What are Corporate Bylaws?
A corporation’s bylaws — in conjunction with its Articles of Incorporation — make up the framework that is used to determine how it will be run and managed on a day-to-day basis.
A corporation’s bylaws are basically what an operating agreement is to a limited liability company (LLC).
In this corporate bylaws guide, we examine how corporate bylaws work, why they are crucial, and in what states they are a legal requirement.
How Do Corporate Bylaws Work?
A company’s corporate bylaws are usually written by the initial persons who initiated the formation of the corporation (known as incorporators).
After the bylaws have been drafted, they must be approved by the company’s board of directors, who will have been appointed in accordance with its Articles of Incorporation.
Your board of directors can choose to amend your corporate bylaws before they approve them, but this is rather rare. Following approval, your corporation’s bylaws will be accessible to the Internal Revenue Service (IRS) and — if you are a public company — to the Securities and Exchange Commission (SEC).
If you haven't formed your corporation yet, take a look at our How to Start a Corporation guide to get your company started.
What Information Should I Include in My Corporate Bylaws?
The information that you need to include in your corporate bylaws can depend on your state of incorporation. Not every state requires corporations to draft their own corporate bylaws, and, even when they do, the information required within them can vary significantly.
There is, however, a general guideline of clauses that you should likely include regardless of your corporation’s size, industry, or location:
Statement of Purpose
Your corporation’s statement of purpose describes the reason(s) that your company was incorporated, how you wish to conduct business, and what type of clients you want to serve.
Including a statement of purpose in your corporation’s bylaws can allow you to:
- Attract similar-minded employees and partners
- Prove your tax-exempt status (if applicable)
- Allow potential investors to identify whether your future projections align with their own
Keep in mind that your statement of purpose can be left highly open to interpretation and does not need to be very specific. This can be useful if you are not currently certain about the exact ways that your business will develop in the near future.
Even though some of this information may be in your Articles of Incorporation, you will likely want to include a section that deals with your corporation’s specificities in your bylaws as well.
This could include:
- Your corporation’s location
- Your corporation’s state of registration
- Your corporation’s name
- Whether your corporation is public or private
Board of Directors
Your corporation’s board of directors is responsible for appointing officers — who are then responsible for managing the daily operations of your company — and for assessing the holistic strategy of your company.
Your board of directors will additionally be responsible for:
- Protecting your corporation’s financial assets and investments (fiduciary obligations)
- Hiring and monitor auditors (if need be)
- Overseeing your corporation’s direction and CEO’s efficacy
- Retaining and compensating the corporation’s CEO
From an internal management perspective, you will likely want to ensure that your bylaws include:
- The minimum and/or maximum number of directors that your corporation will have
- How your board of directors will be chosen
- How long directors will remain for
- What qualifications directors will need to have
You may also choose to dictate exactly how your annual meetings (or any other corporate formalities) will take place. For example, you may wish to include: how often they will take place, or the notice period that will need to be given before each one.
This is important, as by stipulating terms in your bylaws that are compliant with the formality requirements of the IRS and/or SEC, you can easily avoid any claims of you not being a legitimate corporation down the line and ensure that your personal assets remain protected (i.e., no piercing of the corporate veil).
For example, you may wish to specify that your annual meetings must have a minimum and a maximum period of notice that must be given, as this is a requirement in several states.
Your board of directors will be responsible for electing your corporation’s officers. Your officers will be in charge of managing the day-to-day operations of your company and will usually include a:
- Vice president
- Chief operating officer (COO)
- Chief financial officer (CFO)
- General secretary
In your corporate bylaws, you will want to stipulate exactly how:
- Your officers will be elected (and for how long)
- Your officers can be removed (if need be)
- The types of officers within your corporation
- The salary for each type of officer
- The responsibilities and fiduciary duties of each type of officer
Your corporation’s bylaws should detail information that relates to how and when you will issue stock.
- The number of stocks that will be issued
- The types of stocks that will be issued
- The process through which stocks will be transferred
Issuing stock to your corporation’s shareholders will likely be one of your first orders as a newly formed corporation, and so detailing how this will be done proactively can go a long way in averting any unnecessary internal disputes.
As your corporation grows and changes, your bylaws will likely need to change as well. This is because they need to stay relevant to your corporation’s current financial goals, purpose, and internal climate.
This means that the vast majority of thorough bylaws will include certain information that relates to how (and how often) they can be changed.
For example, you may wish to stipulate that a supermajority vote will be needed to amend your corporation’s bylaws (e.g., 66%, 75%, etc.).
Settling Conflicts of Interest
This is perhaps one of the most important clauses to include within your corporation’s bylaws, as failing to deal with an unforeseen conflict of interest effectively can significantly undermine the credibility of your board of directors, or even of your entire corporation.
