What are Bylaws: Everything You Need to Know
Bylaws also spelled as "by-laws" are the rules a corporation sets. They are established by the board of directors during the time the corporation is being formed.8 min read
What Are Bylaws?
Bylaws, also spelled as "by-laws," are the rules a corporation sets. They are established by the board of directors during the time the corporation is being formed. This process is called incorporation, and one of the first tasks of this new corporation will be to form corporate bylaws. Written bylaws tell organizations how to handle any new issues or situations that might arise. Having bylaws in place will save time that would've been spent on trying to work out complications within the company. It will also help keep things running smoothly and define goals or missions.
What Do Bylaws Do?
Bylaws will define things like the company's purpose, official name, officers' titles and responsibilities, requirements for membership, how the officers will be assigned, how meetings will be conducted, and how often these meetings will be held. Bylaws will dictate the way the group functions in addition to what the roles and responsibilities of the officers will be. They help lay out an organization map, so everyone will know what the purpose and the daily operations are.
Bylaws are what legally guide the organization, as they could be brought to court if actions are violated. They're sometimes called standard operating procedures or policies and procedures, but these are not the same things. They tend to monitor the day to day operations without having the force of the law which bylaws do. With bylaws, rights are established and protected. The specific roles, duties, and responsibilities for each member, board of directors, executive committee, and others are defined.
Having bylaws in place will help decide how those who are elected or nominated will settle any problems that come up among parties. Bylaws should be amended and formally adopted as is necessary. They're often filed at the same time as a corporation's Articles of Incorporation when the business is originally formed. Bylaws that are well-written will ensure the organization runs smoothly by providing a solution for any issues, including nominations, elections, and settling disputes among parties. They're normally associated with corporations, but associations, nonprofit organizations, and partnerships can have bylaws as well. Since bylaws normally manage subsidies and grants, they need to be strictly monitored.
Reports must be made to stakeholders on a regular basis. They have their own powers and duties as outlined in the bylaws. Societies and clubs may have bylaws as well. Each director, member, and officer should be given a copy of the bylaws that they will read and make sure they understand. Bylaws are typically complex documents that contain many requirements and pitfalls to comply with tax and legal requirements of the IRS and the state. It's smart to use a corporate lawyer to set up the bylaws so money and legal issues will be saved down the road.
It's important for bylaws to be completed for them to be incorporated in your state. The Secretary of State or state office will oversee that the incorporation has the proper template for bylaws that they organization will use. Bylaws aren't public documents, but it's a good idea to keep bylaws available for the public to view to help with the company's transparency.
What is in the Bylaws?
Bylaws need to include the organization's identifying information, including the name, address, and main place of business. They also need to have the designation of the business as public or private, which is where the stock is either sold to the public, or the stock shares are kept between just a few people. Bylaws also need to have the board of directors, how many board members are on it, the general duties and powers of the board members, the tenure of the board members, and how many directors is considered a quorum (how many people need to vote for a resolution to be considered valid).
Board of Directors
The Board of Directors is the main governing body of an organization. Officers are members of the board who perform certain duties (such as president, vice president, treasurer, and secretary). The section of the bylaws needs to discuss how the officers are picked as well as all of their duties, responsibilities, and powers. The composition of the board should be discussed, which will state the minimum or maximum number of directors allowed. The issue of how vacancies are addressed will also need to be addressed, whether that's filled by the board or by the membership.
A nominating committee will often be outlined in this same section, which will include any recommended nominations to the board. It will discuss how officers become selected or removed from office, their duties, powers, responsibilities, and term length. The specific qualifications for serving as a director, their duties, the length of the term, and the possible clauses under which directors are elected also need to be addressed. Different types of members, the process for member acceptance and removal, rights, and sanctions need to be included in addition. If there are no members in the organization, this should be stated in the member section.
If the corporation is a stock corporation, any information on the voting of shares of stock and stockholders should be included. The bylaws will also state:
- The type and number of shares and stock classes that the corporation can legally issue.
- The schedule of regular and special meetings, including the place and name, notifying the board, committee members, regular members, and the conditions of attendance must also be included.
- Any information on the board meetings, such as location, frequency, and protocol need to be included in this meetings section.
Shareholder meetings also need to be addressed, including being notified of the meeting and proxy voting. Any normal, annual, or special meetings should be discussed in this section. An annual meeting is required for each corporation, so it's an important section of the bylaws. The procedure for how the corporation will conduct its record keeping should be included, such as the rules for preparing and inspecting the records and locating the corporate record book.
