What are Corporate Bylaws?
Corporate bylaws are the legal rules a corporation is operated by after the business if formed. Once the organization has a legal entity that has been filed with its state, the board of directors will typically decide on the bylaws which the company will live by going forward. Some examples of bylaws include listing a registered agent and defining the classes of stock for company ownership. To see what bylaws look like, you can see Microsoft’s at this link.
One of the main reasons LLCs became so popular for small businesses is that bylaws and other corporation complexities are not required. Instead, the business creates an operating agreement at the time the legal entity is formed. Many states don’t even require an operating agreement for an LLC to be formed and start operating. If you’re interested in forming an LLC you can learn more about your state’s requirements by checking out are State Startup Guides.
Why You Need Corporate Bylaws
Bylaws help ensure that your corporation runs smoothly. These rules outline the internal rules of your business, from a legal standpoint. The bylaws outline how decisions are legally made, who gets to vote, and the structure of how it works. If your business is very large, or you plan for it to be, then this will be helpful to make sure there’s organization to the chaos of both making big decisions and having a large ownership structure.
The bylaws are important for all corporations to have, especially if you end up becoming a publicly traded one. This is because the bylaws outline how the official books are to be kept and what the reporting timeline looks like. Anyone wanting to invest in your business will want strict rules around how they’ll be able to keep up to date with what’s happening inside the organization’s performance.
The bylaws also outline how the stock of the company is going to be divided up. It’s important for any business that plans to sell stock or take on investment money in the future to have a strategy behind the various classes of stock and how those stocks are transferred between owners. There also needs to be set rules around qualifying stockholders and knowing exactly who has a right to make business decisions and who doesn’t.
However, the main reason you’ll create bylaws when you’re still a smaller company is because it’s required for all corporations to do so. What many small business owners don’t know is that you can start out as an LLC, which has more relaxed rules, and then as you start to grow you can switch to a corporation later. If you’re unsure of what the success of your business might be then this might be your best bet.
Note: As of the date of publication, the only states that require your LLC to create an operating agreement are Delaware, New York, Maine, California, and Missouri.
Example of the Benefits of Bylaws
All states have rules around how businesses are meant to operate and interact. If you’re not required to create bylaws, or an operating agreement for LLCs, you might still want to in order to counteract some rules in your state.
For example, some states might have a default rule that all profits are evenly distributed or that the legal responsibility for a company’s actions is evenly distributed among shareholders. In many cases you can actually get around these rules by having very strict bylaws that says the profits or legal responsibility is broken down much differently than the state’s rule.
How Corporate Bylaws Work
Bylaws are pretty straightforward, like most legal contracts. The bylaws are not registered with your other incorporation documents that you provide to your state, but they can be equally important to operating your business. While you don’t legally file the bylaws with your state, it doesn’t make them any less enforceable. The bylaws are binding as soon as a majority of the board of directors votes them into action.
The size of your corporation’s bylaws will heavily depend on the size of your business. You may want more relaxed bylaws early on and then you may want to enact more strict rules right before you take the company public. Things like the number of directors the business has will also have a necessity to change as time goes on and you grow in both revenue and employee count.
Typically whatever the bylaws say is the law for your business. Legal entities typically have the right to operate internally in anyway that the majority of shareholders agree to. This means that while you’re legally bound to your bylaws, you have a lot of flexibility in how you can setup your business to operate the way you need.
How Corporate Bylaws are Created
The creation of bylaws is simple from a legal standpoint. All you have to do is draft them and get a majority of the board of directors to vote “yes” on enacting the document. There aren’t a lot of rules that restrict you on the actual creation of your bylaws in terms of what can be included in them, but there are many common things that you should include to make the legal operation of your business clear and concise.
Common Corporate Bylaws
Some of the most common corporate bylaws include:
- Your Business Management Structure: How many Directors will your business have? Who has the legal authority to make binding decisions for the business? Who is ultimately responsible for legal or tax filings and who is the contact person or group for your business?
- Your Business’s Registered Agent: If your business is going to receive legal notices or documents in the future then they will be sent to your registered agent. It’s important to keep this part of your bylaws up to date so that you don’t miss an important legal notice. Whomever you have in your official bylaws is the only person or group that has to be contacted for notice to be given to you.
- Classes of Stock: How much stock do you have in the business initially, what classes are there, and what are the rights and privileges of those classes? This is extremely important if you’re bringing on outside capital or going public.
- Voting Rights: This should be called out specifically so it is clear who has the legal opportunity to weigh in on big business decisions, like taking on outside capital or selling the business.
- How the Business Can Be Dissolved: This is important to include so that the only ways to dissolve the business are clear to everyone, regardless of any state statutes.
- Corporate Meeting Information: How often do the directors meet and what is the purpose of those meetings? Are these meetings the only time that big decisions can be made and if so, can the board of directors call a special meeting to vote on something important? How do you give notice of meetings to directors? These are all important things to spell out so that there is no internal legal dispute amongst shareholders.
- Dividends: If the shareholders have a right to dividends then it should be spelled out in the bylaws on when they might receive one and how it would be dispersed.
- Amendments: Any specificity you can provide on how amendments to the bylaws are enacted in the future will be important to make sure it’s clear how things can adapt and change over time.
This list isn’t all-inclusive for every business. If you need complex bylaws, you should partner with a lawyer that is experienced in setting up businesses and enacting bylaws for many different types of businesses.
Does My Business Need Corporate Bylaws?
The real answer to whether or not your business needs bylaws is that it really depends. If you’re starting a corporation then you’ll need to draft a set of bylaws. However, if you’re a smaller business or unsure of what direction you want to take your new business, then you may benefit from starting out as an LLC, which means you won’t need corporate bylaws. We do recommend that you still craft an operating agreement, even if it’s not required in your state, especially if your business has more than one owner.
Getting Started With Corporate Bylaws
Whether you’re getting started with your corporation and need to enact specific bylaws for your business, or you instead want your legal entity to be an LLC, we can help. My Company Works has completed tens of thousands of business formations and our packages include an Operating Agreement (for LLCs) and Bylaws (for a corporation).