What Are Corporate Bylaws and Why Are They Important?

business owners in a meeting about corporate bylaws
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Contrary to popular belief, corporate bylaws apply to any company that chooses a corporate structure, regardless of size. Your venture may be relatively new, but it needs its bylaws once it becomes incorporated. 

The bylaws of a corporation play a vital role in ensuring efficient daily operations. Typically, they outline the processes of the business, from meeting requirements to dispute resolution procedures, making them important for businesses. But aside from this, most states require corporations to maintain bylaws. 

The rules and regulations included in corporate bylaws vary from one company to another. In certain cases, state business laws require companies to mention specific information about the corporation

Creating the bylaws of your corporation from scratch can be challenging. So, to help you out, we’ll discuss what corporate bylaws are, how they work, and the essential provisions you should keep in mind.

What Are The Bylaws of A Corporation And How Do They Work?

Corporate bylaws are legally binding documents that set the rules and regulations of a company and articulate management procedures and structures. In other words, these bylaws function as the internal operating manual of the company.

The bylaws of a corporation are specifically tailored to the needs of the business and its industry. Aside from establishing company procedures, corporate bylaws should also protect the rights and responsibilities of the owners, directors, shareholders, and other stakeholders.

Typically, bylaws are drafted once the Articles of Incorporation have been submitted to the state. And though companies are not required to submit their corporate bylaws to the Secretary of State, lawyers and investors may request them during certain processes.

Banks and other financial institutions often include corporate bylaws in their requirements for loan applications and corporate bank account applicants. Furthermore, companies may also need to submit these documents when obtaining government certification as a minority-owned or woman-owned entity.

As a company owner, creating corporate bylaws should be one of your first orders of business. After drafting your bylaws, your board of directors will adopt them and vote for their approval. Once the bylaws are formally adopted, they become part of your corporate records. 

By creating comprehensive corporate bylaws, you can guarantee efficient and effective business operations.

Seven Essential Components of Corporate Bylaws

Now that we’ve discussed what corporate bylaws are, let’s talk about provisions. While the bylaws of a corporation vary from one venture to another, certain provisions are considered essential.

Company Information

Before adding any other provisions to your corporate bylaws, it should include basic information about the company. Some of the details included in this clause are; the corporation’s name, its office locations, principal place of business, and the fiscal year. 

Statement of Purpose

The first component of your bylaws should be a statement of purpose, reflecting what your business does and your motivations for doing what you do. It should summarize the characteristics of your company.

Some of the vital information included in this provision include who your primary customers are, what makes your services different from your competitors, and how you plan to achieve your business goals.

The statement of purpose is especially important in non-profit organizations. It could determine whether or not your company qualifies for tax exemption. While the federal government doesn’t require non-profit companies to use certain language in their statement, there are terms they look for when deliberating on tax-exempt status.

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Boards of Directors

A corporation’s board of directors acts as its primary governing body. They typically have regular management meetings to develop new initiatives and discuss the current status of their business. 

Corporate bylaws should include the number of directors in the company, their qualifications, duties, and how their vacancies are filled. It should also dictate where and when management meetings occur. For instance, virtual meetings can be held every second Tuesday of the month. 

The provision should also stipulate the number of directors needed to constitute a quorum. Quorum is the minimum number of voting members present at a meeting to conduct business on behalf of the entire board. Typically, one-third of the total directors are required to reach a quorum. 

Lastly, the clause needs to specify that the board of directors may take action without a meeting if all members consent to the act. Once consent is set forth, the resolution should be signed and documented in your corporate records.

Management Structure

A clear management structure is vital to any well-functioning organization. This clause in your corporate bylaws ensures that proper procedures are followed when filling a higher vacant position and prevents the company’s leadership from being disrupted whenever a vacancy opens. 

Indemnification

Your corporate bylaw should also have a clause dedicated to indemnification. This provision stipulates that directors and officers may be compensated should they face liability due to their role in the organization. You may include this clause in your company’s articles of incorporation, bylaws, or both. 

Conflicts of Interest

Another important provision is what to do in case of a conflict of interest. The clause should require your directors to disclose actual and potentially conflicting interests. Additionally, it should stipulate that members need to exclude themselves from any discussion relating to the matter.

For example, suppose your company decides to acquire another business from an entrepreneur related to one of your board members. In that case, the said director must sit out discussions on the deal. 

This condition places procedural safeguards that prevent abuses in your corporation. It also showcases the fiduciary responsibilities of your prospective board members. 

Amendment to the Bylaws

Lastly, the amendment clause should outline the process of how your corporate bylaws can be amended when needed. The provision should include the requirements your board of directors must follow when amending bylaws and any other internal regulation established within your company. 

While corporate bylaws are written with the long-term outlook of the company in mind, changes in your rules are inevitable. Your committee may want to review your bylaws and change them if certain clauses have become outdated in the future. 

This clause ensures that you and your board of directors have a procedure to follow when revising the company’s bylaws. 

See Why Corporate Bylaws are Vital to Your Business

The bylaws of a corporation determine how effective an organization can be. It guides companies on how to operate and efficiently resolve issues. And though drafting comprehensive bylaws can be difficult, company owners can always seek the help of a business lawyer.

NCH’s representatives are here to provide you with all the help in navigating the internal formalities you need to do in building your own company. For more information on how NCH can help you finalize your corporate bylaws, visit our blog here.

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