When you form a corporation, you must write your company bylaws. Bylaws govern how your business entity will operate and are established by your board of directors.
Unlike employee guidelines, bylaws pertain to board-level decisions and actions about the day-to-day running of the business. Think of them as legal guidelines for your business, any action that violates them could be challenged in court.
In this article, we explain why bylaws matter, how they differ from Articles of Incorporation, if they apply to LLCs, and how to write your company’s bylaws.
Are company bylaws a legal requirement?
Most state laws require that corporations establish company bylaws. Bylaws ensure consistent and agreed-upon voting and decision-making procedures and are particularly important should an officer or director leave the company.
Bylaws also help maintain separation between your business and your personal obligations or interests. For example, bylaws evidence that your business is a legal entity distinct from its shareholders and that they are protected from any legal liability for the corporation’s debts and/or obligations.
Who can view your company’s bylaws? Copies of bylaws must be kept and provided to any shareholder on request. Copies may also be needed when opening a business bank account, obtaining financing, establishing a corporate retirement program; or qualifying as an SBA-certified small business, woman-owned business, or minority-owned business.
Even when not required by the state, it’s important that your company establish internal operating rules.
Are bylaws the same as Articles of Incorporation?
Articles of Incorporation are not the same as bylaws. However, like Articles of Incorporation, bylaws form the legal foundation of your business and how its operations are governed.
For example, Articles of Incorporation are filed with your state when forming a corporation. Information in the Articles is public record and can be accessed by anyone. For example, the corporation’s name and address, the number of authorized shares and par value, name and contact information for the in-state registered agent, and the names and addresses of incorporators.
There is no requirement that a corporation file its bylaws with the state, even if it is required by the state.
For more information, see What are Articles of Incorporation?
Do LLCs have bylaws?
LLCs are not required to have bylaws. However, they are governed by an operating agreement which is like a corporation’s bylaws. The agreement, also known as an LLC agreement, establishes the rules and structure for the LLC and can help address any issues that arise during business operations, such as a disagreement between partners, succession planning, transferring ownership should a member leave the LLC, and so on.
For more information, see What is an LLC operating agreement?
What should be included in the corporate bylaws?
Corporate bylaws must be tailored to meet the specific needs of your business. One size truly does not fit all. However, your bylaws should address the following key areas:
Board of Directors:
- Definition of the number and term of office
- Enumeration of powers of directors
- Rules for increasing/decreasing the number of directors
- Provisions for vacancies and removals
- Provisions for meetings—regular and special—including virtual meetings
- Rules regarding notice and waiver of notice
- Quorum requirements for directors’ meetings
- Provisions allowing consent in lieu of meeting
- Process for creation of committees
- Allowance for remuneration
- Policy regarding loans to directors
Officers:
- Qualifications, election and term of office
- Duties of each officer (e.g., president, vice-president, secretary, treasurer)
- Delegation of duties
- Provisions regarding vacancies and removal of officers
- Policies regarding loans to officers, requirement of bonds, and officer salaries
Shareholders:
- Information regarding the annual meeting, as well as provisions governing special meetings
- ·notice provisions – including provisions for waiver of notice – for both annual and special meetings
- Rules for fixing the record date and determining a list of shareholders qualified to vote
- Quorum requirements for shareholder meetings
- Voting rights, including the margin required to elect directors and take other actions
- Provisions allowing consent of the shareholders in lieu of annual meeting
- Note: A separate shareholder’s agreement must be written to cover the rights and obligations of shareholders
Stock:
- Description of stock certificates
- Provisions for stock transfers and nominees
- Actions required for lost or destroyed certificates
- Treatment of fractional shares
Dividends:
- How declared and when paid
- Warning: An S corporation can have only one class of stock, so if you plan to elect S corporation tax status with the IRS, be careful that you do not inadvertently create problems.)
Other provisions:
- Authority to execute documents binding corporation
- Authority to sign checks or notes
- Indemnification of directors and officers
- Governing law that should be applied
- Provisions for amending bylaws
