Corporate Bylaws: What They Are & Why They're Important

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Many 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!

When Should I Get Legal Help Starting My Small Business?

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It's pretty common for small businesses to try to go it alone and not seek out help, even when help is needed. While many small businesses try to handle matters on their own, many times, it is the fear of the costs involved with bringing in professionals that prevents small business owners from seeking the help they need, particularly when it comes to legal issues. But when it comes to professional help for starting your small business, you can’t not afford to not seek out legal advice when it comes to critical issues with starting a small business, and it's a lesson that often comes too late for many small business owners. Read on for a list of crucial issues that your Small Business Legal Protection Plan attorney will be able to make easier while starting your small business, even on a shoestring budget.

Registering A Business Name

Formalizing your legal business name is the first step to starting a small business, and process is more involved than just making a logo and registering a domain name. Legal recognition of your small business means going through a process to officially register your business name with various levels of government entities. In some states, when you create articles of incorporation or organization for your business entity, you may be automatically registering your business name with your state, for example. If you intend to do business under a name that is different from your business name, you will need to register a DBA (Doing Business As) with your state. Doing business in multiple states means that you may want to protect your business name at the federal level, which means registering your business name with the U.S. Patent and Trademark Office.

All of these options mean that you have to research whether your business name is available in all of these databases, and an experienced small business attorney can help you with the process of research and registering your business name with all the relevant agencies required for your business and business structure.

Creating a Business Entity

Creating a business entity protects your personal financial assets from potential corporate debts and obligations, and while many people attempt to form and register their business entities themselves, the process may be complex and a lawyer well versed in the creation of business entities can make this process quicker and easier than doing it on your own.

Creating a business entity means choosing the right option for your business and industry. There are several options: LLCs, partnerships, LLPs, or forming a C-Corp or S-Corp. Each of these types of entities differ in both large and small ways, and which ones will be a good match for your business and business style and industry can be a complex question to answer. Without experience or knowledge in creating business entities, you run the risk of making the wrong choice for your business.

Once you choose and entity type, there is paperwork to be filled out and submitted to various government bodies, and mistakes can cost time and money, both in the long and short term. And if this seems complicated, we haven't even touched on articles of incorporation or organization and will need to be created.

Getting these early choices right is important and working with an experienced small business consultant or attorney from the beginning will save you time and money. Learn more about our New Small Business Filing Package!

Contracts

As a small business owner of any type, you will work with contracts for both internal and external reasons. Many small business owners aren't prepared with basic internal contracts and documents to start or grow their small business.

Contracts protect you and your interests, so it is important to have the right documents in place to cover all aspects and details of your business and day-to-day work. From partnership agreements to contractor agreements; from employment contracts to vendor and sales documents, it is important to have legally binding contracts written and on hand from the first day you start your business. You can't rely on templates from sites on the Internet to keep you and your assets fully covered as these types of generalized documents almost never cover state-specific needs, industry specific needs, or the specialized content you may need from your contracts based on your type and style of business.

Companies that your business will work with - rental agreements for office space, suppliers, equipment sales and repair, contracted workers - will all have contracts for you to sign, as well, and it is important that you understand what responsibilities you're agreeing to for you and your business with each one. Your network attorney under our Small Business Legal Protection Plans can look over contracts for your business and contracts given to you by businesses you work with and help you understand the terms before you sign.

Intellectual Property

Your business is built on your ideas or intellectual property, so it is important to protect that value. Your ideas and creations as well as the process and knowledge to create your work, your customer lists, skills, and branding are all intellectual property that should be protected the same way you'd protect physical property. Your intellectual property - depending on what it is - could be protected by trademarks, copyrights, or patents, and knowing which you need and the process for acquiring each can be complicated. You will want to make sure that you are getting the appropriate protection for each, and an experienced small business attorney, like those who are part of our network of legal firms, can help you navigate the process particular to your business and industry, getting you the protection you need. Registering your patents, trademarks, and copyrights means that you can take legal action should someone violate your intellectual property.

Getting Legal Help For Your Small Business Doesn't Have to Be Difficult or Expensive

Though it is tempting to try to save money by doing all of these things yourself, the truth is, you'll actually save yourself money in the long run by having a professional tackle the legal aspects of your small business. You can avoid mistakes by hiring an attorney, and our network of lawyers available to our Small Business Legal Protection Plan members offers this kind of protection at a fraction of the cost you'd pay by hiring an attorney on your own. Our Small Business Legal Subscription Plans offer you advice, document review, contract review, consultations, and more with law firms in your state. In most cases, you can talk with an experienced, dedicated attorney within one business day. Learn more about all the benefits of a Small Business Legal Protection Plan membership, or sign up your small business today!

