An S corporation is a qualifying corporation that has elected to be taxed under Subchapter S of the Internal Revenue Code. Corporate operating agreements, commonly known as bylaws, specify how the corporation is to be governed. To draft corporate bylaws you must research state law and familiarize yourself with the issues at stake.
Fit your business needs with the right LLC package
Research the corporate law of your state. State law places many restrictions on the content of corporate bylaws.
Include the official name, registered address and the principal place of business of the corporation.
State the number of directors the corporation is authorized to appoint and list their terms of office. State law often places restrictions on both of these matters by, for example, specifying a minimum number of directors.
List the officers employed by the corporation along with their terms of office, and briefly describe their duties. The corporate laws of many states require corporations to appoint certain officers, such as a CEO and a CFO.
State which types of decisions many be made by the board of directors or the officers and which types may be made only by the shareholders. All states require, for example, that only shareholders may vote to dissolve the corporation.
List the number of shares and the classes of stock that the corporation is authorized to issue. S corporations may issue only one class of stock. Consistent with S corporation eligibility requirements, state that the corporation is authorized to sell shares to no more than 100 shareholders. You might also include other S corporation requirements -- that partnerships and corporations cannot purchase shares in the corporation, for example -- to ensure corporate compliance. These restrictions do not have to be included in the corporate bylaws as long as the corporation complies with them; however, including them will tend to ensure compliance.
Include a section listing the frequency and location of shareholders and directors meetings, and state how many directors or shareholders must be present to constitute a quorum. The corporate law of every state requires at least one shareholders meeting per year.
Add a section detailing what records the corporation must keep. Include rules for the inspection of records. State corporate law requires corporations to keep certain records, such as minutes of shareholders and directors meetings. States also require corporate management to allow shareholders periodic access to corporate records for inspection.
Describe exactly how the corporation may amend its bylaws and Articles of Incorporation.
Tips & Warnings
If your S corporation becomes ineligible for S corporation status at any time -- by adding one too many shareholders, for example -- the IRS will consider the corporation's Subchapter S tax status automatically and immediately revoked, even during the middle of a tax year.
Corporate bylaws will likely be more complex the larger the business. To ensure that your by-laws are complete and cover all legal bases, you may want to consult with a business attorney.
References & Resources
- Stockbyte/Stockbyte/Getty Images