Corporate bylaws are the set of rules that govern a corporation’s operations. They are legally enforceable as a contract among the members of the corporation. A typical set of corporate bylaws will define important matters, such as how the corporation is to be operated, as well as the leadership roles of board members and corporate officers.
State laws vary widely concerning corporate bylaws. Usually the bylaws are mentioned in state laws as part of the “corporate formalities checklist” that a business needs to satisfy in order to register as a corporation with the state. However, keep in mind that corporate bylaws, often simply referred to as by-laws, are important to the efficient operation of any corporation. They help to prevent legal disputes and can provide guidance in the event that a dispute actually does arise. They establish solid procedures for the operation of a company.
Who Can Draft Corporate Bylaws?
The owners of a corporation can prepare its bylaws when they found the corporation. It is advisable, however, to work with an experienced business lawyer to complete this task. While corporate bylaw templates are available from many sources, these do not necessarily fit the corporation that the owners want to start. Owners should work with an attorney to draft bylaws that make sense for the company they wish to establish. At the very least owners who have prepared their own bylaws should have them reviewed by a business lawyer..
The bylaws become legally enforceable when a majority of the board of directors votes to adopt them.
What Should Be Contained in the Corporate Bylaws?
State law mandates the contents of corporate bylaws, but the exact requirements differ from state to state and from company to company. Typically they contain the following information:
- Corporate officers – which corporate officers the corporation will have;
- Responsibilities of corporate officers – the responsibilities of each officer are identified, as well as how they are elected and their term of office;
- Board of directors responsibilities – the number of board members and their responsibilities; how they are elected, their terms of office, their general powers and how many must be present at a board meeting to establish a quorum. Specifying the way to remove or replace a board member is also recommended;
- Extent of authority – the extent of the authority of officers and directors, for example, the value of contracts that officers can enter into on behalf of the corporation;
- Stock – the number, type and classes of stock shares that the corporation is authorized to issue; the bylaws might also specify restrictions on stock ownership or establish a right of first refusal, enabling a corporation to buy stock back from a departing shareholder;
- Shareholders – information about shareholder meetings, including how shareholders should be notified of a meeting, shareholders’ voting rights and procedures for voting by proxy,
- Annual meeting – the date, time and location of the annual meeting, and requirements for notifying shareholders; every corporation must have at least one annual meeting, so this is an important part of the bylaws;
- Special meetings – how to call a special meeting for a time and date different than regular meetings.
- Committees – whether the board of directors will have committees and the procedures for setting them up, dissolving them and appointing and removing members.
A business that plans to sell stock or accept money from investors in the future should have a strategy for the structure of its stock offerings. This should be set out in the bylaws. Also, the bylaws should specify who qualifies as a stockholder and how stocks can be transferred between owners.
Some states might have a so-called “default” rule. A default rule is a rule that will apply if the bylaws do not specify something different on the subject of the rule. For example, a default rule might state that all profits should be evenly distributed among shareholders. Or, it might state that legal responsibility for a company’s actions is evenly distributed among shareholders. The bylaws can avoid these rules and specify something different if the founding owners know about them and draft the bylaws competently.
The law in the various states may determine the way in which bylaws can be enforced and the consequences for violating the bylaws. Again, In some cases, bylaws can make provision for their enforcement that differs from the state provision.
This is another reason why a corporation’s founders would want to consult with an experienced business lawyer when writing the bylaws. An experienced lawyer knows what state law provides regarding bylaws. They know when it would be advantageous and when it is allowed to include provisions that differ from state law.
What Happens When Corporate Bylaws are Violated?
Corporate bylaws are generally enforceable as a contract between the members of the corporation. Violations of corporate bylaws can have the following consequences:
- Removal from office – members and directors can be removed from office for violating the bylaws;
- Internal liability – members could be required to pay an award of damages for losses to other members of the the corporation, depending on the violation;
- External liability – a member may become liable for losses that the violation caused because the corporation is liable to a third party;
- Dissolution of the corporation – a corporation can have only a few shareholders who might also be active in running the corporation’s day-to-day operations. If there is a dispute among them that cannot be resolved, a court might order the corporation to be dissolved;
- Criminal liability – in some cases, violations of corporate bylaws can also involve criminal charges, which can lead to the imposition of fines and/or jail time.
Thus, corporate bylaws can also provide some protection from legal liability. They also impose accountability for the members of the corporation. For this reason, it is important that the bylaws be drafted by a business lawyer who is experienced with corporate bylaws and the role they play in a corporation’s operation.
Do I Need a Lawyer for Assistance with Corporate Bylaws?
The laws governing the requirements for corporate bylaws differ from state to state. Bylaws are technical legal rules. Their provisions can be very important in certain critical situations. Such issues as stock buybacks, right of first refusal and the liability of officers and board members can have big consequences. So it is advisable to have an experienced business lawyer draft corporate bylaws.
It is a good idea to establish a relationship with a good business lawyer early on so as to avoid problems later. Decisions on matters other than bylaws have to be made when a corporation is founded and a good business lawyer can advise you about these as well. You also want to have access to a lawyer who is familiar with you and your corporation in the event legal issues arise.
An experienced business lawyer can help you draft a set of bylaws that meet the requirements of your particular state and best serve the activities of the corporation you want to establish. In the event that a lawsuit arises, your lawyer can help defend your corporation’s interests.