What Are Bylaws?
REtipster does not provide legal advice. The information in this article can be impacted by many unique variables. Always consult with a qualified legal professional before taking action.
Why Are Bylaws Important?
Not all states require the creation and memorialization of corporate bylaws, but even in states that do not need them, they are important for a few reasons. Bylaws help avoid uncertainty in conflicting interests, for example, and ensure companies’ compliance with state and federal mandates.
There are two main ways bylaws deliver value to a company:
- As a business road map. Bylaws describe how a business is run. These guidelines set the number of a corporation’s board of directors and officers and their duties. Bylaws also set the procedures of board and shareholder meetings. When issues or disagreements arise on business operations, bylaws provide clear guidance.
- As a stamp of legitimacy. Bylaws extend legitimacy to a company. The bylaws of a company serve as a guarantee that a business deal is legitimate, lawful, and legal and it is consistent with the company’s established rules and modes of conduct.
Bylaws are essential not only for running for-profit businesses. Non-profit organizations can also benefit from the structure that bylaws provide, such as homeowners’ associations (HOA), which are typically non-profits.
As bylaws outline how a business organization operates, these policies function in tandem with a company’s articles of incorporation. Together, the bylaws and articles of incorporation provide the personality and identity of a company or business.
Bylaws vs. Articles of Incorporation
Bylaws are not to be confused with the articles of incorporation, although these two are usually written at the same time.
New businesses are required to file their articles of incorporation in their respective states, but not all states require filing bylaws for for-profit organizations. Non-profits, however, need to file their bylaws.
After the state approves a company’s articles of incorporation, the document then becomes a matter of public record. On the other hand, bylaws are private documents and are typically inaccessible to the public. These are mainly kept in a company’s records.
The drafting of bylaws typically happens at the same (or soon after) as that of the articles of incorporation. The articles of incorporation are also shorter than the bylaws. The incorporation document contains the following:
- Name of the business or corporation.
- Business location.
- Type of corporate structure.
- Number and types of shares.
- Names and addresses of the incorporators.
- Names and addresses of board members.
- Business duration.
What Bylaws Contain
In writing its bylaws, a corporation has to follow its home state’s rules for corporate meetings and organization. But broadly, the bylaws have to be tailored to the corporation’s business objectives and setting.
There are 10 key considerations when writing corporate bylaws. These include the following:
1. Statement of Purpose
This item declares the name and address of the corporation, its business objectives, its customers, and its products or services. The statement of purpose also highlights the qualities that make the corporation different from its competitors. It also declares how the corporation will go about reaching its business goals.
The bylaws of a company provide more details about the shareholdings declared in its articles of incorporation. The bylaws specify voting shares and non-voting shares.
Corporate bylaws detail how the company’s stock certificates are issued to the shareholders. This document classifies the different types of stocks and those entitled to receive them. Policies on the transfer of shares and issuance of stock certificates are also set in the company’s bylaws.
4. Board of Directors
Bylaws specify the number of the corporation’s directors, their terms, duties, and qualifications, as well as the process for choosing and removing them. The procedure of calling meetings of the board of directors can also be spelled out in the corporate bylaws.
Bylaws list the job titles of the corporation’s officers —president, vice president, secretary, and treasurer—and describe their duties. How these officers are chosen and removed are also explained in the bylaws.
Corporate bylaws provide a clause for the indemnification of its directors and officers from any liability arising from the exercise of their function.
7. Conflicts of Interest
The bylaws of a company ensure that its board members put the company’s interests above theirs. Thus, bylaws require board members’ disclosure of their other business interests to anticipate potential conflicts of interest. Bylaws specify how to address such conflicts.
A corporation can create committees with members from among the board of directors. Bylaws explain the procedure in organizing committees, the choice of members and their tenure, and how to disband them.
9. Shareholders’ Meetings
Bylaws set the schedules of the corporation’s annual and special meetings of its shareholders. The meetings provision will specify how to disseminate meeting notices, the order of business, and the required quorum.
Bylaws explain the procedure for any amendment of their provisions. This includes how an amendment should be proposed and the manner of voting on these proposals.
- Bylaws are a set of rules that specify the procedures of a company’s internal affairs. It functions as a company handbook that all its stakeholders follow when carrying out their duties and responsibilities to the company.
- Bylaws are indispensable in running a business, although their filing is not always required when seeking state approval for a new corporation.
- Bylaws are different from articles of incorporation, although both are usually created at the same time. The latter are public records and need to be filed with the state; bylaws are private and are only enforceable within the organization.
- Rocket Lawyer. (n.d.) Do You Need Corporate Bylaws? Corporate Bylaw Requirements by State. Retrieved from https://www.rocketlawyer.com/business-and-contracts/starting-a-business/incorporation/legal-guide/bylaw-requirements-by-state
- Associa (n.d.) HOA 101 Rules & Regulations. Retrieved from https://hub.associaonline.com/blog/hoa-101-rules-regulations
- Kenton, W. (2020.) Articles of Incorporation. Investopedia. Retrieved from https://www.investopedia.com/terms/a/articlesofincorporation.asp
- Corporate Finance Institute. (n.d.) What Are Company Bylaws? Retrieved from https://corporatefinanceinstitute.com/resources/knowledge/finance/company-bylaws/
- Kappel, M. (2020.) What Are Bylaws, and How Do They Impact Your Organization? Patriot Software. Retrieved from https://www.patriotsoftware.com/blog/accounting/bylaws/
- Malek, W. (2015.) What Is the Difference Between Articles of Incorporation and Bylaws. Widerman Malek. Retrieved from https://www.legalteamusa.net/what-is-the-difference-between-articles-of-incorporation-and-bylaws/
- Freedman, M. (2020.) Articles of Incorporation: What New Business Owners Should Know. Business News Daily. Retrieved from https://www.businessnewsdaily.com/4038-articles-of-incorporation.html
- Haskins, J. (2021.) What Information Must Be Put in Corporate Bylaws? LegalZoom. Retrieved from https://www.legalzoom.com/articles/what-information-must-be-put-into-corporate-bylaws
- LegalNature. (n.d.) Top 10 Provisions to Include in Your Corporate Bylaws. Retrieved from https://www.legalnature.com/guides/top-10-provisions-to-include-in-your-corporate-bylaws