Corporate Bylaws: What They Are & Why They're Important
Four people sit around the end of a table looking at a laptopMany aspiring new business owners know that incorporating their new venture is a great first step to protecting yourself, but the corporation alone isn't usually enough. To fully protect your personal assets and interests and those of your business partners, you’ll need to create corporate bylaws that outline how your new business will be run. If that sounds complicated, you don't need to worry because our legal subscription plans for small businesses allow you to consult experienced, dedicated small business attorneys who are well versed in creating corporate bylaws to help you customize the kind of bylaws your new small business will need. In the meantime, here is a brief overview of what corporate bylaws are and how they work:
What Are Corporate Bylaws?
The direction of a corporation is done by a board who makes important decisions for how the business is run. That same board of directors will develop a set of rules and regulations that dictate the corporate or organizational structure of the business and how business will be conducted and decisions made on a day-to-day basis. Most states require that corporations have these rules - known as bylaws - but they aren't generally required to be filed with your state. That doesn't mean that corporate bylaws aren't important, as they map out visions, expectations, and rules that ease the decision-making process, and reduce conflicts over time.
What Is Included In Corporate Bylaws?
Each businesses' corporate bylaws will be different and based upon the needs of the corporation, shareholders, industry, conventions, and other members, but the best corporate bylaws usually contain rules and regulations that cover the following areas:
Statement of Purpose
This part of corporate bylaws lets the board of directors establish overall goals, aspirations, and vision for the business. It often details the type and kind of clientele or market the business will target, the reasons that the business exists (what kind of market need it fills), how the business differs from competitors, and how those goals will be reached. The Statement of Purpose is particularly important for those organizations seeking to qualify for status as a 501(c)(3) non-profit, so those kinds of entities should pay special attention to this section of the document.
Membership
The members of a corporation differ from those in an LLC in that, in a corporate structure, they are shareholders, directors, officers, and employees. The corporate bylaws should address the type of members your company has or can have, the responsibilities of each member type, the rights of each member type, the voting rights of members, and the process by which members can be removed or added. Members aren't always just individual people: other corporations, partnerships, or other entities can also be considered members under corporate bylaws.
Board Of Directors
Corporate bylaws should set forth a structure for the Board of Directors, including:
The minimum and maximum number of board members
The qualifications needed to serve on the board
Board member term length
Rules for board elections
How meetings are called and conducted.
Corporate bylaws should also detail what is considered a quorum for meetings of the board of directors.
Officers
Officers are designated by the board of directors to deal with the day-to-day workings of the business, and corporate bylaws should define those roles, their titles, the responsibilities, and how these officers can be elected, appointed, or removed from those positions.
Stock
Issuing stock to shareholders is one of the first things a corporation does, and your bylaws should detail the type and amount of stock as well as who receives stocks, how much they get, and how that transfer takes place. Your bylaws is also where you note the differences between non-voting and voting stock for shareholder meetings.
Shareholder Meetings
Shareholder meetings are annual meetings that corporations have, and your bylaws should contain the details of those meetings: when, where, and an agenda of what is to be covered at the meetings. It should also state the number of shareholders needed to have a quorum and begin proceedings. Shareholders can also hold special meetings, and your bylaws can dictate under what circumstances these special meetings can be called.
Committees
Committees are created by boards of directors to handle special tasks or issues, and your bylaws should state the types and kinds of committees your board can create, the authority of each, and how they do the work.
Conflicts of Interest
Some board members may be involved in a number of business ventures, and your bylaws should have a section addressing potential conflicts of interest. Adding a requirement that board members must disclose such conflicts and recuse themselves from making decisions or participating in discussions over matters involving these conflicts. Not doing so risks ethical problems, and having these rules in place protects your business' reputation.
Amending Bylaws
Situations change, and including a process for your bylaws to be added to, deleted from, or otherwise changed is important. Your bylaws should detail a process by which the bylaws can be amended. This should include who must approve of the changes, what vote margins need to be met, or other benchmarks that need to be met in order to adopt the amendment.
Let Us Help With Your Bylaws
There's a lot to do when starting a new business, and crafting solid bylaws is an important first step. Getting these rules right the first time will save you time, effort, money, and stress in the long run. Our network of small business attorneys can help you draft all the documents you need to start your small business at a fraction of what you might spend on an attorney on your own. Our Small Business Legal Protection Plans start at just $49 per month, and pay for themselves the first time you use them. Learn more about our Small Business Legal Plans or sign up now!
