute a quorum, as long as it consists of at least one-third of the total number of directors. Furthermore, any action taken by a majority of directors present at a board meeting at which a quorum is present should be deemed an act of the entire board.
Finally, it should be made clear that your board of directors may take action without meeting if all directors consent to the action and when this consent is set forth in a resolution, which is then signed and recorded in your corporate minute book.
As mentioned above, your board of directors will play an important role in corporate governance. Inside of your board of directors you can also have smaller groups of directors (committees) that perform very important tasks. This provision pertains to:
Committees, which are usually established and dissolved by a corporate resolution, consist of board members who are put together for specific purposes. The idea is for the corporation to take advantage of the expertise possessed by certain members of its board of directors in order to solve problems or address issues that require a certain amount of specialized knowledge.
There may be certain members of your board of directors that have very valuable skill sets. For example, if you have a financial expert on your board, you may want to put him or her on a committee that deals with financial problems. Likewise, if you have a fundraising expert on your board, he or she can lead the fundraising committee.
A committee can, therefore, be created around a board member who has the specific skill set needed to solve a particular problem. Its function is not to make binding decisions but to recommend to the board what decisions should be made.
There are essentially two types of committees that can be established by your board of directors: standing committees or ad hoc committees. Standing committees are committees that are running all the time, while ad hoc committees are those that are created around a given issue or problem and then dissolved when the issue has been resolved.
Your corporation should not do business until it has issued stock to its shareholders. Here you will explain how the issuance of stock certificates will proceed, who will be entitled to receive stock in the company, the different classes of stock that will be issued and to whom, and how the transfers of stock shall be made.
Stock or equity in a corporation comes in the form of shares. Each share represents a percentage of ownership in the corporation. There are fundamentally two types of stock that can be offered by a corporation — common stock and preferred stock — and each has a different set of ownership rights associated with it. These rights are referred to as preferences.
Preferred stock, as the name implies, generally comes with a lot more preferences than common stock. Some of these preferences include the following:
Preferred stockholders generally have more power than common stockholders in terms of corporate involvement. Furthermore, when a company is liquidated or sold, preferred stockholders will be paid before common stockholders see any money.
Your bylaws should include provisions for electing and appointing officers, and to specify whether or not these officers will be board members and what responsibilities they will have.
Officers are generally employees of a corporation, although they don't always have to be. They oversee the day-to-day operation of the corporation and report directly to the board of directors. They are usually elected or appointed annually by the board, and may typically be removed at any time if it is in the best interest of the corporation.
Some typical titles or positions held by officers include the following:
The various officers of a corporation typically include at least a president, one or more vice presidents, a secretary, and a treasurer. Also, unless specified otherwise in your bylaws, an individual can be both an officer and a director, and may hold more than one office, as long as it is not both president and secretary.
A corporation's bylaws should generally include a provision indemnifying its directors and officers from any liability that they may be exposed to because of their association with the corporation. Directors and officers will typically want to be indemnified to the maximum extent permitted by law. This may be included in your bylaws or your articles of incorporation, or both.
The indemnification provisions contained within your corporate documents and any separate indemnification agreement signed between your corporation and an individual serve one primary function––to help the corporation attract and retain highly qualified officers and directors. This is because they provide these individuals with legal protection against lawsuits that may be brought against the corporation.
This is important because when a person becomes an officer or director of a corporation, they have an increased risk of litigation. They may be named in a lawsuit against the corporation and, in some cases, be held personally liable. An indemnification agreement makes it very clear that the officers and directors of the corporation are indemnified from legal liabilities that may arise because of the position they hold.
Here your bylaws will require your directors to disclose both actual and potential conflicts of interest and to exclude themselves from any discussion of related matters that may be under consideration by your board of directors. This provision is very important as it demonstrates to prospective board members what is inherent in the fiduciary responsibilities that they will be undertaking, and it also sends a message to those who will do business with the corporation that procedural safeguards are in place to prevent abuses.
Finally, this provision should outline how your corporation’s bylaws can be amended when the need arises and should specify the requirements for amending bylaws under the state law, your articles of incorporation, and any other internal rules established by your board of directors or committees.
While most corporate bylaws are written thoughtfully and with the corporation's long-term outlook in mind, the fact remains that at some point, most corporations will find it necessary to review their bylaws and change them if certain provisions have become obsolete, unenforceable, or undesirable.
If several provisions of the corporate bylaws are considered for amendment, then perhaps the entire document needs to be rewritten.
It is important to the success of any organization that it articulates the rules and regulations governing how it will be structured and managed. Your bylaws provide you with a vehicle to adopt guidelines by which your corporation will operate and to address potential issues long before they occur.
A well-thought-out set of corporate bylaws should never be overlooked. Instead, they should be prioritized and given the respect and attention they deserve as one of the most important investments you can make in terms of the long-term success of your corporation.
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