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What Are Corporate Bylaws & Why Do You Need Them for Your Corporation?
If you are in the process of starting a corporation, there are many important legal documents you must create and abide by to comply with your state’s laws and ensure that the corporation will operate efficiently. Corporate bylaws are one of the most critical documents to have in place. Bylaws lay the corporation’s foundations and include important information that your directors will use to run and govern your business. (Similar concerns apply to and are often even more important with respect to limited liability companies [Company or Operating Agreement] and partnerships [Partnership Agreement]).
When you form a corporation, the first step is to prepare a document called the articles of incorporation (Certificate of Formation in Texas) and file it with the appropriate state agency, often the secretary of state. Many people conflate or confuse the articles of incorporation with the bylaws, but the two documents serve different purposes. Articles of incorporation usually establish the corporation’s existence in public records, whereas bylaws govern the company’s internal operations. Because some states do not require the filing of corporate bylaws, you may be tempted to go without them. However, we urge you to avoid succumbing to that temptation because your bylaws can be the backbone of your corporation. The following are a few important things to consider regarding bylaws.
Bylaws are Required Documents in Most States
When forming a corporation, most states include bylaws as part of their corporate maintenance requirements. If you do not have your bylaws in place, your business may not be in compliance with state law. Failure to comply with this corporate formality creates the risk that you could lose your limited liability protection, giving your creditors access to your company’s assets. You also run the risk of being sued by an interested party such as a shareholder or director, who may argue that you are violating your duties to the corporation by not fulfilling this fundamental maintenance requirement.
Bylaws Guide the Corporation’s Internal Operations
Your articles of incorporation are critical, but they provide little guidance regarding your corporation’s day-to-day operations. Your bylaws fill that gap as the internal set of rules governing how your business runs. Your bylaws should include the following information:
A.) The formal name and location of your corporation
B.) How meetings between shareholders are to be conducted
C.) The procedures for electing directors and selecting officers
D.) Rules for voting
E.) A description of how the corporation will keep corporate records and how shareholders can access such documents
F.) The process by which shareholders can make amendments to the company bylaws
Your State’s Default Rules may Apply if You Omit Important Governance Provisions in Your Bylaws
As is often the case, if you do not have a plan for your corporation, state law will provide one for you. The default rules that your jurisdiction may impose if you do not address important issues in your bylaws might not work well for your unique situation. However, if your corporation does not create its own regulations to reference, or if they are incomplete, you will be legally bound by your state’s default rules.
PLEASE NOTE: Different jurisdictions have different requirements for a corporation’s bylaws, so you must be aware of your state’s law. Additionally, if your corporation will eventually seek outside venture capital, you should understand that your corporate bylaws, and how well you comply with them, will likely impact the way potential investors approach your corporation.
We Can Help
Our team of experienced business attorneys is here to help answer any questions you may have about what to include in your corporate bylaws and how to craft them to comply with your state’s requirements. We can ensure that you have the proper business documents in place to support you as you grow your corporation. Contact us today for an appointment.