Corporate Bylaws: Explained

Business owners looking to incorporate their company must first register their business with state officials—specifically with the Secretary of State’s office.  Once all of the necessary forms are filed, officials will review the documents and (if approved) register the corporation, giving the business all of the legal and tax benefits associated with incorporation.

Deciding whether to incorporate is a big decision for owners, and largely depends on the type of work that the company does, its risk-level, it’s yearly revenue, and its ownership structure.  Nonetheless, the protections and tax benefits associated with incorporation make it an incredibly appealing track for many owners.  To this end, how can an owner (or group of owners) incorporate their business?  If it’s simply a matter of filing the correct documentation, then a logical next-step would be to locate the required forms.  For corporations, this usually means the Articles of Incorporation, the Shareholders’ Agreement, and the company Bylaws.

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Formation Documents and other Required Forms

Folks interested in incorporating their business are required to file the necessary documentation.  While the exact paperwork will depend on state-specific regulations, many jurisdictions frequently request the articles of incorporation, the shareholders’ agreement, and the company bylaws.  

Of these three, the Articles of Incorporation are perhaps the most straight-forward.  Typically, they provide basic company information, such as the company name, its location, is purpose or mission, the names and contact information of the owners, and the employer identification number (EIN).  While the articles of incorporation largely cover the company’s identifying information, the shareholders’ agreement contains a bit more detail.

In a general sense, a shareholders’ agreement represents an understanding between owners (in the context of a corporation, owners are also called shareholders) in regard to the pricing, selling, and managing of company shares.  A strong shareholders agreement will include language on the value of company shares, the number of shares to be issued, the proportion of ownership for individual shareholders, and the protocol for the selling/purchasing of shares.

While the shareholders’ agreement establishes rules and procedures for managing company shares, share management only represents one aspect of a corporation. What about rules to establish the day-to-day procedures?  For instance, most companies should establish policies for shareholder voting procedures, as well as set rules regarding mandatory shareholder meetings.  Here’s where the corporation bylaws come into play.

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What’s Included in a Corporation’s Bylaws?

Bylaws are essentially the rules for a corporation’s group of owners.  They play a particularly important role in decision-making, especially when owners—for whatever reason—cannot come to an agreement.  Bylaws establish the rights and responsibilities of the shareholders and set limitations on shareholder powers.  In many ways, a corporation’s bylaws provide an internal structure that’s necessary for the collaboration of owners and the unfettered operation of the business.  

Bylaws will vary from company-to-company, and their depth depends on the size and complexity of the operation.  For instance, a multi-national corporation with hundreds of shareholders will have more substantial bylaws than a local operation with only a handful of shareholders.  In essence, as the number of shareholders grows, the complexity of the relationships among shareholders will grow as well, thus more detailed bylaws will be needed to provide structure and order.

Although these provisions will vary by company, strongly written bylaws usually include the following:

  • Voting Procedures and Members’ Voting Rights
  • Procedures for Removing/Disciplining Members
  • Rules for the Board of Directors (Size of the Board, how New Directors are Elected, Length of a Director’s Term, etc.)
  • The process for making Amendments to Company Agreements (Including Amendments to the Bylaws Themselves).   
  • Time and Location of Regular or Recurrent Meetings
  • Detailed Procedures for Corporate Record-Keeping
  • Rules Regarding Corporate Resolutions and other Contracts

These seven considerations will apply to most corporations, but again, bylaws are meant to be company-specific.  With this in-mind, it’s perhaps worthwhile to consult a business attorney or other experienced professional when drafting bylaws.  Realistically, these are complex documents that, when executed poorly, can endanger the corporation and its owners.  

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Does my Corporation Need Bylaws?

In short: usually, but not always.  Currently, 35 states require that a company’s bylaws be provided to the state in other to obtain incorporation.  In other words, the majority of state jurisdictions consider bylaws an essential document and will not register a corporation in their absence.  However, that leaves 15 states where corporations aren’t required to maintain bylaws.

Regardless, it’s always smart to have these key organizational documents drafted—whether they’re state-mandated or not.  They provide the much-needed structure for owners, and establish the rules and limitations for things like voting, shareholder power, and corporate resolutions.

So does your company need bylaws?  It depends on the state jurisdiction.  But should they have bylaws?  Most definitely, especially for larger or more complex operations.  A business attorney can help in these situations.  Attorney-reviewed bylaws should be clear and complete, and ultimately help avoid some of the disputes that naturally arise among groups of owners.

 

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