So you have formed your company after making so many crucial decisions and many different choices, now the very first thing that needs your attention is Company’s “Bylaws.” Company Bylaws are the most valuable legal document of any organization, whether it is a Corporation, Association, or Partnership.
What are Bylaws for a Corporation?
Bylaws (often spelled as “by-laws”) are the rules and regulations of a Corporation, organized by the board of directors during the process of starting a Corporation. Usually, the Company’s Bylaws are confused with the Articles of Incorporation.
Bylaws outline the structure of an organization and should be customized for every situation and condition. Bylaws authorize and protect the rights, and determine the duties and competencies of the organization’s members, Board of Directors, Executive Committee, and others. The Bylaws determine how those in charge are nominated or elected and also help in settling any disputes between the parties. Finally, bylaws must be formally selected and revised as necessary.
What is the Difference Between Bylaws and Articles of Incorporation?
Many people confuse company’s bylaws with its Articles of Incorporation. Unlike bylaws, which include topics such as the types and duties of officers, how the Board of Directors and/or officers are elected, and how the meetings are conducted, the Articles of Incorporation state the fundamental outline of the company. Articles of Incorporation usually provide information such as the name of the person who organized the Corporation; the total number of shares the Corporation can issue, if applicable; the names of the Corporation’s Board of Directors; and the location of the Corporation.
Like bylaws, Articles of Incorporation differ from Corporation to Corporation, but they do not go into detail about the Corporation’s operations or structure, which is handled by the company’s bylaws. Bylaws can be amended at no cost by a vote of the Board whereas the Articles of Incorporation are filed with the state and cost money to amend.
Writing the Corporate Bylaws
A new Corporation’s bylaws are generally created by the person or persons who founded the incorporation process (usually known as the “incorporator”), or they may be addressed (or formally adopted) by the new Corporation’s Board of Directors, as one of the board’s first actions. The bylaws should address the Corporation’s primary aims and reasons for their existence.
A company’s bylaws typically will start with the most common information, such as the company’s name, location as well as the names of the directors and officers. There also will be a section on when and where the shareholder meetings will be held and possibly a statement that the board may call as the meetings as needed. The bylaws should also address what forms a quorum for voting purposes, and rules for proxies.
Finally, the everyday duties and responsibilities of each officer (executives such as the CFO and CEO) must be spelled out in the bylaws. The exact contents of the bylaws will change from one Corporation to the next.
What Information Must Be Put Into Corporate Bylaws?
Each set of bylaws will be specific to each organization, but the basic components of bylaws are as follows:
- An Organization’s Name, Purpose and Office(s) Location
- Board of Directors
- Conflict of Interest
- Amending Bylaws
Name, Purpose and Office(s)
The name of your organization should be stated in the bylaws along with the purpose and the location of your organization. It is important to mention this information in the Company Bylaws.
This section details the several aspects of membership, which includes the various types of members, the membership selection process, members’ voting rights, and the procedures for controlling and/or removing members. Even if there are no members, you need to state that in this document.
Board of Directors
The Board of Directors is the main governing body of an organization. This section determines the composition of the Board, which may be a particular number of directors or a maximum or minimum number of directors. Moreover, in this section, you need to mention how the vacancies are filled, whether the Board itself fills the vacancies or they are filled by the members. Finally, the bylaws should define the qualifications for serving as a director, the length of a director’s term, the duties of directors, and the possible classes in which they are elected.
You can detail any specific committees in this section, including their formation, how they are elected, and their special duties. You should also discuss the roles and responsibilities of the “Executive Committee,” which usually makes all the recommendations to the Board. Some common committees in an organization are an Audit Committee, Membership Committee, and Nominating Committee.
Officers are members of the Board who perform particular functions on the Board (i.e., the President, Vice President, Treasurer and the Secretary). In this section, you should discuss how officers are elected, along with the duties, powers, and responsibilities of each officer. Also, defined in the bylaws are the procedures for removing an officer and filling the vacant officer positions. Normally, a Nominating Committee is described in this section, which approves nominations to the Board. Officers’ length of terms is also defined in this part of the bylaws.
In the Bylaws, you need to discuss any annual, regular, or special meetings. This covers the time and place of the meetings, requirements for reporting the Board, committees, and/or members, attendance stipulations and, most importantly, how many Board members are required for a quorum (the number of directors needed to vote on issues at hand).
Conflicts of Interest
It is essential that a company has a Conflict of Interest Provision in their bylaws. This protects the company from the IRS penalties which may occur if the IRS finds the organization is implementing unfair privileges to directors, members, or others. For instance, a director should not be permitted to vote on a matter in which the director may have a direct financial interest. If a conflict of interest may occur, the director should reveal this conflict immediately in order to be removed from the voting.
The bylaws should contain definite rules as to how they can be amended. The bylaws should clearly state who can recommend amendments and how these amendments will be further voted upon. It is essential that bylaws are current and are accurately representing the organization and its membership. Therefore, bylaws should be changed after every five years, in order to stay updated with the most up-to-date rules and regulations.
Every member, officer, and director should be given a copy of the bylaws, and they should be inspired to read and understand them. You should always consult your attorney to know about structuring your organization’s individual bylaws.
How are the Bylaws Used by the Board of Directors?
After the by-laws are prepared by the committee of your Board of Directors, they need to be approved by the board. The by-laws are part of your company records and must be in a place where they can be inspected by the Internal Revenue Service or your state or another entity which might want to audit your records.
Do I Need an Attorney to Prepare Bylaws?
Bylaws are complex documents, and they contain many pitfalls and requirements. In order to comply with the tax and legal requirements of the state and the IRS accurately, using an attorney to prepare the company bylaws will save you money and legal issues later on.