The term “corporate bylaws” might sound like something that applies only to giant, multinational corporations—and not to your small business. In reality, however, any company that chooses a corporation as its form of business entity must create corporate bylaws.
Many states require corporations to create bylaws and store them at a business’s principal address. And even if your state doesn’t require bylaws, they are important to the smooth daily functioning of your corporation. Here’s how bylaws work, and why you might need them for your small business.
Corporate bylaws are legally binding rules that the board of directors adopts once a business incorporates. They lay out the day-to-day operating rules and procedures for a corporation. Establishing bylaws is an important task for the board of directors, helping them oversee the work and operation of the business.
In short, corporate bylaws are the rules and guidelines an incorporated company has to follow. Corporate bylaws include:
To help visualize what corporate bylaws can look like, the following template example from Rocket Lawyer is a good example to review.
Some of the reasons why bylaws could be so important to a new business include:
Another way in which corporate bylaws help is by maintaining a clear separation between the business and any personal commitments you might have. If your business is ever sued, the plaintiff’s lawyer could try to prove that your company is not a legitimate corporation. This might allow the plaintiff to pierce the corporate veil and attack your personal assets. If your business doesn’t have the proper paperwork required for a corporation—which includes corporate bylaws—you’re putting your personal assets at risk and voiding much of the reason for incorporating in the first place.
Corporate bylaws serve as a complementary document to your articles of incorporation. One is often confused for the other, in fact. However, the Articles of Incorporation is a very short document—typically only a page—with basic information like the date of incorporation, the number of existing and issued shares, the names of the Board of Directors, and the names of the members of the corporation. In contrast, the corporate bylaws provide details about how the corporation will operate on a daily basis, as well as how specific situations will be handled.
Unlike articles of incorporation, which must be filed with the state as part of the incorporation process, your bylaws are primarily for internal use only—and you’re not required to file them with your state. However, that doesn’t mean they don’t matter or that you can neglect to write them. As mentioned above, attorneys, bankers, companies you’re doing business with, and your investors or stockholders might ask to see your bylaws, and when they do, you need to have the document ready.
Most states require corporations to create corporate bylaws, though the requirements for what to include vary. (For a list of which states do and do not require corporate bylaws, check out this table from RocketLawyer.) But in most cases, your bylaws should include the following information:
Keep in mind that publicly traded corporations need to include some specific provisions in their bylaws to comply with securities and exchange laws. Bylaws for publicly traded companies are publicly available on the U.S. Securities and Exchange Commission’s EDGAR website.
The primary shareholders of a corporation typically draft the bylaws at the time of or shortly after the business’s founding. The board of directors, which is elected by the shareholders, will adopt the corporate bylaws at their first board meeting. Rarely, the board of directors will draft and adopt the bylaws.
If creating corporate bylaws sounds stressful, don’t worry! There are ways to make the process easier. There are plenty of resources on online legal helps sites like LegalZoom and Rocket Lawyer that can help you create bylaws by providing easy-to-use templates and tools customized for your state’s requirements. LegalZoom even has sample corporate bylaws and a template.
In some cases, your company’s requirements might be more complex than average. For example, you might have foreign investors, several classes of stock, or a high volume of corporate assets. If that’s true, then you might be better off consulting a business attorney for help. A lawyer can help you identify what to include in your bylaws and how to phrase certain language to protect your company’s legal interests.
Once you’ve adopted your bylaws, you should give a copy to every member, director, and officer of the company. After all, these bylaws affect everyone’s role in the corporate structure. By taking time to create well-thought-out corporate bylaws when you launch your business, you’ll save yourself lots of time, discussion, and stress later on. If the thought of creating bylaws from scratch is too intimidating, try LegalZoom’s step-by-step process.
Priyanka Prakash is a senior contributing writer at Fundera.
Priyanka specializes in small business finance, credit, law, and insurance, helping businesses owners navigate complicated concepts and decisions. Since earning her law degree from the University of Washington, Priyanka has spent half a decade writing on small business financial and legal concerns. Prior to joining Fundera, Priyanka was managing editor at a small business resource site and in-house counsel at a Y Combinator tech startup.