The board may opt to employ the services of external solicitors to prepare a draft of the company’s bylaws to professional standards, after which the board must approve of the draft.
The corporate bylaws are committed rules that regulate the affairs that govern the day-to-day operations of a corporation.
Such bylaws are essentially written as a single document containing corporate standards that the company will perform throughout its existence.
Bylaws formulate part of a company’s corporate records and must be in a place where they can be viewed by the IRS or the state where the company was incorporated or any other authority empowered to perform an audit. Corporations are regulated by States, and the state may have specific procedures and regulations that must be adhered to.
The Working of Bylaws
Bylaws are purposefully designed to cover issues like board officers, their duties, mode of their elections, their term of office, the time and manner of conducting board meetings, and procedures for board operations.
Bylaws made to a professional standard will set out the company’s identifying information such as :
- Name (corporate name and business name)
- Registered address
- Principal place of business
- The status of the company (whether private or public )
- The liability clause
- Fiscal year as determined by the board of directors
The bylaws should also include the number and classes of securities that the corporation is authorized to issue, information aboutshareholder general meetings, as well as provisions for a proxy-annual meeting procedure and requirements for notifying members.
The board of directors is an integral part of a corporation – they are referred to as the company’s alter ego – so provisions in the bylaws should include:
- The number of board members
- The general powers and duties
- Terms of service
- The number of directors considered a quorum
If board officers are selected, descriptions of their duties, how they are elected, and their terms of office should be entered into the bylaws.
Corporate Bylaws vs. Articles of Incorporation
Many often mix up a corporation’s bylaws with its Articles of Incorporation. Unlike bylaws, which makes procedural provisions on how the Board of Directors and/or officers are elected, and the types and duties of the directors, the Articles of Incorporation emphasizes the basic outline of the company.
Every new company must be registered in the state where it does business, and one of the documents necessary for registration is the Articles of Incorporation.
Note That: A new corporation must file its Articles with the Secretary of State or Company Registrar where the company is incorporated.
This document contains basic information about the company sought to be registered that is required of it by the state for purposes of incorporation.
Like bylaws, Articles differ between corporations but are not detailed about the corporation’s operations or structure, provided by the company’s bylaws. Upon successful incorporation of a company, its board is set up. The board of directors decides on bylaws to help direct its affairs over the subsistence of the company. A corporation’s bylaws are rules for its board of directors and how they must run the company, while its Articles serve as regulations for the company itself. Articles of Incorporation are filed with the state and can be amended at a cost. Bylaws can be amended without a cost by a vote of the board. The filing fee of articles varies from State to State, depending on the state registry.
Components Included in the Bylaws
Under this heading is a list of items that typically appear in bylaws, though admittedly, this list could be altered and tailored to suit an organization’s purposes. Thus the document does not necessarily have to be arranged in this order or include all of these components.
Corporations are corporate persons, and just like natural persons, they possess personal information like name, address, and even purpose. All these should be adequately described in the bylaws.
Statement of purpose
Every company has a purpose. A statement of purpose answers the question: “why does this company exist?”. It will expose an independent observer to the intendments of the company. Purpose and mission statements share some similarities, ergo often confused or used interchangeably. However, the two terms do have slightly dissimilar functions. A mission statement describes the acts of a company (for instance, “ABC Inc”), including what it does and who it serves, whereas a purpose statement answers the “why” in “why is ABC Inc in business?”
From the preceding, the mission statement describes what a company does, and the purpose statement says why it does it. Fundamentally, a purpose statement should provide answers to the following:
- Why the company is in business
- Who is its target market?
- What it does for its customers
- What makes its services or products extraordinary?
- How it differs from competitors
- How it will go about reaching its business goals
Basically, a statement of purpose clarifies the reason for what a company does and its motivation. It is crucial for not-for-profit corporations because the wording of their statement of purpose determines if they qualify for 501(c)(3) or 501(c)(4) status and are approved as a tax-exempt organization by the IRS.
It is not a requirement that a specific language should be used in the purpose statement in order to qualify for tax exemption. However, it is expedient because there is a certain language that the federal government checks for.
The bylaws should make provisions for the kind of members in a corporation, their voting rights, and the procedures for adding new members, any. Every company with shareholding capacity has shareholders but may not have members. If a corporation has members, it ought to have a formal membership policy.
This policy should make provisions for:
- Membership rights and duties
- Shareholding qualifications
- Voting requirements
- Membership meetings
- Discipline of members
- Revocation or rescission of membership
Unless otherwise stated in the Articles and bylaws, membership of a company can consist of an individual, a corporation, a partnership, etc. Meetings of members could be physical or by non-physical means such as conference call, video call, or any other mode.
Board of directors
Corporate bylaws usually make provisions for clauses that specify the number of directors the corporation has, their appointment, their qualification, the length of their terms, and grounds for removal. It can also specify the mode and manner of board meetings and voting requirements for the board members.
Remember: A corporation’s board of directors plays a significant role in corporate governance.
The board acts on behalf of the company and has the legal status of an alter-ego. They supervise the officers of the corporation while strategizing and planning for the corporation. Directors, unlike the officers of a corporation, are generally not company employees, but they report to the shareholders.
Appointment of first directors is by naming them in the Articles of association, and they hold office until the first shareholders annual meeting, where new directors get appointed to join or to replace them. In the alternative, members may appoint directors to the board by a resolution in a general meeting. Similarly, any director appointed by members may also be removed by them.
This clause should also state the number of directors needed to establish a quorum and how the board of directors should take action. Usually, a quorum is at least one-third of the total number of directors. Consequently, a board resolution passed by a majority of directors present at a board meeting at which a quorum is formed is deemed a resolution of the entire board.
