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If you are thinking of forming your business as a corporation, you will need to go through the incorporation process. In Texas, this means, among other things, drafting documents like the corporate Bylaws.
Corporations are governed by the corporate statutes of the state in which a corporation is incorporated, regardless of where the company is actually located. However, much of what follows applies to a corporation that is incorporated in any US jurisdiction.
Furthermore, this article is not designed to discuss individual Bylaw provisions in detail, rather it is designed to give you an overview of corporate Bylaws, how they fit into the overall corporate governance structure, and to list some of the common provisions contained in corporate Bylaws.
Some states, like Texas, require corporations to have Bylaws and others do not. So, check with the Secretary of State in the state in which your company will be incorporated to find out if it will be required to have corporate Bylaws in place.
What are Bylaws?
A corporation’s Bylaws are the rules that govern its daily operation and management. Typically, the incorporator of a new corporation will draft the initial Bylaws for ratification by the corporation's Board of Directors at its first annual meeting.
A corporation’s Bylaws should not be confused with its Policies and Procedures, which go into detail about hiring, firing, compensation, per diems, the use of corporate vehicles, etc. Nor should a corporation's Bylaws be confused with its Certificate of Formation (typically called Articles of Incorporation in other states).
How Do a Corporation's Bylaws Differ from its Certificate of Formation?
Corporate Bylaws differ from a corporation's Certificate of Formation in that they are not a public document. They are an internal document that does not have to be filed with any state agency.
On the other hand, a corporation's Certificate of Formation must be filed with the Secretary of State’s office in order for it to receive recognition as a corporation.
What’s more, while the Certificate of Formation typically only provides basic information regarding the corporation’s structure, Bylaws flesh out, in detail, the structure outlined in the Certificate of Formation.
How Do Corporate Bylaws Fit Into Overall Corporate Governance?
You can envision corporate governance as a pyramid with state corporate statutes at the very top. State legal statutes will provide a set of default rules for your corporation.
Also, state laws make certain provisions mandatory, meaning that your corporate Bylaws must contain them and your corporation must abide by them. This includes some provisions that can be opted into, others that can be opted out of, and others that can be altered in either your Certificate of Formation or Bylaws.
Note: If there is ever any disagreement between your corporate Bylaws and the state's corporate statute, the state law is paramount.
Reasons for Having Corporate Bylaws
First of all, corporate Bylaws allow you to set forth the process and procedure by which your corporation regulates the relationships among its Board of Directors, officers, and shareholders and provide the rules and procedures that must be followed.
Corporate Bylaws can also be very effective at helping a corporation resolve internal disputes. There are often disputes within a corporation (perhaps between a Board member and an executive director) and when there is not a strong set of guidelines on how these disputes should be resolved, they can easily spread and infect the entire corporation. Having a good set of Bylaws can help resolve disputes expediently and amicably.
Lastly, there is no one-size-fits-all model for corporate Bylaws. So, you can't simply rely on the default provisions that are included in the state corporate statutes. Carefully constructed Bylaws will allow your organization to adopt provisions and procedures that are more tailored to its needs.
What Provisions Do Corporate Bylaws Contain?
Bylaws can be extremely extensive and contain any number of provisions. But, the basic provisions included in corporate Bylaws, generally, pertain to the following:
- Rights of shareholders;
- Electing officers and directors;
- Meeting requirements pertaining to stockholders meetings, Board of Directors meetings, etc.;
- Voting rights and procedures;
- Keeping and producing financial records;
- Who's authorized to sign checks and approve contracts;
- Indemnification of the corporation's officers and directors; and
- Amending to the Bylaws
Tips For Drafting Your corporate Bylaws
A corporation’s Bylaws can grow over time. Every year, additional pages may need to be added to address a new issue that has come up regarding one policy or another.
However, it is important to understand that your Bylaws should be your basic governing framework, but should not be expected to address every little issue that could possibly come up.
Also, as with most things with the incorporation process, creating corporate Bylaws will be better if they are the product of shareholder collaboration, reflect the values of all of those involved, and comply with relevant state and federal laws.
The final thing to keep in mind when drafting corporate Bylaws is that you should consider hiring a competent lawyer to assist you or, at the very least, to review your Bylaws for consistency with state law.