How to Design a C-Corporation Agreement

By John Cromwell

A C Corporation is the standard form of corporation and is the basis for all other corporate forms. While partnerships and LLCs form agreements to govern how their business is run, corporations use bylaws. Drafting the bylaws should be one of the first steps you take when forming the corporation, to ensure that your business is managed consistently from the outset.

Step 1

Establish the number of directors on the corporation's board of directors. The board is elected by the shareholders to oversee and hire the corporation’s officers. The board also decides matters of corporate strategy. Ensure that there is an odd number of directors on the board, to minimize the potential for tie votes. Also establish when the board will meet.

Step 2

Identify corporate officer roles. The corporate officers are responsible for managing the day-to-day activities of the business, including hiring employees and producing the corporation’s product or service. Common corporate officer roles include the chief executive officer, chief financial officer, chief technology officer, and secretary, but a corporation is not limited to these titles.

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Step 3

Include a buyout provision if your company is not publicly traded. Small, private businesses, otherwise known as close corporations, may not want to allow outsiders gaining ownership of the business. A buyout agreement requires that departing shareholders -- or the estate of deceased shareholders -- sell the shares back the corporation or gives the corporation or other shareholders the right to buy shares before they are made available for purchase to non-shareholders.

Step 4

Establish the date of the annual shareholders’ meeting. Most states require that shareholders meet at least once a year to elect the board and address other corporate business. The bylaws should state approximately when these meetings are to be held every year.

Step 5

Determine what matters need to be voted on by shareholders and which matters only require a vote by the board of directors. Certain matters, such as corporate acquisitions and entering into a business, require formal approval by either the shareholders or the shareholders’ representative, the board of directors. The greater the effect the proposed action will have on the long-term direction of the business or on the shareholders’ ownership percentage, the more likely it should be approved by the current shareholders.

Step 6

Install a process for calling special shareholders’ meetings. If important issues come up that the shareholders must vote on, it is impractical to wait a year until the next annual meeting. Generally, a group of shareholders can call for a special meeting.

Step 7

Draft a process for amending the bylaws. All states permit the shareholder to amend the bylaws, although some states permit the board to amend as well. If the board does amend, it generally must notify the shareholders of the change and give them the opportunity to veto the amendment.

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References

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