Corporate bylaws are rules that are adopted by the board of directors of a particular corporation after its incorporation. They are the rules that dictate how the corporate will be governed and are the first items that the board of directors formulates at the time the company is started.
The board of directors creates the bylaws and compiles them in a single document that outlines the company’s standards throughout its existence. This document specifies the directors’ duties and responsibilities, the set of procedures that the company will follow when convening meetings, and the means of modifying the existing bylaws.
Differences between corporate bylaws and articles of incorporation
Bylaws are different from the articles of incorporation because they are created after the submission of the articles of incorporation. Therefore, the articles of incorporation are necessary for the company to be created legally.
While the articles of incorporation are filed with the state agency responsible for corporate registration, corporate bylaws are not filed. Instead, bylaws remain with the company structure to guide it on its operations.
Why do I need corporate bylaws?
Every company needs bylaws to guide it in its operations. Bylaws specify the company’s structure, operational procedures, and dispute resolution processes. In short, they serve as the legally binding guide or operational manual that defines how the day to day operations of the company are conducted.
Therefore, you need corporate bylaws in your company because they will maintain consistency in the operation of the company while preventing internal disputes and conflicts that could result from miscommunication or misunderstanding. You stand to enhance the company’s success if you have well-crafted bylaws.
What should my bylaws include?
Corporate bylaws must contain the following components:
Information about the company
Bylaws should include the company’s identifying information. It should contain information such as the company’s registered name, whether it is a public or private company, and address.
The management structure
The management structure of every organization is well defined in the bylaws. Since management changes occur frequently, the procedure of filling vacant positions is articulated in the bylaws to ensure there is no confusion or disruption in the organization’s leadership.
The board of directors
Bylaws should include information about the company’s board of directors because they form the company’s governing body. The directors’ information should include the duties and powers of the directors, the duration a director can stay on the board.
Additionally, information about the number of directors that can form a quorum, and the procedure of replacing a board member should be included in the bylaws.
A statement of the corporate’s purpose
The company’s statement of purpose reflects all the facets of the company, including the particular niche of the company. It should include the motivation for business, the reason why you started the business, and what you do for the customers.
It should also include who the primary customers are, how the company will reach its business goals, its distinction from its competitors, and what makes its products or services extraordinary.
Therefore, the statement of purpose sets the path by which the company will tread. This statement is very important because it highlights the objectives of the company, and changes in leadership will not affect its operations as they have already been defined.
A statement purpose can attract investors because they can easily understand the structure of the company by just looking at the bylaws.
Board and shareholders meetings
The bylaws should include information about when annual and special board and shareholders’ meetings are held. The manner in which the notice of such meetings is given is specified in this provision.
Additionally, the quorum needed to vote in such meetings, and the order of business that will be followed during the meetings is specified in this provision.
Corporations always hold the annual shareholders’ meeting, which may be a physical gathering of shareholders held at a place specified by the board of directors. However, the meeting can be conducted on paper when there are only one or a few shareholders.
During such meetings, the shareholders review the company’s performance, inspect the auditors’ report, appoint auditors, review the financial statements, elect officers and directors, and confirm or modify bylaws.
The first shareholders’ meeting should be held within the first 18 months from the date of incorporation. Subsequent meetings should be held within 15 months from the date of the first annual shareholders’ meeting. The frequency of all board and shareholders’ meetings is articulated in this provision.
The company shareholders should be given notice of the place and time of the meeting. The notice of the meeting should be given within 21-50 days before the date of the meeting.
If there is voting during the shareholders’ meeting, each shareholder is entitled to one vote per share they hold in the company, unless stated otherwise in the articles of incorporation. Shareholders can decide to appoint someone else (a proxy) to vote for them during the shareholders’ meeting.
Loan and contract approvals
The company should have well-defined rules and regulations regarding the approval of contracts. Additionally, the procedures of applying for loans and the approval process should be well defined in the bylaws. In essence, the rules governing processes that affect the company finances should be defined in the bylaws.
The corporation should first issue stock to the shareholders before initiating any business. In this section of the bylaws, you will explain how stock certificates will be issued, who will receive stock in the company, how the transfer of the stocks will be conducted, and the different classes of stock to be issued and to whom.
Equity or simply stock in an organization is in the form of shares, and each share represents a certain percentage of ownership of the corporation. A company can issue both common and preferred stock, and each has its own distinct set of ownership rights and preferences.
Preferred stock has more ownership rights and preferences than the common stock. Similarly, preferred stockholders have more powers and privileges than the common stockholders, and they are even paid before the common stockholders in case the company is sold or liquidated. All this information is specified in the bylaws.
Corporate bylaws should include rules and regulations regarding the appointment and election of officers. These provisions should specify whether the officers to be appointed will be board members and what roles they will play in the company.
The officers include the president, the treasure, and the chief executive officer (CEO). They are usually appointed by the board and maybe fired at any time when the board decides that they are no longer tenable.
Since the officers oversee the daily running of the company, they determine the success of the company. Therefore, they have to report directly to the board. In some situations, the officers can be board members unless prohibited in the bylaws.
The bylaws should contain a provision that indemnifies the company directors and officers from all the liabilities that they are exposed to because of the fact that they are associated with the company.
It is recommended that the directors and officers get indemnified to the highest level permitted by law. This information has to be included in the bylaws, articles of incorporation, or both.
Conflict of interest
The directors are required to disclose any conflict of interest that may be direct or expected during their stay in the company. They are required to exclude themselves from matters under consideration or being discussed by the board of directors if there is a conflict of interest.
This provision is important because it shows what is inherent in fiduciary responsibilities that prospective board members will be undertaking. The potential business partners will be assured that they will not be disadvantaged because the directors will not make decisions in their interests at heart when dealing with matters that they have a conflict of interest in.
Amendment of the bylaws
The procedure of amending the bylaws when the need arises has to be articulated in the bylaws and be in line with the state laws. While the bylaws are well-thought-out, it may reach a time when they need to be reviewed. The review and amendment process must follow the guidelines listed in the existing bylaws.
Every organization should formulate bylaws because they are important for the success of the organization. They are important because they articulate the rules that govern how the company will be structured and managed. In short, bylaws act as the vehicle by which the company adopts the guidelines on which it will operate and handle potential issues before they occur.
The corporate bylaws document should contain a list of well-thought-out rules and regulations that guide the company in its operations. Bylaws should be prioritized and accorded due respect and attention because they form one of the most important investments one can make in terms of the long-term success of the company.