Corporate Bylaws: Why Your Business Can't Function Without Them

Corporate Bylaws: Why Your Business Can't Function Without Them
Ronis Gracie
on March 16, 2020
Read in 3 min

While “corporate bylaws” may sound like something that only giant companies need, the reality is that every corporation has to have them– even your small business!

But what are they exactly?

What Are Corporate Bylaws?

Corporate bylaws refer to a legal document outlining your business’s organization and operations. It’s required of every business that chooses to take on the legal form of a corporation. Additionally, they’re an important part of business organization. Here are some of the reasons why you should have your own corporate bylaws:

  1. They define the responsibilities of everyone involved in your business. They also describe details of your business operations, including some day-to-day tasks. Writing these things down and sticking to them helps keep your business running more smoothly than it would if you didn’t have them.
  2. They’ll help resolve disagreements down the line. Every business that expands experiences growing pains, from partners leaving to dissent about operations. Bylaws govern how these disagreements will be resolved and who has the authority to make important decisions. By having them in place ahead of time, you’ll avoid situations that could destroy your company from the inside.
  3. If your business is ever the defendant in a lawsuit, the plaintiff may try to gain access to your personal assets by claiming that your business isn’t a legitimate corporate entity. Making sure that all of your paperwork (which includes corporate bylaws) is in order reduces the chances that they’ll be successful.
  4. They’re required to do many things. For example, you’ll need to show a copy of your bylaws to open a bank account for the business. You’ll also need them if you want to seek certification as a minority- or woman-owned business or set up a retirement plan.

Additionally, you’ll need to show your corporate bylaws if you ever want to request a Small Business Administration loan. Since these loans have such low-interest rates, they’re among the most desirable kind of business loans. They’re also backed by government guarantees. In any case, not having your bylaws prepared ahead of time can cause delays in any loan approval process.

Corporate Bylaws vs. Articles of Incorporation

Corporate bylaws often complement your company’s Articles of Incorporation, so much so that these two documents are often confused. In reality, however, the Articles of Incorporation is a short document that only includes basic information about your business. Generally, it will include the date your business was incorporated, the names of the members of the board of directors, the number of shares, and the names of the corporation’s members. While this information is important, it doesn’t cover any specifics about day-to-day operations and conflict resolution.

Articles of Incorporation must be filed with the state in which your business is incorporated. Bylaws, on the other hand, are only used for internal reference. You shouldn’t use not having to file them as a reason to neglect creating them, however. Many business transactions require sharing your corporate bylaws, including interactions with banks, shareholders and other companies. It’s important to have them ready when you need them.

What to Include in Corporate Bylaws:

By state, the requirements for corporate bylaws vary considerably. As a rough guide, they should always include the following:

  • Business name and address
  • Legal structure
  • Responsibilities of corporate members, including voting rights and different membership categories if there are any
  • How stocks are issues, distributed, transferred and sold, especially if a member leaves the business
  • Total number of shares available
  • Organization of the board of directors, including limits on how long someone can sit, required qualifications and how members are chosen
  • Details of annual meetings, including meetings of directors, shareholders, and committees
  • A process for amending the bylaws
  • A process for handling conflicts of interest that arise

Getting Help

The board of directors of your corporation will usually adopt the bylaws at its first official board meeting, which means that putting together the bylaws should be one of the first steps of starting your business. As part of the process, you should think through any potential issues and develop a plan to deal with them if they do arise. Writing comprehensive and useful bylaws can be stressful and challenging, and it’s tempting to ignore working on them.

There’s good news, though. You can get help without turning to an expensive corporate attorney or legal expert. An online search will yield quite a few resources, including templates customized to the bylaw requirements for each state. Take advantage of these tools early on to create extensive, detailed corporate bylaws. You’ll save yourself and your corporate members from a lot of stressful disagreements down the line, and you’ll open up opportunities that you wouldn’t have otherwise.

Ronis Gracie Finance Journalist

A serial entrepreneur experienced with building several small companies from the ground up and consulting for many others, Ronis understands the finer points of small business financing. He’s passionate about small business & is committed to simplifying small business lending for others.