Questions on Corporation Bylaws

By David Carnes

A set of corporate bylaws is like a constitution for your corporation. Effective bylaws outline the structure of a corporation and how it is to be run. Any issue that is not covered in the corporation's bylaws will be governed by state law default rules: rules that apply only if bylaws don't cover the issue. Although you don't have to file bylaws with state authorities, the corporation must keep a copy in its records.

How Do Bylaws Outline the Structure of the Corporation?

Bylaws set the size of the board of directors, and determine how directors are selected. They also create offices, such as the chief executive officer, and establish committees. Some matters are determined by state law, however. For example, state law may require a minimum number of directors.

Do Bylaws Address Meetings?

Bylaws should state when shareholders' and directors' meeting should be held, and how a special meeting can be called. State law requires corporations to hold at least one shareholders' meeting per year, however, no matter what the bylaws say. Bylaws should also set quorums: how many shareholders or directors must be present before a valid meeting can be held.

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Do the Bylaws Address the Rights, Powers and Responsibilities of the Shareholders?

Bylaws govern the authority, voting rights and responsibilities of the shareholders. Purchasers of certain classes of shares, for example, might not be entitled to vote. Bylaws determine how corporate profits are distributed to shareholders, subject to certain state law limitations. Bylaws should also outline the division of authority between shareholders and directors. Certain important corporate decisions, for example, might be reserved for shareholders only.

Why Should Bylaws Contain a Conflict of Interest Provision?

Bylaws need policies that prevent conflicts of interest to protect the corporation and the public from unscrupulous self-dealing. For example, a provision might prevent a director from voting on any corporate matter in which he has a personal stake. Conflict-of-interest provisions are particularly important for nonprofit corporations, because self-dealing can cause the IRS to retroactively revoke the corporation's tax-exempt status, resulting in back tax bills and penalties.

Should the Bylaws Set Forth Rules to Amend the Bylaws?

Business conditions change, and it may become necessary at some point to amend the bylaws. If the bylaws themselves do not specify a mechanism for amending them, the issue might end up in state court with unpredictable results. Most corporations allow only the shareholders to amend the bylaws.

Can the Bylaws Set Forth Rules That Are Particular to the Corporation?

Bylaws codify the corporation's private "law": rules that apply only to it. Although the content of corporate bylaws is limited by state law, the law allows corporations considerable flexibility in determining how it is to be run. Corporate bylaws may, for example, create an office that exists only in that particular corporation.

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What is the Format for Writing Bylaws?

Bylaws act as an organization’s governing rules, and they are appropriate for many types of organizations, including corporations and nonprofits. For example, a corporation’s bylaws could determine how the corporate voting process works and how many members sit on the organization’s board. Bylaws rarely have to meet a certain format, but there are some topics bylaws commonly address.

Can an Owner Be Voted Out of an S Corporation?

S corporations are corporations that have made a special election with the Internal Revenue Service to be taxed only at the individual shareholder level rather than at both the corporate and individual levels. Owners of the company, known as shareholders, do not participate directly in business operations and may not be voted out. If a shareholder takes on an additional function as a director or officer, he may be removed from that position. However, this removal does not affect the shareholder's ownership in the company.

How to Setup Directors in an S Corp in California

An S corporation, similar in many ways to a standard C corporation, elects to be taxed as a pass-through entity by the Internal Revenue Service rather than to pay corporate income tax. When you file articles of incorporation in California, you must also file Form 2553 with the IRS to confirm the S corp election. Corporate statutes, in the state where a business is formed, govern S corporation management. As such, California corporate law sets forth the rules for setting up a board of directors.

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