Questions on Corporation Bylaws

By River Braun, J.D.

Questions on Corporation Bylaws

By River Braun, J.D.

When you create a corporation, you most likely have a solid vision of what you want to accomplish, whether it's creating an industry-disrupting app or the world's best burger. What is not always clear, though, is how you intend to operate your company in the process. This is where corporate bylaws come into play. Aside from being a legal requirement, corporate bylaws help you develop the rules by which your company will operate. Take the time to really think about how you want your company run because if it's not in the bylaws, state laws apply—and they may not align with your corporate vision. Many corporations work with an attorney or online service provider to ensure their bylaws reflect the realities of their business.

Coworkers talking at big white table

Do your bylaws identify your corporation's purpose?

Your corporate vision guides the rest of your bylaws, so it's important to set it down in writing before moving on to the rest of your governing documents. This is a great time to sit down with your partners and make sure you have a single, identifiable vision. Before forming the business is usually the best time to iron out any differences.

Do your bylaws detail your corporate structure?

Your bylaws are the place to identify the size of your board of directors and how to choose them. Additionally, your bylaws should establish corporate officers, such as the chief executive officer, chief financial officer, and chief operating officer. If you anticipate the need for committees, your bylaws should determine how they are established.

Do your bylaws identify shareholder and director powers, rights, and responsibilities?

In addition to identifying the size of your board, committees, and corporate officers, your bylaws govern the duties and responsibilities of these individuals as well as the duties and responsibilities of other corporate executives. This may include voting rights, share distributions, and profit distribution.

The bylaws are also an ideal place to delineate authority between corporate officers and shareholders. When creating this section of your bylaws, it's a good idea to consult with an attorney about state laws that might govern such things as the number of directors or how to distribute profits.

Do your bylaws address meetings?

While state laws require corporations to hold at least one meeting a year, your corporate bylaws should identify how many shareholders' and directors' meetings are required, how they are called, and the requirements to call a special meeting. Every meeting requires a quorum—how many shareholders or directors must be present for a valid meeting to ensue. For example, you might require that 7 out of 10 shareholders be present in order for a valid shareholder meeting to occur. The bylaws should include the definition of a quorum specific to your corporation.

Do your bylaws contain a provision for avoiding conflicts of interest?

Self-dealing is always a risk when power and money are present, regardless of the trust placed on directors and shareholders. For this reason, bylaws must include a provision to avoid conflicts of interest to protect the corporation and its' shareholders. For example, bylaws may contain a provision prohibiting directors from voting on an issue in which they have a personal interest. This matter is particularly important for nonprofit corporations because the IRS can revoke this protected status retroactively. The corporation would then be responsible for back taxes and penalties.

Do your bylaws provide for the removal of corporate officers?

Despite best practices and highest hopes, there may come a time when a corporate officer must be removed from office. Your bylaws govern how this process unfolds. Is the removal automatic? Or will your bylaws call for a majority shareholder vote? As founders of the corporation, you have the power to decide that process.

Do your bylaws allow for amendment?

As with anything in life, change is inevitable. Your corporate rules should allow for changes in business conditions. Specifying how to amend your corporate bylaws can help you avoid costly litigation with uncertain results in the future.

Do your bylaws reflect the special needs of your corporation?

Despite certain limitations under state law, bylaws form the private governance of your corporation. As founders, you have considerable flexibility in how you create this document. Take time to consider hypothetical situations that your company may encounter so that you can proactively address them in the bylaws.

This portion of the site is for informational purposes only. The content is not legal advice. The statements and opinions are the expression of author, not LegalZoom, and have not been evaluated by LegalZoom for accuracy, completeness, or changes in the law.