What are "bylaws"?
Bylaws are a set of formal rules or guidelines established by a corporation to govern certain of its internal operations. They outline how the organization will be managed, set the framework for decision-making, and dictate the roles and responsibilities of board members, officers, and shareholders.
Bylaws typically cover essential aspects of corporate governance such as meetings, voting procedures, the structure of the board of directors, and the rights of members or shareholders. Every corporation typically adopts bylaws, and various terms of the bylaws are subject to the laws of the company's incorporation.
The primary reason bylaws are important is that they provide a clear operational framework for the organization. Without bylaws, there could be confusion or disputes about how decisions should be made or what powers certain individuals within the organization hold. For example, bylaws might dictate how frequently board meetings should occur, the procedures for electing officers, and what constitutes a quorum for decision-making. These rules prevent ambiguity and ensure that all members and officers are aware of their rights and obligations, promoting governance.
Another reason bylaws are critical is that they help maintain legal compliance. In many jurisdictions, having bylaws is a legal requirement for corporations and non-profit organizations. Courts and regulatory bodies often refer to bylaws in the event of a legal dispute within the organization, and having clear, well-drafted bylaws can protect the organization from litigation. For instance, if a shareholder claims that a decision was improperly made, the company can refer to its bylaws to show that it followed the proper procedures for making that decision.
Bylaws also serve as a guide for resolving internal disputes. They establish procedures for handling disagreements among directors, officers, or members. For example, if there is a disagreement over whether a particular decision requires shareholder approval, the bylaws can clarify the matter by outlining the voting procedures and the powers of the shareholders versus the board. This clarity can help prevent conflicts and ensure that decisions are made in an appropriate manner.
The structure of a corporation's board of directors is another area governed by bylaws.
Bylaws often describe the number of directors, how directors are elected or removed, and the specific duties of the board. For example, the bylaws might specify that the board should consist of no fewer than five and no more than seven directors, elected by shareholders every year. This ensures that the corporation is consistently governed by a qualified board and that there are clear mechanisms for leadership transitions.
In addition to setting rules for governance and operations, bylaws can address financial management. Bylaws might outline procedures for approving budgets, managing bank accounts, or issuing dividends. This ensures that financial decisions are made in accordance with the organization's best interests and legal requirements. For example, a corporation's bylaws might state that any expenditure over $100,000 requires board approval. This kind of rule helps safeguard the organization’s financial stability and ensures accountability in spending.
Bylaws also play an important role in defining the powers and duties of officers. These are individuals responsible for the day-to-day operations of the organization, such as the CEO, CFO, or secretary. The bylaws typically outline the specific duties of each officer and the process for appointing or removing them. This prevents overlapping responsibilities or power struggles between officers and ensures that there is a clear chain of command. For instance, the bylaws might specify that the CEO has the authority to make certain strategic decisions, while financial matters must be approved by the CFO, all potentially subject to board approval.
Key components of bylaws typically include the following:
- The size of the board of directors
- When and how board meetings are called (including notice)
- When and how shareholder meetings are called (including notice)
- Duties and responsibilities of directors and officers
- Procedures for exercising voting rights
- Regulation of the transfer of corporate stock
- Indemnification obligation for officers, directors, and agents (indemnification refers to protection from lawsuits and claims)
- The company’s fiscal year
- General corporate matters
- How the bylaws themselves can be amended or changed over time.
A standard form of bylaws is often prepared by the company's legal counsel. Bylaw templates are easily found on the web through a Google search. Incorporation services like LegalZoom and RocketLawyer can also provide their form of bylaws.
In summary, bylaws are a fundamental tool for managing an organization’s operations, ensuring legal compliance, and providing a clear roadmap for internal governance. By setting specific rules on leadership, decision-making, and financial management, bylaws help maintain order and prevent confusion or disputes.
For more information, see How to Incorporate a Startup: A Complete Guide.
