Key Takeaways

  • S corporation bylaws govern internal management, voting procedures, officer duties, and conflict resolution.
  • Drafting bylaws is critical even if your state doesn’t legally require them.
  • Bylaws can include rules for issuing stock, holding meetings, electing directors, and resolving internal disputes.
  • States differ in their requirements for corporate bylaws—some mandate written bylaws for compliance.
  • Bylaws should be tailored to the corporation's specific structure and goals, and reviewed periodically.

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:

  1. S corps may only issue one class of stock
  2. S corps may only have 100 shareholders or less
  3. All of those shareholders must be U.S. citizens
  4. 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:

  1. Company name
  2. Contact information of officers
  3. An outline of the corporation's structure
  4. The number of shares of stock the company plans to issue
  5. The voting rights for each share
  6. 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.

Are S Corporation Bylaws Legally Required?

While the IRS governs S corp tax status, state law determines whether bylaws are required. In many states, corporate bylaws are legally required for both C corporations and S corporations to operate compliantly. For example:

  • California, Delaware, and New York mandate that corporations adopt bylaws after incorporation.
  • Some states do not legally require bylaws, but lacking them may make it harder to open business bank accounts, resolve disputes, or appear credible to investors.

Even in states where bylaws aren’t mandatory, they serve as a key organizational document that establishes clarity and structure within the corporation.

Bylaws Include

Corporate bylaws:

  1. Definition of a corporation's purpose
  2. Lay out how the corporation will operate
  3. Outline the structure of the organization
  4. Delineate the duties and responsibilities of the owners, executive office personnel, managers, members, and Board of Directors members
  5. Describe how stock is issued by the corporation
  6. Establish and protect the rights of the owners, executive office personnel, managers, members, and Board of Directors members
  7. Lay out how executive directors and BOD directors are nominated and/or elected
  8. Describe settlement options for disputes
  9. Requirements to hold annual meetings for electing a board of directors
  10. Quorum needed in order to vote or make other transactional business decisions
  11. What happens if an officer has forsaken their duties: probationary period, automatic removal, removal by shareholder majority vote, etc.
  12. 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:

  1. in writing
  2. detailed; and
  3. comprehensive

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.

Examples of S Corporation Bylaws Provisions

Here are some common provisions included in S corporation bylaws:

  • Corporate Purpose: A broad or specific statement outlining why the corporation exists.
  • Board Structure: Number of directors, how they are elected, and their responsibilities.
  • Officer Roles: Detailed job descriptions and appointment processes for officers (e.g., president, treasurer).
  • Shareholder Voting Rights: Procedures for voting on major decisions, including quorum and proxy rules.
  • Meeting Requirements: Frequency and notice requirements for shareholder and board meetings.
  • Conflict of Interest Policy: Procedures for handling director or officer conflicts.
  • Indemnification Clause: Defines if and how the company will cover legal expenses for officers or directors sued for corporate actions.
  • Stock Issuance Rules: Conditions for issuing, transferring, or repurchasing stock.
  • Amendment Procedures: The process for changing the bylaws.

These clauses ensure that the corporation can function efficiently, resolve disputes internally, and reduce ambiguity.

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.

How to Draft S Corporation Bylaws

Writing effective S corporation bylaws requires a structured approach. Consider the following best practices:

  1. Use a Template: Start with a professional bylaw template tailored to your state’s requirements and your business type.
  2. Customize Key Sections: Tailor your bylaws to reflect the size, structure, and specific governance needs of your business.
  3. Consult Legal Counsel: Work with a business attorney to ensure your bylaws comply with state laws and are aligned with your articles of incorporation.
  4. Review Regularly: Update bylaws as your business grows, adds shareholders, or changes strategy.
  5. Get Shareholder Approval: Most bylaws must be formally adopted by a majority vote of the initial shareholders.

Once adopted, store a signed copy with your corporate records, and be prepared to provide it when applying for bank accounts, licenses, or legal filings.

Bylaw Requirements by State

The requirements for corporate bylaws vary by state. Here's a quick overview of a few examples:

  • Delaware: Requires corporations to adopt bylaws but gives wide flexibility in content.
  • California: Requires bylaws to be adopted after incorporation; must be consistent with the Articles of Incorporation.
  • Texas: Does not require corporations to file bylaws with the state but recommends having them for internal governance.
  • Florida: Bylaws are not mandatory under Florida law, but most banks and investors expect to see them.
  • New York: Requires bylaws under its Business Corporation Law (BCL) for S corps and C corps alike.

It’s best to check with your Secretary of State or an attorney familiar with your state’s corporate law to ensure compliance.

Frequently Asked Questions

  1. Are bylaws required for an S corporation?
    Not always, but many states require them, and they are strongly recommended for clarity and legal protection.
  2. Can I write my own S corporation bylaws?
    Yes, but it's best to use a template and consult an attorney to ensure your bylaws comply with state law and align with your Articles of Incorporation.
  3. Do I need to file S corporation bylaws with the state?
    Generally, no. Most states don’t require you to file your bylaws, but you must keep them with your corporate records.
  4. What happens if an S corporation has no bylaws?
    Without bylaws, the corporation may struggle with legal disputes, regulatory compliance, or investor relations, especially in states where bylaws are legally required.
  5. How often should S corporation bylaws be updated?
    Review your bylaws annually or when there are significant business changes such as adding shareholders, merging, or restructuring.

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