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Corporate bylaws are essential legal documents that outline norms and rules for daily operations, aiming for smooth and consistent business management. In contrast to articles of incorporation, bylaws are private and are not needed to be presented to the Secretary of State. Nevertheless, investors, lenders, solicitors, and banks might all ask to see the corporation's rules. A corporation's bylaws should contain specific information depending on the state. The bylaws usually deal with internal management issues, such as where the offices are, the formalities for holding shareholders' and directors' meetings, the voting rights of shares, the powers, duties, and qualifications of directors and officers, etc. Let’s learn more about several aspects of Corporate bylaws.
What are Corporate Bylaws?
When a company has become incorporated, the corporation’s board of directors will adopt a set of corporate bylaws that act as detailed rules for the company.
Corporate bylaws are an important part of corporate governance because they detail how the company will be run. Bylaws will include rules about the management structure, meeting requirements, stock issuance, and other important company policies.
Corporate bylaws can be thought of as the operating manual for a company. They will dictate procedures and standards that the company will follow. Bylaws will state what a company can and cannot do and outline the roles of each director and corporate officer.
Unlike articles of incorporation, corporate bylaws are private and do not get filed with any government entity. Even though they are private, bylaws are required by most states for your corporation to legally exist.
Essential Elements of Corporate Bylaws
Bylaws are the fundamental laws and regulations that govern a corporation's internal administration and operations. These bylaws ensure the business runs smoothly and upholds legal compliance. The following major provisions must be included in these bylaws:
- Corporate Name and Address: The bylaws should begin by clearly giving the corporation's official name, address, and, if appropriate, the contact information for its registered agent. This data is essential for legal identification and communication.
- The Corporation's Purpose: The provision explains the organization's fundamental objective or mission statement. It establishes the scope of the corporation's activities and guides its operations and choices. This clarity aids stakeholders in understanding the corporation's goals.
- Board of Directors: The corporate bylaws refer to the Board’s composition, responsibilities, and authorities. It entails the number of directors, their qualifications, the durations of their terms and tenures, and the procedure for electing or appointing directors. It may also describe how board meetings are called and conducted.
- Officials: The functions and responsibilities of corporate officials such as the CEO, President, Secretary, and Treasurer are outlined in this category. It specifies their responsibilities, tenure of office, and the procedure for appointing or removing them. It may also concern remuneration and indemnity for officers.
- Shareholders: The bylaws outline shareholders' rights and duties, such as voting rights, meeting processes, and the issuing and transferring of shares. It may also specify the procedure for shareholder meetings, such as notification requirements and quorum rules.
- Stock Certificates and Records: This provision outlines how stock certificates are issued, kept, and transferred. It may cover the format of stock certificates, record-keeping practices, and, if relevant, the obligations of the corporation's transfer agent.
- Dividends and Finances: Dividend distribution, reserve reserves, and financial decision-making are frequently addressed in corporate bylaws. This section may include rules on dividends, financial reporting requirements, and processes for dealing with surplus cash.
- Bylaw Amendments: Procedures for altering bylaws are required to react to changing conditions. The method for proposing, authorizing, and recording revisions should be specified in the bylaws, which frequently involves a supermajority vote by the shareholders or directors.
- Dissolution: The provision details the procedures for liquidating assets and distributing them to shareholders or specified beneficiaries if the corporation is dissolved. It may also specify the conditions under which dissolution can occur.
- Reports: Corporations are required by state laws and regulatory authorities to keep records and generate reports. The records to be preserved and the processes for inspecting them should be specified in the bylaws.
- Policies on Conflicts of Interest: Corporate bylaws may incorporate conflict of interest regulations to ensure transparency and ethical behavior. These rules bind the directors and officers to reveal possible conflicts of interest and disqualify themselves from decisions involving such issues or conflicts.
- Indemnification and Liability: Corporate bylaws generally include indemnification clauses that protect directors, officials, and employees against personal liability for actions committed during their duties. It may define the terms and limitations of indemnity.
- Corporate Seal and Document Execution: Bylaws may demand a corporate seal on official documents and the officials or persons authorized to sign contracts and legal papers on the corporation's behalf.
- Distinctive Provisions: This clause includes a variety of terms, such as arbitration agreements, choice of law, and the fiscal year of the corporation. It may also cover the process of implementing new business rules and processes.
Thus, corporate bylaws are important for each business because they provide a clear structure for governance, decision-making, and compliance. Each of the fundamental factors listed above plays an important role in determining the structure and activities of the organization, assuring transparency, accountability, and legal conformity.
How Bylaws Work
Corporate bylaws are usually written by the owners of the company. After the bylaws have been prepared, they must be approved by the corporation’s board of directors. Once approved, the bylaws will become part of the corporate records and must be accessible to the IRS or any other entity that may audit your corporate records.
Even if a company chooses to not have detailed bylaws, at the very least, they need to include the corporation's name and identifying information like address and place of business. The corporation should be designated as public or private, and lastly, the bylaws should include the fiscal year of the corporation.
Do Corporations Need Bylaws?
