Corporate Charter and Bylaws: Everything You Need to Know
Corporate charter and bylaws are two documents both of which are required by the state for a corporation to get incorporated.4 min read
Corporate charter and bylaws are two documents: namely the articles of incorporation and the insider regulations for the daily running of a corporation, both of which are required by the state for a corporation to get incorporated.
Charter vs. Bylaws
A charter is a legal document, which is created for a profit or nonprofit organization. It is often called “articles of incorporation,” and makes up the essence of the organization as a legal entity. The office of the secretary of state of the home state of an organization must be the authority to receive, process, and approve the organization's charter.
Bylaws are also legal documents that define the internal structure and guidelines of an organization. In other words, they create the framework for the governance of the inner workings and daily operations of the organization. Bylaws and charters play different roles in the running of an organization. Therefore, they're made of different components. The corporate formation procedure is incomplete until the company's bylaws are adopted, in some jurisdictions.
Components of a Charter
A charter has to include the organization's name and location. It also has to indicate if the organization is a profit or nonprofit organization. Furthermore, the charter describes the organization's board of directors and the structure of ownership of the organization. A profit organization's articles of incorporation (or charter) include the classes, number, and par value of authorized shares. The company's registered agent's name and address ought to be included as well.
Components of Bylaws
A company's bylaws are normally adopted by its board of directors at its foremost meeting. Bylaws are customized to suit the needs of a particular organization. However, all bylaws have certain standard features in common. Bylaws spell out the times and venues for the meetings of the company's board of directors and shareholders. Bylaws also provide the rules for the organized operations of the company.
For instance, they spell out the requirements for shareholders to vote when resolving disputes. State laws normally allow companies the freedom to draft their bylaws. For instance, Delaware says companies can write whatever they choose as their bylaws, provided they don't conflict with the laws of the state and the information in their other corporate articles.
Bylaws sometimes contain far more detail than charters. Some of the subjects covered by bylaws are as follows:
- How should corporate directors be selected?
- How should a corporate director be removed?
- How should board meetings and shareholder meetings hold?
- What are the obligations of corporate personnel, such as the CFO or the CEO?
- How should officers and directors be paid?
- How should executive decisions be made?
Bylaws can be as voluminous or as sparse as a company's board of directors chooses to make them.
Some companies avoid duplication by not including what's covered in their articles in their bylaws. If any change occurs, duplicate information will constitute more work because they'll have to be updated as well.
For nonprofit organizations that are looking to obtain tax exemption from the state and federal governments, incorporation is required, and the process of incorporation involves writing an organizational charter. Typically, the charter of an organization is written by an attorney. Even if an attorney is a member of an organization's board of directors, its charter is ideally prepared by the organization's appointed attorney who's usually a different person.
On the other hand, bylaws are written by the board of directors. Bylaws must be written to align with the charter. However, the opposite isn't true. Charters are generic, while bylaws are more particular. Since a charter is a pivot on which an organization's tax exemption depends, it has to be free of any hint of conflict of interest.
More on Charters and Bylaws
Whenever a conflict arises between bylaws and a charter, the charter wins. That's because the charter pulls more legal weight than the bylaws, which are generally drafted with less statutory guidance. Besides, since bylaws are usually made with greater legal flexibility, they're easier to amend than a charter.
For nonprofit organizations, when issues of bylaws versus charters arise, they're usually about which should be drafted before the other and never about whether they're both necessary. In every state, a nonprofit organization is required to have bylaws.
When bylaws are changed by a nonprofit organization and the changes result in a conflict, a court can resolve the conflict by interpreting the organization's charter. Therefore, a poorly drafted charter can get an organization in trouble.
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