A Conflict of Interest Provision also needs to be included in the bylaws. This protects the company from any IRS penalties that can happen if the IRS finds the organization provided unfair benefits to its members, directors, or others. It prevents the director from having an unfair advantage due to their position. Any director who might benefit from an issue should not vote on that matter. If a conflict occurs, the director should disclose that right away, so they won't be removed from voting.
Bylaws should have certain rules about how they can be changed. They should state who can recommend amendments and how they will be voted on. The bylaws need to be current and accurate, so they represent the organization of their membership. Bylaws should be changed every five years, so they stay up to date with the rules and regulations. The financial (or fiscal) year should also be stated. Any rules on approving loans, contracts, stock certificates, checks, and other types of corporate resolutions will need to be included in the bylaws. They should also include financial inspections and audits of the corporate records.
When Should Bylaws Be Written?
Bylaws are written to clarify how officers become elected, the organization's purpose, and other basic issues related to the group operations. They're also written when an organization is going through a change related to its purpose or how the organization runs. If they want to apply for a nonprofit status, they also need to be changed.
How are the Bylaws Used by the Board of Directors?
Once the committee of the board of directors or the corporate directors has prepared the corporate bylaws, they need to be approved by the board. These are part of the corporate records and have to be placed where the Internal Revenue Service, the state, or another entity which would possibly want to audit the organization's records can view them.
What is a Corporate Resolution?
One of the most important parts of the board is enacting resolutions, as described in the bylaws. Resolutions are decisions which the board will make. They need to be in a very specific format and recorded in the board meeting minutes.
What is the Difference Between Bylaws and Articles of Incorporation?
Corporate bylaws will be written by the owners of the corporation when the business is founded. The Articles of Incorporation will need to be filed with the state. They do not need to be filed with the federal government. These will state the basic outline of the company and provide general information, such as who is in charge of organizing the corporation. They also provide how many shares the corporation can issue and if it applies, the name of the Board of Directors and the location of the corporation. The Articles of Incorporation will vary between each corporation, but don't get into detail about the structure or operations. This is handled by the company's bylaws. The Articles of Incorporation are filed with the state, and a fee will be paid to amend these.
How Do You Write Bylaws?
Organizations will need to consider if they really need bylaws and what the purpose of them will be for their company. Nonprofit organizations need them to serve as a legal document that the organization must uphold. Organizations that provide a direct service don't always have bylaws apply to them as a whole. Instead, they might delineate the board's power instead of the director. It's important to decide who will write the bylaws and how they will be written and approved. One person should be in charge of writing the first draft and making any additional changes. If they are too complex or too long, the writing tasks can be divided up, so several people divide up different sections.
The group in charge of approving the bylaws needs to meet at least once to put together an outline before the writer begins writing the bylaws. The first draft may be easy for one person to complete or may require multiple members to work together on it depending on how much the organization will operate. It's best to write general information first and leave specific information for later. Filing in a general bylaws outline will be easier than writing it from scratch for the first draft. It should clearly contain the name and reason for the organization. This can be done by stating the words, "This organization shall be known as" or "The official name of this organization is." Define if the group's purpose is social, political, service, or something else.
The bylaws should include:
- If the organization will be focused on one issue, multiple issues, a specific population, or a geographic area
- Members' rights
- Requirements for membership.
- Required fees
- Attendance requirements
- Situations where the membership can revoked
If honorary memberships are allowed, any particulars on this will need to be included as well.
The third part of the bylaws should be about the officers and the decision-making process. It should go over the governing structure of the organization, procedures for filling and vacation offices, officers, committees, amendments, and decisions. The correct titles and duties of each officer should be outlined, as well as how long their terms will run. Other areas to include are how an office will be elected, who will vote on it, the process, and who makes the appointment if an office is to be appointed. Each organization will vary on what other areas their bylaws cover based on the nature of their organization. The more complete the bylaws are, the better the accuracy of each position and the organization will be.
The fourth section of the bylaws will cover meetings:
This should go into detail about how often meetings will be held. It should state if meetings will occur on a regular basis or only as needed. The meeting procedures should be described as well as who has the authority to call meetings. Special meetings should also be noted, such as who has the authority to call them and what type of business is conducted at one.
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