Corporate bylaws are mandated by some state’s business laws. If you live in a state that requires bylaws, then you must have them for your company to be legally recognized as a corporation.
If you are not sure if your state requires corporate bylaws, check out the list below to see which state’s business laws mandate bylaws.
Bylaws are required in the following states:
- District of Columbia (DC)
- New Hampshire
- New Jersey
- New Mexico
- New York
- North Carolina
- South Carolina
- South Dakota
- West Virginia
Examples of Corporate Bylaws
Corporate bylaws are created by the owners and board of directors of a company so bylaws will vary based on an individual company’s size, structure, and management needs.
Although the bylaws may be different, the following list includes rules and topics that will most likely be covered in any company’s bylaws.
Statement of Purpose
The statement of purpose describes what the business does. It should include:
- The reason you started the business
- The target customers
- What the business accomplishes for customers
- What makes your business stand out from the competition
- How you will reach your business goals.
If your business is a non-profit and you are looking to file for tax exempt status, the statement of purpose is especially important. This statement will help determine whether your company qualifies for tax exempt status with the federal government.
The member section of your bylaws will lay out the rules for the types of members your company will have, voting rights of the members, and procedures for adding members. Other important membership information includes:
- The rights and responsibilities of members
- The voting rights of members
- How membership can be revoked
Not all corporations have members so this will not apply to all companies.
Board of Directors
The board of directors of your corporation is a very important part of corporate governance. The board oversees the officers of the company and because they are usually not employees, only report to shareholders. For this reason, your corporation’s bylaws should detail the roles and requirements of the board. These rules can include:
- The number of directors
- How directors are elected
- Required qualifications
- Length of terms
- How directors can conduct meetings
- The number of directors required to constitute a quorum
Corporations are required to hold corporate meetings, specifically, an annual shareholders meeting. In addition to the shareholders meeting, monthly or quarterly regular meetings can be held, and special meetings may also be called. The bylaws will dictate how these meetings are called and noticed, and lay out the procedures that will be followed during the meeting.
Depending on the state in which your company is incorporated, there may be specific requirements that you must follow for the corporate meetings. If you are unsure of your state business laws, you could consult with a corporate lawyer.
Some corporations opt to create committees within their board of directors. Committees will perform specialized tasks for the corporation. If you choose to have committees within your corporation, your bylaws should include the following:
- The kinds of committees your corporation will have
- Meeting information for the committees
- How the committees will operate
- What the committees are authorized to do within the company
Committees will generally utilize specific knowledge by board members to make recommendations as to how to solve problems within the company. Some examples of committees that a corporation may form include:
- Executive committee
- Finance committee
- Fundraising committee
- Audit committee
- Research committee
- Ethics committee
Issuing stock to shareholders should be one of the first orders of business for a newly incorporated company. The corporate bylaws will detail the number and type of stock classes that can be issued, who is entitled to receive stock, and how stocks will be transferred.
Officers are usually employees of the corporation, and they oversee the day-to-day operations of the company and report to the board of directors. Officers can sometimes be board members, but this needs to be specified in the bylaws. The bylaws will also dictate how officers are elected and appointed and what responsibilities they will have. Common officer tiles you will find in a corporation include:
- Vice President
Conflict of Interest
It is common for bylaws to require directors to disclose any conflicts of interests they may have that could prevent them from acting in the best interest of the company.
Policies for Amendments
This section will dictate how any bylaws can be changed or amended.
Corporate Bylaws vs. Articles of Incorporation
Articles of Incorporation are a legal document that is filed with the state when a business becomes incorporated. This document allows a business to be recognized as a legally functioning corporation.
Included in the articles of incorporation will be basic information about the business like the name, place of business, when the business was formed, and sometimes, who will be included on the board of directors.
Corporate Bylaws are the guidelines by which the company will run. The biggest difference between articles of incorporation and bylaws is that bylaws do not have to be filed with any government agency.
Corporate bylaws are like the operating agreements for corporations.
How to Write Corporate Bylaws
Most corporate bylaws usually follow the same basic structure even though the specifics will vary for each company. Bylaws generally begin with the corporation’s general information including the name and location of the company and the names of officers and directors.
Bylaws will then describe the reason why the company was formed and the goals of the corporation.
The body of the corporate bylaws is filled by the various laws that the company will abide by. This usually begins by describing the leadership structure and the roles and responsibilities of each member of the corporation.
If you are unsure how to structure your corporate bylaws, you can easily find a template online. Each state has different laws regarding what needs to be included in bylaws, so it is always a good idea to consult with a corporate lawyer when drafting this important document.
Final Thoughts on Corporate Bylaws
Corporate bylaws should evolve along with a company's growth and evolution. For that reason, bylaws ought to specify how they might be changed. Bylaw amendments often need a supermajority of two-thirds or three-fourths of the voting members, depending on the bylaw. Important legal papers that chart the destiny of a business are its bylaws. Depending on the state of incorporation, founders can incorporate additional clauses in a corporation's bylaws to safeguard the business against expensive litigation, such as a language demanding forced arbitration in the case of a legal disagreement or a clause requiring forum selection. Organizations should carefully draft bylaws to adhere to state incorporation regulations.
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