Finally, it is noteworthy that the board of directors may take action without meeting if a unanimous resolution is made to that effect, which is then signed and recorded in your corporate minute book.
The bylaws of a company should make provision for annual and special meetings of members and shareholders. This should include information about the issuance of notices alongside the ordinary or special business of the meeting and the quorum required to vote at such meetings. Generally, each shareholder is usually entitled to one vote for each share he or she holds unless the Articles of Incorporation expressly prohibits poll voting. A shareholder is usually allowed to appoint a proxy to attend a shareholder meeting and vote in his or her stead.
The legal requirements of shareholder meetings are dependent on the laws and policies of individual states. Thus there are State-specific requirements regarding shareholder meetings – some more specific than others. These requirements vary according to the type of shareholder meeting and the type of corporation.
Having said that, regardless of the state of incorporation, a company’s first shareholder meeting should be held within 18 months after incorporation and subsequently, no later than 15 months after the first annual meeting. Shareholders are entitled to the notice of the time and place of such shareholder meetings. This notice should be issued no more than 50 and no less than 21 days before a shareholders’ meeting.
The business of the annual meeting of shareholders usually include:
- Review of the affairs of the company
- Presentation of financial statements by the board
- Appointment of auditors
- Presentation of auditor’s reports
- Election of officers and directors
- Confirming, amending, or rejecting bylaws
For the board to effectively play out its role in a company’s corporate governance, there is a need for its compartmentalization into smaller groups called committees. The bylaws should establish special committees and their specific duties. The bylaws in respect of this section should cover:
- The kind of committees the corporation should have
- Time of committee meeting
- Manner of operation
- The extent of authority delegated to the committee
There are two kinds of committees that are established by the board: standing committees or ad hoc committees. Standing committees are committees that are recurringly in operation. Meanwhile, ad hoc committees are those that are created to tackle an issue or problem and then dissolved upon successfully dissolving said issue.
Below are some examples of committees:
- Executive- acts for and on behalf of the board in-between board meetings
- Finance- oversees the budget process, prepare financial statements and ensure that financial reports are properly handled
- Fundraising- involved in raising additional capital
- Compensation– involved in deciding, for example, the director’s remuneration
- Audit– conducts audits periodically
- Research– established to inquire around areas the board is none the wiser about
A corporation should not do business until it has issued stock to its shareholders. The bylaws should explain the varying stock classes as well as the time and mode of issuance of stock certificates. The bylaws should also show who will be entitled to receive stock in the company and the mode of transfer of stock.
Stock or equity in a corporation takes the form of shares, and each share represents a unit of ownership in the company.
There are two types of stock that can be issued as securities by a company — common stock and preferred stock — and each with varying rights associated with it, which are referred to as preferences.
Common Shareholders bear the major financial risks of the company and are often the “equity shares” of the company. These are shares that give the holder the right to participate in the company’s surplus profit and capital of the company and are often the “equity shares” of the company. They usually attract no special rights and carry no fixed rate of dividend or interest.
These are shares that do not entitle the holder to any right to participate beyond a specified amount in any distribution either by way of dividend or return of capital on redemption, in winding up, or otherwise. Preference shares carry a prior right to receive an annual dividend of a fixed amount – for example, a 6% dividend.
Preference shares may give its holder the right to more than one vote per share in certain circumstances. They do not entitle holders to share in surplus assets of the company except for participatory preference stockholders. When a company is wound-up or sold, holders of preferred shares will take precedence and get paid by the liquidator before common stockholders.
Officers are company employees though sometimes, persons other than company employees could be made officers. The bylaws should make provisions for the procedure of selection of company, as well as the duties, powers, and responsibilities of each officer. Consequently, the bylaws should disclose procedures for removing an officer.
Some positions held by company officers include the following:
- Vice President
- Chief Executive Officer (CEO)
- Chief Financial Officer (CFO)
This section of the bylaws should indemnify company officers and directors from any liability that they may be exposed as a result of association with the corporation. This clause may also be replicated in the Articles of association.
Conflicts of interest
This provision imposes a fiduciary duty on the directors to disclose all conflicting interests to the company. This clause in the bylaws will compel directors to disclose conflicts of interest and to recuse themselves from any deliberation of conflicting interests that may be under consideration by the board of directors. This indemnifies the company from IRS penalties which may occur if it is discovered that the organization is providing unfair and prejudicial benefits to directors, members, or others.
Time evolves, people change, and so do corporations; hence, the bylaws should make provisions for its amendment if the need arises. The amendment clause should specify the requirements for amending bylaws under the State law and the Articles of incorporation. It should also state the voting procedures for the amendment. If one too many clauses of the corporate bylaws are considered for amendment, then perhaps the entire document needs to be redrafted. The bylaws would be required to be reviewed every five years if it is to remain up-to-date.
Below are the customizable templates to be downloaded:
Frequently Asked Questions (FAQs)
It is not necessary to file the bylaws (unless the corporation is applying for non-profit status), unlike Articles of association, which must be filed in order for an organization to obtain corporate status.
There is no hard and fast rule in this respect, that notwithstanding bylaws should be current. Hence, bylaws should be revised every five years in order to up-to-date with contemporary times.
Amendment of bylaws is determined bylaws itself. The bylaws are prepared by the owners of the company at the time of incorporation. They could decide to vest the board with the power of amending the bylaws by making provision for the same in the bylaws itself.
The importance of bylaws to a company cannot be overemphasized. They are an important instrument of corporate governance. Corporate governance is a system of direction and control that dictates how a board of directors governs and oversees a company. A salient purpose of corporate governance is to establish a system of rules and global best practices for a company – in other words, bylaws to account for accountability. When good corporate governance is missing in a corporation, a company runs the risk of liquidation, and shareholders stand to suffer substantially.