S Corp Bylaws: Everything You Need to Know
S corp bylaws are essentially a set of rules established by a corporation's board of directors. Created when a corporation is first formed, this helps protect the company as well as the corporation's shareholders. 3 min read
S corp bylaws are essentially a set of rules established by a corporation's board of directors. Created when a corporation is first formed, this helps protect the company as well as the corporation's shareholders. More specifically, S corporation bylaws clearly state all of the rules and regulations regarding the company's internal management. Since bylaws are specific to each organization or business, they will differ from one corporation to the next.
What Is an S Corporation?
In order to incorporate your company, you must complete the associated application process. Your articles of incorporation must also be submitted, in addition to S corporation bylaws. This type of business differs from other corporations in that it is not subject to double taxation. This means that all profits pass through to the shareholders, and the corporation does not need to pay taxes.
Based on state law, an S corporation must adopt bylaws which represent the internal rights and responsibilities of the shareholders. In comparison, a limited liability company, or LLC, does not need to complete this process. However, LLC members are expected to create an operating agreement in relation to their company. It is also important to note that S corporations are only allowed one type of stock.
What Are Corporate Bylaws?
Corporate bylaws are sometimes referred to as "company bylaws" or simply "bylaws." This set of rules is used by corporations to organize all associated rules and regulations for the company's directors, shareholders, and officers. These bylaws are then typically broken down into articles that further govern the corporation's shareholders and board, as well as the company's stock. By taking this step, shareholders will need to adhere to specific guidelines that are not covered by the statute.
Who Needs Corporate Bylaws?
All corporations are required to have corporate bylaws in order to properly structure their organizations. By creating this critical document, all rules will be set in terms of meetings and voting rights. Each individual will also be made aware of his personal power and associated responsibilities.
What Are Some of the Terms in Corporate Bylaws?
When familiarizing yourself with corporate bylaw terms, it is important that you have a thorough understanding of each definition.
Here is a short list of some of the terms you need to know:
- Special meeting — This is a meeting that cannot wait until the next scheduled meeting. A special meeting is required when making key, time-sensitive decisions.
- Quorum — This is the minimum number of shares required to make decisions at a meeting.
- Voting trusts — A trustee is appointed by a shareholder, who not only holds shares but is able to vote based on the trust agreement.
- Cumulative voting — Within this system, each shareholder is given one vote per share. This is then multiplied by the number of directors elected by the shareholders.
- Remote communication — This is when a meeting is held via telecommunication, such as over the phone or through a video chat app.
- Company management structure — This structure can either be simple or complex in terms of management. For example, a simple structure may consist of a president, whereas a complex structure may include a CEO, presidents, and vice presidents.
There are numerous other terms you need to know, so be sure to do your homework. If you are unclear about any term at any time, it is important to seek advice.
When Do Corporate Bylaws Come into Effect?
Once the state issues the articles of incorporation, initial bylaws are created at the first organizational meeting. This meeting is usually run by the corporation's directors. When bylaws have been officially adopted, they continue to be in effect until any changes are made. These bylaws will state all associated procedures and rules, guiding the company's internal management.
When creating an S corporation, you should not overlook this critical step. By developing clear, formal bylaws, all associated shareholders, officers, and directors will better understand what is expected of them. This helps to maintain order and promotes sustained success. Since a corporation's bylaws can influence future litigation, it is recommended that you practice due diligence and create detailed, comprehensive bylaws.
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