Differences Between Corporations & LLCs

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Deciding between a Corporation and an LLC often comes down to small details when a new small business owner is building a new business. Choosing the right entity for your business means taking a long look at all the considerations.

It is always best to seek the advice of an experienced small business lawyer, consultant, or accountant before you start (and our small business legal subscription plans are the perfect, in-budget solution for small business startups!), but here is a brief overview of the differences between a Corporation and an LLC.

Legal Entity VS Tax Entity

There is a difference between a Legal Entity (an LLC or Corporation) and a Tax Entity (C-Corps and S-Corps VS Sole Proprietorship/Partnership). A tax entity is how the IRS (and some state tax boards) classifies the business. The legal entity is how the courts, the state, and partners view the business. For instance, a corporation (the legal entity) gets a C-Corp or S-Corp tax designation and a tax entity; however, an LLC (the legal entity) gets to decide how it is classified: as a sole proprietorship/partnership or C-Corp for tax purposes, as there is no LLC tax entity. LLCs are then designated, for tax purposes, one of the other tax identities, typically, the tax type that has the most benefits for the business.

Speaking of Taxes...

LLCs have flexibility with their tax designation that corporations don't. A disadvantage of the corporation tax designation is the "double taxation" implication. Corporations' profits are taxed (corporate tax), and then shareholders are taxed on their dividends (individual tax). S-Corp designations allow for flow-through taxation (eliminating the corporate tax), but there are requirements to qualify for this designation, and some requirements may not be ideal for some businesses. Some businesses may have no choice except the C-Corp tax designation and accept the double taxation.

An LLC, regardless of organization and structure, chooses how it wants to be taxed. An LLC is treated like a "pass through" corporation by default (single taxation), but it can choose to be treated like a C-Corp or an S-Corp if it qualifies. While choosing double taxation may seem counter intuitive, but it does make sense in some situations, though this is rarely the case.

The taxation differences between an LLC and an S-Corp are more nuanced, as both offer pass through taxation (no double tax), but the LLC's distribution of profits are then subject to employment taxes, while an S-Corp's dividends are not. Careful planning means that some businesses can avoid the employment taxes by becoming an S-Corp. However, S-Corps require a lot more paperwork which may deter some businesses from choosing this entity type. As always, new business owners should consult with a small business professional - such as an attorney or a consultant - before making this choice for their new business.

Business Ownership

Shareholders are the owners of a corporation, while the owners of an LLC are members, and there are other differences besides just the names. LLCs can distribute their stakes in ownership regardless of the amount of capital a member has put into the business. A C-Corp can achieve the same result by creating a stock class structure while an S-Corp must have a single class of stocks with dividends distributed proportionally to the amount of capital put in by each shareholder. Creating unique classes of stocks means agreeing to the double taxation.

The management structure of an LLC is usually centralized, meaning that any member can act as a manager and the LLC can choose to have no distinction between the LLC owner and the manager. A corporation must have a Board of Directors to handle management responsibilities and corporate officers running the day-to-day operations. Shareholders are considered owners as a class, but are separated from business decisions except to approve major corporate decisions and to elect directors. Individual shareholders may be elected to be directors or appointed to be officers.

Legal Considerations

The corporation designation has been in existence for hundreds of years, meaning that, as the form has matured, the laws for corporations are virtually uniform. Centuries of case law precedent exist to resolve disputes involving corporations, and financial experts can comfortably guide a corporation knowing how the laws will work.

LLCs are relatively new. LLCs began to be recognized in the 1970s, and with characteristics of both corporations and sole proprietorships/partnerships, an LLC is a "newer" type of legal entity. These dual characteristics mean that states may have different laws and regulations in how LLCs are treated.

Though there can be some similarities to how LLCs are treated state-to-state, there are enough differences that some businesses even choose to be an LLC in one state but a corporation in another. Eventually, laws governing LLCs in the United States should become more uniform, but for now, these discrepancies can be enough to be the deciding factor when a new business owner is structuring their new enterprise.

Helping new business owners understand the legal and tax implications of their new business entity is why I started my business consulting firm. I have helped dozens of businesses through the research, documentation, and filing of forms for small businesses and look forward to helping you and your small business, too!

If you want to start getting the paperwork for your startup handled quickly, easily, and conveniently so you can focus on your business, call (208) 755-8335 or email me at debbie@debbieaferguson.com for an appointment today!