Purpose of Bylaws for Corporations
The purpose of bylaws for corporations is to establish the company's management structure, procedures, and dispute resolution processes.3 min read
The purpose of bylaws for corporations is to establish the company's management structure, procedures, and dispute resolution processes. This legally binding document serves as an operating manual for the corporation and is developed by its board of directors.
What Are Bylaws?
When a new corporation is formed, the creation of bylaws is one of the first tasks of the board of directors. This document is tailored specifically to your industry and the needs of your company. It protects the rights and responsibilities of your owners, directors, executives, shareholders, and other stakeholders. They establish processes for elections and for resolving disputes that arise. Bylaws must be formally adopted by a vote of the board and can be changed by amendment.
Companies that do not establish bylaws are subject to the state laws governing corporations by default. Corporations can establish their own procedures with bylaws, but some legal statutes are mandatory, while others can be altered.
Bylaws are often required to open a corporate bank account and to purchase some types of insurance policies. The larger and more complex your company, the larger and more complex your bylaws will be.
How Do Bylaws Differ From Articles of Incorporation?
Bylaws are sometimes confused with articles of incorporation, but these are two different documents with different purposes. The articles of incorporation are filed with the state where your company will exist and include basic information about the company, including:
- The name of the person creating the corporation
- The number of stock shares that can be issued
- The names of the directors
- The business address
This document does not detail the company's structure, administration, or function. Articles of incorporation are filed with the state.
What Provisions Should Be Included in the Bylaws?
Although bylaws will vary by organization, the basic elements should include:
- Name of the corporation
- Business address
- Purpose of the corporation
- Names of members
- Names of the board of directors
- Names of officers
- Meeting requirements
- Conflicts of interest
- Procedures for amendment
The written statement of purpose will explain to current and future managers, directors, officers, and stakeholders the original mission of the company. It discusses why you started the business, who your target customers are, what distinguishes your products and services from others in the market, how you are different from your competitors, and how you plan to reach the goals you've set for your corporation.
The statement of purpose is especially important for nonprofit organizations, since it will be used to determine if you qualify for tax exemption with the IRS, as well as for legal 501(c)(3) or 501(c)(4) status.
What Are Committees?
Committees are groups of board members that have specific projects or duties. The bylaws should detail how committees are formed, how members are appointed, and any existing committees and their responsibilities. For example, many corporate boards have membership committees, audit committees, and nominating committees.
Also indicate how committees operate, how often they should meet, and what type of authority they have. In most cases, a corporate resolution is used to create and dissolve committees. Members of your board who have valuable skill sets, such as accounting or fundraising, can be chosen to lead committees.
Committees usually don't make binding decisions independently; instead, they make recommendations to the board to assist in these decisions.
Committees can either be standing, which means they are always in existence, or ad hoc, which means they are created for a specific purpose and dissolved when no longer needed. Other common committees include compensation, executive, research, and ethics.
What Are Officers?
Officers are board members who have specific responsibilities, usually including the president, vice president, secretary, and treasurer. The bylaws indicate how officers are selected and the duties and responsibilities they have. This section may detail the information about the nominating committee and indicate the length of each officers term.
In most cases, officers are categorized as employees of the corporation. They oversee the daily administration of business and make reports to the board of directors. Most corporations allow directors to serve for one year. Sometimes, an individual can hold more than one office; however, the same person cannot serve as both secretary and president.
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