What Belongs in the Bylaws?

By Wayne Thomas

Bylaws set forth the internal rules and procedures for running your corporation. There is no set form that bylaws must take under federal or state law, and you need not file these documents with any government office. However, there are several issues that should be addressed in your bylaws to ensure that your corporation operates effectively.

Overview

It is important to distinguish corporate bylaws from your company's articles of incorporation. The articles serve as the functional equivalent to a constitution for your business. The articles must conform to certain legal requirements, and they are usually filed at your local secretary of state's office. The articles are limited in detail and typically require you to provide the names and addresses of the individuals involved in forming the company, as well as a short statement regarding the purpose of your business. Bylaws, by contrast, fully address the internal protocol and procedures for operating your business, often in great detail. The articles are kept on file with your corporate documents. In a sense, the articles provide basic information to government agencies and the public, whereas bylaws create an internal reference manual for those actually involved in running the company.

Board of Directors

A standard issue that you should address in your bylaws is the functioning of the board of directors. The owners of a corporation are often referred to as members, or as shareholders if the company issues stock, and are in charge of electing directors. Directors are those individuals tasked with collectively making strategic and financial decisions for the corporation and ensuring compliance with all regulations and accounting rules. Decisions made by the board influence the actions of the officers who manage the company, such as the president and secretary, as well as the employees. Typical matters covered in the bylaws include outlining the responsibilities of the directors, specifying the size of the board and detailing the manner of election for directors and their terms of office.

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Meetings

You should also address corporate meetings in your bylaws. Specifically, the bylaws should indicate who may call meetings, the place of the meetings and how directors and members are to be notified. Bylaws also should indicate how many members or directors must be present for corporate action to occur, referred to as a quorum, and what constitutes a majority vote. An example might be requiring a supermajority vote, meaning two-thirds majority, for any amendments to the bylaws. The bylaws should also address whether action can be taken without meetings, and whether voting can be done without a member or director actually present, known as proxy voting.

Conflict of Interest

Your corporation also should provide a conflict of interest policy in the bylaws. A conflict of interest can arise if a director stands to personally gain from a particular course of action taken by the corporation. An example might be if your business was interested in acquiring a warehouse to house corporate assets and a director recommends purchasing or renting the warehouse from his privately held real estate company. A properly drafted conflict of interest policy can help avoid the appearance of self-dealing in these cases. Examples of conflict policies include requiring disclosure of the conflict by the director and then requiring the director to abstain from voting on that particular issue.

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References

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