Bylaws: Everything You Need to Know
Bylaws are the internal legal rules applicable to a corporation and must be followed by the company, its directors, shareholders, and officers when conducting business. 5 min read
2. Why Are Bylaws Important?
3. Reasons to Consider Not Using Bylaws:
4. Reasons to Consider Using Bylaws:
5. Examples - What Happens When You Use Bylaws vs. When You Don't Use Bylaws
6. Frequently Asked Questions
7. Steps to File
Bylaws are the internal legal rules applicable to a corporation and must be followed by the company, its directors, shareholders, and officers when conducting business. They are applicable to both for-profit and nonprofit corporations.
State statutes govern what bylaws can and cannot say and do, and while there are similar considerations throughout the country, every state is different. So, it’s important to consider state-specific laws when drafting bylaws.
Generally, bylaws are legal documents that formally set out the rules of a company. While they may seem like a burden at times, once the company and its personnel are familiar with them and what they require, they can help the company work more efficiently by providing rules for determining how business must be conducted, how to solve problems and how to make important decisions facing the business when there are multiple voices trying to be heard.
You don't need to be an expert to know what to include, but it can be helpful enlisting the help of one to be sure the bylaws are written in an effective and legally enforceable way.
Bylaws: What Are They?
At a basic level, bylaws are the "who, what, where and why" of your club, business or nonprofit. They define how choices are made and by whom. Think about who is in charge of your organization. For example, this might be a board of people or an individual member.
Ask yourself things such as how that group should make decisions, how many affirmative votes are required, and how those decisions must be documented. Think about when and where meetings are required to be held (if at all), who is responsible for important tasks and what happens when disputes arise.
These are the kinds of items laid out in bylaws.
Why Are Bylaws Important?
Bylaws are legally enforceable documents that instruct the corporation, shareholders, officers, and directors how the affairs of the business must be conducted. When conflict or disagreement arises, they state how to decide who is right. They may impose restrictions on who can own stock in the corporation or how a stockholder must sell his or her stock, so they provide a way for companies to ensure that there are limits on who is involved with the management, ownership, and control of the company.
Bylaws set out how shareholders and directors vote for leaders of the business and may impose restrictions on the sale or ownership of an interest in the business, for example by placing restrictions on the stock or establishing a right of first refusal, enabling a corporation to buyback stock from a departing shareholder. Without them, companies run the risk of being taken over by shareholders that may not have the same interests in mind when it comes to running the company.
While bylaws are not public - non-public companies and private clubs do not need to share the content of their bylaws with anyone except the shareholders - some do so in order to gain trust. When bylaws are available, everyone the company gives access to can read them.
Reasons to Consider Not Using Bylaws:
Leave small issues out of bylaws. In the early drafting stages, you may want to put every detail into the document. However, since bylaws are legal rules, too much detail can get you into trouble and create roadblocks to the conduct of the business’ affairs. For practical reasons, omit the day-to-day stuff. For example, don't specify a day of the week for meetings. You may have the library space every Monday right now, but in three months you might have to switch to Tuesdays.
You should also not name specific people in the bylaws. Only lay out roles and duties. A good rule of thumb is to keep the bylaws flexible so that details of the company and personnel may change, but the overall structure does not.
Reasons to Consider Using Bylaws:
Bylaws are different depending on the size and scope of the business, whether it is a for-profit company or nonprofit, where it is located and what type of business it conducts. You can find out that kind of detail with the help of a lawyer. To get started, think about these items:
Name, purpose, office locations
In a nonprofit, who has control of the organization
Board of directors -- how they are chosen, how many, and for how long
Officers, such President and Treasurer -- how they are chosen and what they do (some states require certain officers while some leave it open)
List of important committees and what they do
Meetings -- how often they are and how many people are needed to make decisions
Conflicts of interest
Ways to change the bylaws
Notice requirements for meetings
Shareholder agreements or restrictions on stock
An attorney can help you come up with bylaws specific for your company. While there are statutory default rules for companies that operate without bylaws, companies that draft them and follow them can be seen as more worthy of trust. To make sure they are up-to-date, you should review your bylaws periodically, but probably no later than every three years.
Examples - What Happens When You Use Bylaws vs. When You Don't Use Bylaws
When drafting bylaws, keep in mind how important well-written bylaws are.With Bylaws
Bylaws set the number and term of directors. If a director wants to leave, the bylaws will state how a replacement is chosen and when the term will end or whether the seat will be left vacant until a certain time.
Bylaws determine when a vote is valid and what notice may be required prior to holding a vote or meeting. They often state a minimum number of people who must vote on important matters and the total votes required to be counted as a formal action of the company.
Bylaws can include situations in which an office holder should resign and what recourse the company may have for any abuses of power or failure to disclose conflicts.
Without bylaws state-specific laws provide default rules that may or may not be the most beneficial and effective fit for a business.
Without bylaws, a company may be at risk for a “hostile takeover” as a lower number of votes may be required for action than the company would like.
Without bylaws, board members may have conflicts of interest which may or may not need to be disclosed depending on state laws.
Frequently Asked Questions
I am an individual running a business. Do I need bylaws?
Probably not. But, if you take on a partner, you may want to set up some legal rules. Generally, it can be a good idea to adopt flexible and comprehensive bylaws up front even if you are the only owner, as it can be easy to forget to adopt them as the business grows.
I have started a nonprofit with some friends. Do we need bylaws?
Yes. In order to be recognized as a tax exempt organization, you must have bylaws. Nonprofit bylaws must cover very specific items and usually may not be as flexible as for-profit bylaws. If you are starting a non-profit, it’s a good idea to get a lawyer involved early on.
Steps to File
UpCounsel can connect you to the legal services that help you achieve your startup or professional goals. Talk to an UpCounsel lawyer about getting started with bylaws today.