Your bylaws should detail specific rules that apply to scenarios of conflict of interest, addressing exactly how they will be settled and what procedures need to be followed. This can make settling cases of conflict simple, predictable, and less chaotic.
For instance, if a member of your board is “conflicted” when it comes to a company merger or purchase, your bylaws may dictate that that member will not be allowed to participate in any discussions that relate to that particular commercial acquisition.
Why Are Corporate Bylaws Important?
The most obvious reason why a corporation’s bylaws are important is that they provide a mechanism through which internal disputes, management choices, and general day-to-day business operations can be run smoothly and with no complications.
Setting everything out in your bylaws will mean that future partners, employees, and investors will get the chance to read them before they join your company. This can mean that neither party will ever be left feeling blindsided.
Your bylaws may dictate exactly what procedure partners will need to follow if they want to leave your corporation, what steps you will need to take in order to dissolve your corporation, and what happens if a key shareholder of your business happens to unforeseeably pass away.
Other reasons that make your bylaws exceptionally important include:
- Increased growth opportunities: You may be required to show your corporation’s bylaws in order to secure financing, open a business bank account, or obtain a government certificate that improves your brand image
- Maintaining your corporate veil: Your bylaws will set out the specific obligations and duties that you and every other shareholder will have in relation to your corporation.
- Proving compliance: Bylaws can provide evidence that the way you operate your corporation is compliant with the formality requirements that relate to corporations.
It is important to note that even though their contents are highly discretionary, your bylaws cannot overwrite state or federal law — even if every single party agrees to them. You will need to ensure that your stipulated clauses meet the guidelines imposed by the IRS and possibly the SEC.
How Do I Write My Corporate Bylaws?
The way that you choose to write and structure your corporation’s bylaws will ultimately be up to you, as — at the end of the day— these will mainly be for internal use only and will not need to be filed with any state or federal government agency.
There is, however, a general structure that most business owners tend to follow:
- Start with information that relates to your corporation’s specificities: This can include your company’s name, address, officers, and directors.
- Write your statement of purpose: This will explain the reason your corporation has been formed and what it aims to achieve
- List the types of officers that you will include in your corporation: You will also likely want to include their specific duties and obligations as well as how often they will need to be re-appointed.
- Include any other clauses mentioned above that will specify the ways that your corporation will be run on a day-to-day or annual basis (e.g., meetings, conflict of interest, stock, etc.).
If you are having trouble structuring your bylaws in a thorough manner, you may want to rely on online templates. These can provide you with a comprehensive and succinct guideline that you can use to fill in your information.
If your budget allows you to, you may also wish to hire a specialized business formation attorney.
Which States Require Corporate Bylaws?
As mentioned above, even if you are required to create your own bylaws, these do not actually need to be filed, and the information mandated within them can vary depending on your state.
Moreover, even if you are working in a state where bylaws are not a legal requirement, you will likely benefit greatly from drafting them nonetheless.
The states that do not require you to create bylaws are:
- Rhode Island
Frequently Asked Questions
No, an operating agreement is used for LLCs. The equivalent documents for corporations are known as its corporate bylaws. These work in conjunction with a corporation’s Articles of Incorporation to entail the regulatory framework that it will use to conduct its business on a day-to-day basis.
A corporation’s Articles of Incorporation are a set of documents that legally establish a business structure as a corporation.
The information that is required to be included in a company’s Articles of Incorporation is generally quite brief:
- Corporation’s name
- Business address
- Registered agent(s)
- Types of stock that will be issued
These are essential, as they serve as proof of your incorporated status, which may be needed to prove that you have limited personal liability, to open a business bank account, or to apply for external loans.
After you have established your corporation successfully, you will still need to conduct your business in a way that complies with the IRS. If you are a publicly traded company, you will need to comply with the even stricter regulations of the SEC.
These usually relate to the type of information that you record, the way that you manage your company internally (e.g., annual meetings, etc.), and the corporation filings that need to submit.
Failing to conform with these can mean that you:
- Face fines and back taxes
- Lose your “good standing”
- Become forcibly dissolved
Incorporating your business as a corporation or as an LLC can have several benefits. The main ones include:
- Increased ability to make tax write-offs
- Increased growth opportunities
- Increased access to financing
- Improved brand image
- Limited personal liability under the law
However, these do come at a cost. Incorporated business structures are generally harder to set up (even with incorporation services) and — especially when it comes to corporations — can be subject to much tighter managerial guidelines.
It is difficult to elect a “best” business entity for all small businesses, as this can depend on your location and industry.
Nonetheless, the two most popular options tend to be sole proprietorships and LLCs. This is because they are both very easy to set up, require almost no administrative rigmarole, and offer a lot of managerial flexibility.
LLCs have the added benefit of decreased risk since they are incorporated business structures (and thus enjoy limited liability).
Check out our How to Choose a Business Structure guide for more information on finding the best business entity for your business.