When you incorporate your business, you turn it into a legal entity separate from the individuals—yourself and your business partners—that started the company. Alongside incorporation, it can be highly useful to implement corporate bylaws that establish the internal structure that will dictate how your business is run.
What are Corporate Bylaws?
If you’ve ever established articles of organization or incorporation for a business, you’re likely familiar with bylaws. Bylaws are rules and regulations established by an organization or group to govern its internal affairs. These rules can cover a wide range of topics, such as membership requirements, voting procedures, meeting protocols, officer duties, and financial management. Bylaws are typically created when an organization is formed, and they may be amended over time to reflect changes in the organization's needs or circumstances.
In general, bylaws are more specific to C-corporations and S-corporations. However, LLCs have operating agreements that are essentially used for the same purpose as a corporation's bylaws. If your business isn’t legally registered as a corporation, you are not obligated to create corporate bylaws. However, bylaws are a highly proactive tool to ensure your business runs smoothly.
Note that bylaws are not the same as articles of incorporation, as those are documents filed with state agencies to establish your business as a separate legal entity. Bylaws primarily serve an internal purpose, though are required to be made public if your company is publicly traded.
Why are Bylaws Important?
Bylaws serve as a critical component of your business, as they provide a framework for how your organization operates, and they help ensure that everyone involved is aware of the rules and procedures that govern their actions. They can also be used to resolve disputes and ensure that decisions are made fairly and transparently.
As a note, bylaws are generally legally binding, so you should ensure that your business is in compliance with any legal requirements when creating or amending any bylaws.
Bylaws proactively protect your business by providing the following:
Governance: Bylaws establish the rules and procedures for how an organization operates and how decisions are made, making sure that everyone in the organization is aware of their roles and responsibilities. They similarly provide a framework for conflict resolution and general decision-making.
Compliance: Bylaws aid in setting a business up for compliance with any legal or regulatory requirements that apply to it. For example, nonprofit organizations may be required to have certain provisions in their bylaws in order to maintain their tax-exempt status.
Clarity: By implementing bylaws, you clarify the rights and obligations of members, shareholders, or other stakeholders in an organization. This also allows you to define the scope of authority for different positions within the organization, establish internal controls, and provide a clear understanding of how decisions are made.
Continuity: If your business experiences turnover, having bylaws in place establish a sense of continuity, even as individuals come and go. This is helpful especially if your business changes leadership, as you have a guarantee in place that the business will run in the same way regardless of who is in charge.
Transparency: Finally, bylaws aid in establishing transparency and accountability within an organization. By establishing clear rules and procedures for decision-making, bylaws help ensure that everyone is aware of how decisions are made and who is responsible for making them.
Overall, bylaws are an important tool for ensuring that an organization operates effectively and efficiently, and that everyone involved is aware of their roles, responsibilities, and obligations.
Does Your Business Need Bylaws?
Whether or not your business is legally required to establish bylaws depends on the structure of your business and the size of your organization. Bylaws are typically associated with formal organizations, such as corporations, nonprofit organizations, and cooperatives. If your business falls within this category, then contracting an outsourced attorney to put bylaws in place is an excellent, proactive step to take.
Bylaws are especially useful for organizations that have a complex structure or multiple stakeholders, as they help to define roles and responsibilities, establish decision-making processes, and clarify the rights and obligations of members or shareholders. They also aid in preventing or resolving disputes within the organization and ensure that everyone involved is on the same page.
If your business is a sole proprietorship or a partnership with a small number of partners, you may not legally need formal bylaws. However, even in these cases, an outsourced attorney can help you put basic rules and processes in place to protect your business in case of disputes, lack of internal controls, or big changes. Ultimately, bylaws are a proactive measure to protect your business in the long-term.