S Corp Corporate Bylaws: Everything You Need to Know
S corp corporate bylaws are required when incorporating your company as an S corp business.3 min read
S corp corporate bylaws are required when incorporating your company as an S corp business. Your company must submit your application to the state agency that requires it with your articles of incorporation.
How to Obtain S Corp Status
First, ensure your company meets the requirements to qualify for S corp status:
- S corps may only issue one class of stock
- S corps may only have 100 shareholders or less
- All of those shareholders must be U.S. citizens
- S corps may not sell stock shares to another corporation or partnership
Your company will revert to C corp status unless all these requirements are satisfied for the entire tax year.
Second, an S corp must prepare Articles of Incorporation and file them with the Secretary of State. Articles include:
- Company name
- Contact information of officers
- An outline of the corporation's structure
- The number of shares of stock the company plans to issue
- The voting rights for each share
- Other basic information such as the company’s business purpose
Third, an S corp should consider drafting corporate bylaws. Not all states require them, but S-corporation bylaws govern how the corporation will be run. The Articles of Incorporation are only a basic outline of the company. The bylaws are more beneficial because they can prevent future disputes as well as lay out procedures for certain common events in order to save time and hassle in every day operations.
S Corp Defined
Internal Revenue Service tax code delineates the requirements of a corporation that elects S corp status. However, it is state’s laws that require an S corp to adopt bylaws that govern the corporation’s internal management and the rights of the shareholders.
- Definition of a corporation's purpose
- Lay out how the corporation will operate
- Outline the structure of the organization
- Delineate the duties and responsibilities of the owners, executive office personnel, managers, members, and Board of Directors members
- Describe how stock is issued by the corporation
- Establish and protect the rights of the owners, executive office personnel, managers, members, and Board of Directors members
- Lay out how executive directors and BOD directors are nominated and/or elected
- Describe settlement options for disputes
- Requirements to hold annual meetings for electing a board of directors
- Quorum needed in order to vote or make other transactional business decisions
- What happens if an officer has forsaken their duties: probationary period, automatic removal, removal by shareholder majority vote, etc.
- Means of amending the bylaws and/or articles of incorporation
This type of business outline allows for day-to-day operations to run smoothly because they are:
- in writing
- detailed; and
Some people consider the bylaws the most important legal document for all organizations: corporations, partnerships, associations, etc. If anyone wanted to see how the company is organized or the exact duties your organization expects from its Board of Directors, he/she would merely have to read the company’s bylaws. This additional step in more clearly defining the business entity and its status as a corporation is important.
The bylaws must be formally adopted. Some banks and institutions require a copy before conducting business relations.
Many small business owners question the importance of by-laws, especially if they do not have multiple shareholders. But, even if a company is small today, there is a potential for growth and the by-laws can help provide a roadmap in that event.
S corp v. LLC
An S corp does not have to deal with double taxation. This means that the shareholders pay income taxes on the company’s profit and/or payout that they receive. The corporation is not taxed as well. Many businesses, especially sole proprietors and smaller-sized businesses, choose to form an S corporation because of the protection against duplicate taxes.
Most states require that S corps abide by bylaws regulations. An LLC, however, does not have to abide by state-mandated bylaw requirements. The members of an LLC should adopt an operating agreement to govern their company, but they are not required to do so.
If you need help with S corp corporate bylaws, you can post your legal need on UpCounsel’s marketplace. UpCounsel accepts only the top 5 percent of lawyers to its site. Lawyers on UpCounsel come from law schools such as Harvard Law and Yale Law and average 14 years of legal experience, including work with or on behalf of companies like Google, Menlo Ventures, and Airbnb.