5 min read
Corporate bylaws are the backbone of your business—they define how your corporation operates, make roles and responsibilities clear, and ensure everyone is on the same page. Whether you’re using a template or drafting from scratch, understanding the key provisions will help you create bylaws that truly work for your business. And help you start your corporation off the right way.
Let’s dive into how to draft your bylaws effectively, what provisions to include, and why they matter.
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Corporate bylaws are essentially a rulebook for your corporation. They define how your company will be run, who does what, and the procedures for making important decisions. Here are some key provisions commonly found in corporate bylaws:
Directors’ Duties: Responsibilities of your board of directors.
Election of Directors: How and when directors are chosen.
Officers and Their Duties: The roles of your officers (e.g., CEO, CFO).
Indemnification: Protection for directors and officers from liability.
Meetings: Rules around shareholder and board meetings.
The beauty of bylaws is that you have a lot of freedom to include any provisions that make sense for your business—just make sure they don’t conflict with your Articles of Incorporation or state laws.
Writing bylaws might sound daunting, but it’s all about taking it one step at a time. Here’s how to make it manageable:
Your bylaws should include a section that specifies the registered office and principal office of your corporation.
Registered Office: This is the official address where the state sends legal notices. If you’re incorporating in a state like Delaware but operating elsewhere, you might want to hire a third-party service to act as your registered agent.
Principal Office: This is usually where your corporation is headquartered. Keeping the registered office and principal office the same can save you time and fees—just something to keep in mind if you’re a small business.
Example: If you incorporate in Delaware but run your business from Missouri, you can use a third-party registered agent in Delaware to avoid setting up a physical office there. For more insight, explore the best states to incorporate.
Meetings are an essential part of corporate governance, and your bylaws should lay out when and where these meetings will happen.
Annual Meetings: Specify when your shareholder meeting will be held. For example, “The annual meeting of shareholders shall be held on the second Monday of January.” This keeps everyone on track and avoids confusion.
Special Meetings: Include who can call a special meeting and for what purpose. Directors should be able to call special meetings if needed, but you can also give certain shareholders that right.
Tip: Allow remote meetings for flexibility, but make sure everyone can hear each other and verify their identities—it’s often required by law.
Directors are responsible for big decisions, so it’s crucial to define their powers and duties clearly.
Powers: Directors usually have the authority to oversee the corporation, but you can put limits on their power if you want, like requiring shareholder approval for expenses over a certain amount.
Qualifications: Some states don’t require directors to meet specific qualifications, but you can add requirements, like age or shareholder status, if that makes sense for your business.
Example: To avoid deadlock, consider having an odd number of directors. For smaller corporations, three directors is usually ideal.
Your bylaws should also describe how directors are elected and how they can be removed.
Elections: Decide whether directors are elected annually or serve staggered terms. Staggered terms can prevent a complete board overhaul and protect against hostile takeovers.
Removal: Decide whether directors can be removed with or without cause. If you want to protect minority shareholders, consider requiring a supermajority vote to remove a director.
Tip: Staggered terms can be helpful if you’re worried about rapid changes in control—especially if you’re looking for stability.
Your bylaws should cover the officers of the corporation—like the CEO, CFO, and Secretary—and outline their responsibilities.
Appointment: Officers are usually appointed by the board of directors, and your bylaws should state how this process works.
Duties: Be specific about what each officer is responsible for. For example, the Treasurer might be responsible for keeping custody of the corporation’s funds and disbursing them as directed by the board.
Example: If you’re a small startup, it might make sense to let officers hold multiple positions—for instance, the CEO could also be the Treasurer. Just make sure this is allowed under your state’s laws.
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Indemnification provisions are a must-have in most bylaws. They provide protection for directors and officers if they’re sued for actions taken on behalf of the corporation.
Standard Provision: Most corporations include a provision stating that directors and officers will be indemnified to the fullest extent permitted by law.
Fraud Exception: Consider adding an exception for cases involving fraud or intentional misconduct—no one wants to be liable for covering those costs.
Tip: Think of indemnification as an insurance policy for your directors and officers. Without it, you might struggle to attract top talent to your board.
Bylaws should be adaptable, but not too easy to change. Your bylaws should state who has the authority to amend them and what kind of vote is needed.
Amendment Authority: Typically, shareholders have the power to amend bylaws, though you could allow the board to do so as well.
Supermajority Requirement: Requiring a supermajority to amend the bylaws can prevent frequent changes and ensure stability.
Example: Imagine your shareholders pass a resolution limiting the board’s power, and the board then amends the bylaws to undo that limitation. Giving amendment power solely to shareholders can help avoid this scenario.
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Being Too Vague: Your bylaws should be specific enough to avoid ambiguity. If there’s a certain process you want followed, spell it out.
Ignoring State Requirements: Bylaws must comply with your state’s laws. If you’re unsure, consult an attorney to make sure you’re not missing anything important.
Failing to Revisit Bylaws: Your corporation evolves over time, and so should your bylaws. Regularly revisit them to ensure they still meet your needs.
Drafting corporate bylaws is an essential step in organizing your corporation effectively. While it may feel overwhelming, taking it one provision at a time makes it manageable. Remember, these bylaws are there to protect you, guide your business, and ensure smooth operation.
If you’re only drafting generic bylaws, you may not need an attorney—but if you start making custom changes or have a complex setup, professional advice is worth it to ensure everything is legally binding and clear.
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Chris Daming, J.D., LL.M. : Oct. 9, 2024
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