Bylaws: Purpose and Types

Bylaws are a vital component of organizational governance. You can think of them as the machine by the product that ensures the organization meets its legal obligations. Whether your state or location legally requires bylaws, you should draft a personalized document since they can help your organization handle disputes, concerns, or questions as they arise in the future.

This article outlines the basics of bylaws, including the different types, what’s typically included, and much more.

What are Bylaws?

Bylaws are legal documents that organizations use to define the legally binding rules a corporate or nonprofit board of directors uses to operate their organization. They address critical issues, such as quorum requirements, board member terms, annual meetings, and other top-level administration issues.

Many organizations choose to follow the rules of parliamentary procedure when defining and governing rules surrounding annual, executive, and special meetings.

You can learn more about bylaws by checking out this web page.

Purpose of Bylaws

The purpose of bylaws is to establish the set of rules that govern an organization’s internal operations with board members. Bylaws can address dividends, administrative functions, and board composition. Additionally, they contain information about the company’s share capital, location, and nature of business.

Historically, bylaws date back to the inception of commercial operations, when the prerequisite for operation focused on establishing goals, powers, resources, and legal plans.

A common mistake made when forming a business is not paying enough attention to the wording of bylaws, with some organizations even copying and pasting a boilerplate template that is unlikely to meet the legal situation. Ensure that you consider the different bylaws available and standard provisions to avoid this oversight.

Types of Bylaws

There are two types of board bylaws, including corporate bylaws and nonprofit bylaws. Board bylaws are legal documents that an organization uses to establish its internal management structure by outlining the rules and responsibilities of shareholders, directors, and officers. They establish meeting procedures, create voting rights, and define officer positions and responsibilities.

Organizations can amend bylaws to meet the organization’s needs. Generally, any amendments must be approved by the Board of Directors regardless of whether the organization is a corporation or nonprofit, and states may have other additional requirements for an amendment to be valid.

The two different types of bylaws are described below:

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Corporate Bylaws

Corporate bylaws establish the structure and operation of your S Corp or C Corp. Many states even require them. They are beneficial as they eliminate uncertainty and ensure that board members and directors follow all legal formalities.

Nonprofit Bylaws

Nonprofit bylaws are the legally binding rules that govern the organization. They define the organization’s structure and direct the Board of Directors . Bylaws are essentially a nonprofit organization’s basic operating rules.

What’s Typically Included in Bylaws?

Your organization’s bylaws are private, internal documents that you generally are not required to file with the Secretary of State’s Office, contrasting the Articles of Organization. Regardless of filing requirements, you cannot legally operate a corporation or nonprofit without bylaws in most states.

Boards of directors typically include the following terms in bylaws:

Term 1. Mission Statement

Your mission statement should encompass all facets of your business and its unique offerings. Essentially, it’s a statement of purpose explaining what your company fulfills in its market. This element is critical if you are a nonprofit corporation since it affects your ability to obtain tax-exempt status.

Term 2. Members

Member terms address corporate member issues, such as allowable member types, voting rights, and procedures for adding new members. Unless otherwise specified in the organization’s bylaws, a member may be an individual, a corporation, a general or limited partnership, an association, or any other entity.

Term 3. Board of Directors

Bylaws should provide information about the board of directors, including the number allowed, elections, qualifications, and term limits. Your bylaws can also specify the dates, locations, and methods by which your board meetings may convene.

Term 4. Shareholders’ Meetings

The annual shareholder’s meeting is the most critical legal requirement for an organization to uphold. Shareholder meetings may occur at any location approved by your board of directors. This provision should also specify meeting dates, notice of meeting requirements, agendas, and quorum voting terms under the shareholders’ agreement and founders’ agreement.

Term 5. State Requirements

Some states impose highly stringent requirements on shareholder meetings. These requirements will vary depending on the nature of the shareholder meeting and organization. Ensure that you not only consider Robert’s Rules of Order when drafting your bylaws, but you should also check with your local Secretary of State’s Office.

Term 6. Committees

You appoint smaller groups of directors within your board to perform critical tasks on committees. Committees usually comprise of board members convened for specific purposes while attaining the benefit of specialized knowledge, including:

• Audit
• Compensation
• Ethics
• Executive
• Finance
• Fundraising
• Research

For anyone with experience serving on a board, you know how instrumental these committees are for introducing corporate resolutions to the larger group. Ensure that you allow for special committees to keep your organization running smoothly and welcoming of fresh perspectives.

Term 7. Stocks (Corporate Bylaws Only)

Organizations should not conduct business until shareholders purchase stock. Your bylaws should describe how it will issue them, eligibility requirements, and stock classes. A corporation may offer common and preferred stocks, each with individual ownership rights.

Term 8. Officers

Your bylaws should include provisions for electing and appointing officers, as well as defining their responsibilities. They are responsible for the organization’s day-to-day operations and report directly to the board of directors, including the president, vice-president, treasurer (or chief financial officer for corporations), and secretary. An individual may serve as both an officer and a director and hold more than one office unless otherwise specified.

Term 9. Indemnification

Bylaws usually contain a provision indemnifying its directors and officers against any liability incurred due to their association with the corporation. Typically, directors and officers seek indemnification to the maximum extent permitted by law.

Term 10. Conflict of Interest Possibility

Your bylaws should require directors to disclose both actual and potential conflicts of interest for board recusal. This provision is critical as it informs prospective board members of fiduciary responsibility and risk. It also communicates to stakeholders that procedural safeguards are in place.

Term 11. Modifications

Your organization’s bylaws should outline how they can be amended if the need arises vis-à-vis a modifications clause. Most corporations will need to review and amend them over time, especially if specific provisions become obsolete or unenforceable. Ensure that you draft specific rules around modifications so that they are not easily amendable yet not so restrictive that the organization cannot adapt over time.

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Who Needs Bylaws?

Boards of directors of corporations and nonprofits need bylaws, in addition to their annual report, certificate of incorporation (for corporations), and other essential legal documents as applicable by law. Bylaws control the operation of administrative work of the organization. As such, seek professional legal help when drafting bylaws so that your organization has a personalized document that functions as intended.

Get Legal Help Drafting Bylaws

If you serve on a board, work as a director, or represent your company as a founder, it’s critical to draft the bylaws that meet your legal needs. Corporate lawyers in your state can help you finalize the perfect documents. Connect with a legal professional today.