Bylaws

Your articles of incorporation (Articles) set out the basic information governing the corporation. For example, the name of the corporation, its physical location, who serves as registered agent and the agent’s address and the minimal information required by the state of incorporation. In order to maintain privacy, the Articles should provide only the minimum amount of information required by law since what you provide is publicly available for inspection.

Your corporation should adopt bylaws (Bylaws) concurrently with its filing of Articles and organization. Bylaws supplement the Articles by filling in the gaps intentionally left in the Articles for privacy purposes. For instance, you may want to divide your share structure into common and preferred shares and to divide the common and preferred into series themselves. The Articles are drafted in general to provide for this but leave the actual implementation of share structure to the Bylaws and, consequently to the board of directors. This way, the share structure and ownership remain private. In other words, the Bylaws would delegate the procedure of determining what the various series of common and preferred are to be called and their characteristics, e.g., voting preferences, dividends, sinking funds and other matters.

Bylaws are your rules of the road. While Articles can only be amended through shareholder approval, Bylaws are established and amended generally by the board of directors. Bylaws define things like the procedures for electing and removing directors and what officers the corporation will have, as well as their titles and responsibilities and a description of their job functions. The Bylaws specify how meetings of directors and officers will be called and conducted and how often meetings will be held. Bylaws lay out an organizational map. This way everyone knows what the daily operations of the corporation are and how they will be conducted. In other words, Bylaws are your operating procedures.

Bylaws establish and protect the rights of shareholders, directors, and officers. They have the force of law and may be enforced in court. They are not public documents.

Board of Directors: The corporation’s board of directors (Board) is the main governing body. They are elected by the shareholders. The procedures for nominating, meeting and electing directors are specified in the Bylaws. The Bylaws should provide how the Board is composed. For example, the minimum and maximum number of directors, their term of service, how vacancies will be filled, when, where and how often they meet regular and the procedure for calling special meetings.

Officers: Officers are generally appointed by the Board and may or may not be directors. The Bylaws generally spell out what officers the corporation will have, how they are nominated or appointed and the procedure, if any, for electing them.

Shareholders: Regarding shareholders, the Bylaws will generally provide:

• The type and number of shares and stock classes (common and preferred and series within each, as well as the respective rights differentiating the type and class); and
• A schedule of regular meetings and the procedure for calling special meetings, including when, where and for what purposes, and the procedure for notifying shareholders of a meeting. An annual meeting is required. This should be spelled out in the Bylaws.
• The procedure for conducing the meeting and keeping records should be included, e.g., the rules for preparing and inspecting the record book.

Conflicts of Interest; Indemnification. These provisions should be in the Bylaws to spell out and protect the officers, directors, employees, shareholders, and others, including the corporation. This also protects your corporation from any IRS penalties that can happen if the IRS discovers your corporation provided unfair benefits to these individuals. Any person who would benefit from an action should not vote on it and should disclose the potential conflict to the persons acting on it prior to any action being taken.

Amending the Bylaws; Miscellaneous Matters. The Bylaws themselves should specify how they are to be amended. Who can recommend amendments and who votes. Keep the Bylaws current and accurate; particularly reflect up to date rules on loans approvals, contracts approvals, stock certificates, banks accounts, check writing, and all other necessary corporate resolutions. Finally, include a provision on financial inspections and audits of corporate records.