Corporate Bylaws: A Primer
Bylaws are the structure of the corporation: its election procedures, meeting rules, distribution structure, conflicts of interest, and other important issues that the corporation must address. Think of the bylaws as your corporation’s “laws.” The bylaws are semi-permanent. They can be updated and should be reviewed at least every other year. Contrast the bylaws with corporate policies, which can be changed from meeting to meeting.
Bylaws: A Primer
Bylaws address a broad range of issues and are variable depending on your corporation’s needs. Guides should give you ideas and issues to consider but don’t rely on any particular guide as your Rosetta Stone because every corporation is different; therefore, bylaws should be tailor-made to your needs.
In general, bylaws will address these issues:
- Electing directors,
- Member rights,
- Meeting rules,
- Distribution rules, and
- Director/Officer duties, and
Corporations can enshrine certain cultures in their bylaws, for example, the bylaws might include a mission statement that the purpose of the corporation is to advance the interests of a defined group of refugees or to adhere to Christian religious principles in business dealings, etc.
When are bylaws adopted? The Board of Directors adopts the bylaws at their first meeting after the corporation is formed. Adopting bylaws is the first thing the Board should do.
Directors: Directors oversee the officers who run the day-to-day operations. In most corporations, the same people will occupy both officer and director positions. Some of the easiest avoidable mistakes committed by new corporations occur when officer and director duties are confused.
Directors must meet at least once a year to oversee the corporation. The directors set the annual budget, review officer performance, and direct corporate strategy. Officers execute the day-to-day operations of the corporation and executed the directors’ instructions. If the same people occupy both positions, it is easy to forget that you are required to hold at least one annual meeting to review the corporation’s activities and budgets.
Failure to observe this corporate formality results in a substantial amount of corporate litigation. Disaffected shareholders can sue the corporation to fire officers/directors using their failure to observe the formalities as a pretext to remove them. These lawsuits often only enrich the lawyers and experts who fight these cases, it is far cheaper for a corporation to design dispute resolution systems to prevent these fights from boiling over. Often, these lawsuits are about personal issues – never about business.
Officers: run the day-to-day operations. The officers, such as the CEO and CFO, can be hired and fired at will by the directors.
There are two types of meetings: (1) board of directors and (2) shareholder. Board of Directors meetings can be between the full or executive Board, and among the subcommittees. Directors must meet at least once a year, but they can meet as often in a year as needed. Newer corporations sometimes meet more frequently to guide corporate development, whereas directors for established corporations might meet once or twice a year.
Shareholder meetings must be held once a year. Shareholder meetings are when directors present the corporation’s health to the shareholders, and they elect directors.