Corporate bylaws are guidelines for the way you'll structure and run your corporation. Bylaws are required in most states. Even when they're not required, bylaws are useful because they avoid uncertainty and ensure you're complying with legal formalities.
Bylaws serve a couple of important purposes:
- They provide a road map for running your business. This map includes how many people will be on your board, how to handle board and shareholder meetings, and the duties of each of your officers. When an issue arises, bylaws can provide clear guidance, minimizing disagreements over how the business will be run.
- They give your business legitimacy. In a lawsuit, loan application, or other business dealings, you can point to your bylaws as evidence that you're following proper corporate rules in running your enterprise.
Bylaws are not the same as articles of incorporation—the articles are a short document filed with your state to form your business. Bylaws are a longer, more detailed, internal document. Both for-profit and nonprofit corporations should have bylaws.
Drafting Corporate Bylaws
The process of creating bylaws usually happens along with, or soon after, the articles of incorporation. To write bylaws, you'll need to follow your state's rules for corporate meetings and organization while also tailoring the document to your own situation.
Here are eight key things to include when writing bylaws.
1. Basic Corporate Information
The bylaws should include your corporation's formal name and the address of its main place of business. You can also include the purpose of your business and the address of any satellite locations.
2. Board of Directors
The board sets policies and oversees the “big picture" of your business. Bylaws should specify how many people will serve on the board, how long their terms are, and any qualifications needed. They should also explain the procedure for choosing and removing directors.
Officers are in charge of running the business day to day and are usually appointed by the directors. Your bylaws should list the titles of the officers of the corporation—such as president, vice president, secretary, and treasurer—and describe their duties. Bylaws also explain how officers will be chosen and how they can be removed.
Shareholders own stock in the company. In a small business, shareholders often serve as officers and directors. Your articles of incorporation usually list the number of shares issued, but bylaws can go into more detail, such as specifying whether shares are voting or nonvoting, how shares can be transferred, and whether and how you will issue stock certificates.
If your corporation will have committees, your bylaws can identify the committees and describe their responsibilities. In addition, they explain how committee members are chosen, how long they serve, and the procedure for creating or disbanding committees.
The board of directors and shareholders must meet at least annually, and the directors may also hold special meetings. Your bylaws should explain when meetings will be held and the procedure and timeline for notifying the appropriate people of the date, time, and location of the meeting. They should also describe voting requirements, such as how many votes are needed for a quorum and how shareholders can vote by proxy.
7. Conflicts of Interest
Board members have an obligation to place the company's interests ahead of their own, but conflicts can arise if one of your directors has a financial stake in another company you're doing business with. Bylaws should require directors to disclose conflicts and specify how your business will handle them.
Your bylaws should also explain the procedure for amending the bylaws, including the way that notice of a potential amendment should be given and the way amendments can be voted on and approved.
Once your bylaws are finished, give copies to your officers, directors, and shareholders. Also keep a copy on file at your place of business with your other corporate paperwork.