Corporations are often run by strong-willed, ambitious people with visions for a prosperous future. It isn’t unusual for strong personalities to clash on occasion, especially when debating a rule or policy that can change the future of a company they care about. That’s where corporate bylaws become important.
Corporate bylaws provide order and solutions to allow a company to manage its day-to-day operations without being hindered by obstacles or disagreements. This is how corporate bylaws can be an important foundation for a company.
What Are Bylaws?
In a society, we have checks and balances. There is a clear structure of power, rules and laws we have to follow, and systems of accountability to answer to when we don’t play our part. There are also consequences for violating established order. Corporate bylaws are a way of turning a company into a society.
Corporate bylaws are similar to an internal government. The roles and responsibilities of all people in positions of power are clearly defined, and expectations are upheld for the maintenance of those roles. Bylaws dictate how a corporation is to be run by way of enforceable procedures and policies that maintain a tightly-knit internal structure.
Corporate bylaws often dictate:
- How members are appointed to the board of directors
- Information about annual meetings and special meeting schedules
- The way committees and subcommittees are formed
- The schedule for board meetings or meetings with key players like investors and shareholders
- The power of shareholder votes and voting rights
- What powers are afforded to which people in high-ranking positions
- Necessary qualifications for key roles within the company
Anything that isn’t dictated by state or federal law will be dictated by corporate bylaws, should a corporation choose to create and enact these bylaws. Many corporations choose to utilize bylaws because the formality and clearly defined rules help to maintain order within a corporation and prevent disagreements by providing policies for many scenarios.
Corporate bylaw requirements have exceptions. There are different rules governing nonprofit organizations and for-profit organizations. Nonprofit bylaws may be slightly different because they’re expected to abide by a different set of legal regulations. A small business or a startup wouldn’t necessarily be required to establish bylaws due to the smaller scale of their operation and the limited number of people in positions of power.
What Information Is Included in Bylaws?
Company bylaws can include any information that a company wishes to include as long as it doesn’t directly conflict with state or federal laws surrounding business practices. Although companies have the freedom to shape their corporate bylaws in any way they choose, most corporations utilize a similar structure and include similar information. For more information, you can view a sample of a published bylaw document to use as a template.
Basic Company Information
Corporate bylaws generally open with a company’s name, mission statement, and the location of the company’s main office. The basic information section usually features a roster of members of the board, including the number of directors and officers. The responsibilities of each role should be listed or briefly defined in this section.
Companies also include shareholder information in this section, including the total amount of each type of stock or share available.
Most companies include information about their registered agent or the law firm that represents them at the beginning of their corporate bylaws.
Rules
The rules and regulations section is the most important part of a corporate bylaws document because it details everything from how disagreements will be handled to how people are appointed to the board or committees. Rules dictate the procedures the board is required to follow, as well as how officers, directors, and shareholders are expected to interact or approach their duties at meetings.
Rules are typically unique to an organization’s needs and structures. They often detail how voting procedures occur and set parameters for the types of agreement and approval a corporation needs to move forward with a significant change. A voting majority should be established. Some organizations use “more than half,” while others use a clearer two-thirds majority in the decision-making process.
Rules should include information about how vacancies should be filled, and nominations should be awarded for leadership positions within the board.
Roles and Expectations
The roles and expectations section of a corporate bylaws document explains the allocation of power and a detailed description of the roles of each member. It may also detail a procedure to be followed if board members agree that a particular member isn’t properly fulfilling their duties as a board member.
How Are Bylaws Created and Amended?
Members of the board of directors act as a governing body to discuss new rules and amend existing rules. In most cases, a majority vote works to advance a suggestion into a bylaw or modify a bylaw that was previously agreed upon.
A corporation’s shareholders have the power to amend existing bylaws or repeal existing bylaws they may object to. Shareholders have a significant amount of influence in the way a corporation operates, particularly because their power as shareholders works to keep a corporation afloat.
The formal procedure for amending bylaws involves calling a meeting with everyone who is entitled to an opinion about bylaws. Attendees receive documents detailing proposed changes to bylaws or documents detailing new bylaws and discuss the implications of enacting a new law or change. “These meetings are often long and drawn out. Bylaws affect the entire organization, and even small changes could have drastic effects on how partners are compensated and employees are managed,” clarifies Taylor Fike, Partner at Fike Advisors and Expert Contributor for Mosey.
The final decision regarding a new law or amendment will be made at a second meeting after everyone involved has had adequate time to consider what was proposed. At the second meeting, a vote will be held to determine the future of a law or amendment. If it passes, it can be written into the existing bylaws. If it doesn’t, most corporations will try the process again with a new or modified idea they feel will be more appealing.
How Do Bylaws Interact With Other Corporate Documents and Legal Requirements?
Bylaws are created and amended with a mindfulness of federal laws. Corporations are required to create bylaws to supplement existing federal laws that are intended to regulate the way corporations must behave for the protection of the public and compliance with federal rules for things like taxes and public safety.
How Do You File Bylaw Changes?
Bylaws and amendments will go into effect as soon as they’re passed, but corporations are still required to file a document detailing their changes. There is no need to amend articles of incorporation when bylaws change.
When required, corporations file a copy of their bylaw changes with the Secretary of State in the state where their corporation is registered. Directions for filing changes vary between states. Information about filing changes is usually available on your Secretary of State’s website.
Some states don’t require corporations to file a copy of their bylaws, as bylaws are considered to be internal documents. Corporations can refer to state laws for more specific information about bylaw changes.
What Role Do Bylaws Play in Conflict of Interest and Quorum?
A quorum is the officially recognized number of members necessary for a meeting to be considered valid. The United States House of Representatives uses a quorum system similar to the system utilized by corporations.
Establishing a quorum prevents a handful of people from making unilateral decisions without the opinion or input of a sufficient number of people. Simply put, quorum prevents sabotage, coup behavior, and circumvention of valuable voices. Corporate bylaws will establish a quorum.
Quorum is usually the majority of the board of directors. If there are 8 directors on the board, the presence of 5 directors at a meeting is quorum. The attending directors are allowed to hold important discussions and make decisions even though some board members aren’t present.
Conflict of interest is when a matter is being discussed that holds the personal or financial interest of a board member. A board member or director is required to disclose their conflict of interest before the discussion of the matter can begin. Anything said by someone with a conflict of interest can be viewed as skewing the discussion towards a particular bias, which creates an ethical dilemma.
People who hold a conflict of interest are required to excuse themselves from meetings or portions of meetings where conflicts are discussed. Meetings can still continue if there are other matters to discuss that don’t relate to the conflict of interest. In cases where every matter discussed pertains to a conflict of interest, a meeting would conclude due to loss of quorum.
Master Compliance Management With Mosey
The majority of state governments require that corporations establish bylaws, which are an essential part of compliance. Mosey’s automated compliance platform makes it easier for corporations to meet their compliance requirements in every state. We make it easy to keep track of compliance with local and state governments. Focus on running your corporation while Mosey works for you in the background.
Schedule a demo with Mosey to learn how we can make running your business easier.
