Explaining the Basics of Bylaws
This blog post is part of a series geared towards small business owners to help them understand general legal concepts and documents affecting their business. To view other blogs in this series, click here.
When forming a corporation—whether it's a C-corp or S-corp—one of the most important internal documents you’ll need to create is your corporate bylaws. While bylaws aren’t typically filed with the state, they are a critical part of your company’s legal foundation. Please don’t make the mistake of viewing your bylaws as just another administrative burden. Your bylaws are the “operating manual” for the company and serve as the key document governing your company.
So, what exactly are corporate bylaws, and why do they matter? Let’s break it down.
What are corporate bylaws and how are they different from articles of incorporation?
Corporate bylaws are a set of rules and regulations adopted by your corporation's board of directors. They govern the day-to-day internal management and operation of your business. They outline how decisions are made, who has authority to act, how meetings are conducted, and how disputes are managed internally. Bylaws are typically adopted by the corporation’s board of directors at the company’s first organizational meeting, shortly after the Articles of Incorporation are filed.
Your articles of incorporation, on the other hand, is similar to your company’s “birth certificate” – even going so far as to be filed with your state. Articles of incorporation establish the corporation’s legal existence, but the bylaws define how the corporation actually functions. Unlike the articles, bylaws are typically an internal document and are not usually filed with the state.
Why are bylaws important?
Whether you are the sole owner or there are dozens of owners, bylaws serve several critical functions for your business:
- Legal compliance: Most states require corporations (both S-corps and C-corps) to have and maintain corporate bylaws.
- Helps maintain corporation formalities and shield owners from personal liability: Bylaws help demonstrate that your corporation is operating as a legal entity separate from its owners. This separation is crucial for maintaining the limited liability protection that shields your personal assets from business debts and obligations. Without bylaws (and the formalities they help enforce), courts may be more willing to “pierce the corporate veil” and hold owners personally liable.
- Provides structure for decision-making: Bylaws spell out how and when meetings are held, how votes are taken, and what constitutes a quorum (the minimum number of members needed to make decisions).
- Clarifies roles and responsibilities: Bylaws help define the powers and duties of directors, officers, and shareholders. This reduces confusion and helps prevent internal conflicts.
- Conflict resolution: In any business with multiple shareholders or directors, disagreements can arise. Bylaws provide a pre-agreed-upon, formal roadmap for resolving disputes, setting clear expectations, and preventing misunderstandings that could lead to litigation- which is often extremely expensive in the case of disputes between corporate owners.
- Required by banks and investors: Many banks will ask for a copy of your corporate bylaws when opening a business account or approving a loan. Similarly, potential investors will want to see how your company is structured and managed.
What’s Typically Included in Corporate Bylaws?
While the exact content can vary depending on the size and complexity of the corporation, most bylaws include the following sections (many of which I will break down in more detail in future blogs):
- Corporate name and purpose
- Principal place of business
- Board of Directors
- How directors are elected or removed
- Terms of service
- Meeting and voting procedures
- Officers
- Roles (e.g., President, Secretary, Treasurer)
- Duties and powers
- Shareholder meetings
- How and when they are held
- Voting procedures
- Issuance and transfer of shares
- Conflict of interest policy
- Indemnification
- Amendments to the bylaws
Bylaws Should Be Regularly Reviewed and Updated
If you are incorporating or haven't looked at your bylaws since filing, now is the time. Consult with a legal professional to ensure your bylaws are properly drafted, legally compliant, and accurately reflect how you want your business to be run.
If need legal assistance or need help understanding or updating your bylaws, please contact Danielle Dietrich, Esq. at ddietrich@potomaclaw.com or 412-449-9141.
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