Bylaws are the written rules or legally binding rules that control the internal affairs of an organization and act as operating manuals of the organization. They are used for defining things like official name, requirements for membership, purpose, titles, and responsibilities of officers, how each and every annual meeting should be conducted, how offices should be assigned, and how often meetings need to be held.
Nonprofit bylaws provide binding rules for electing directors and outline how the board of nonprofit organizations should function. Bylaws are general guiding rules and regulations which help in operating a business. They are the guiding principles that lay down directive guidelines for the board of directors, which further helps them overlook the corporation’s day-to-day activities and responsibilities.
These bylaws are required to be approved by the corporation’s board of directors and then the internal revenue service department of your state under which your company or corporation is set up.
What are Bylaws?
Definition: Bylaws are defined as the rule of law established by an organization or community for regulating itself. They are generally established by different entities like a business corporation or an association or a non-profit organization. A legislature or some other local government body as higher authority may also establish the degree of control that the by-laws may follow.
One of the first things done by the board of directors of a company or corporation is to establish company bylaws which are rules and regulations required to govern how a company runs and functions. It is written as a single document with all the information regarding the standard set of principles the company will follow and what tasks are to be performed and operated throughout its existence.
Some of the essential things that a company bylaws specify are the duties and responsibilities of the board of directors, the protocol that is needed to be followed on the occasion of a meeting held when an issue requires immediate attention, and the means to modify the existing company bylaws if necessary. Company bylaws are highly crucial in running a business and maintaining an organization’s order; therefore, companies work with professional legal advisories like an attorney to write these bylaws.
Bylaws vs Standard Operating Procedures
People often get confused in bylaws and standard operating procedures or policies and use them interchangeably, but they are quite different.
Standard operating procedures tend to govern day-to-day operations but they do not have the force of law while bylaws incorporate the force of law with themselves.
What do Bylaws Define
As your organization’s operating manual, bylaws periodically may define-
- Size of the board
- How the board will function
- Directors and officers’ roles and duties
- Rules and procedures for electing directors, holding meetings & appointing officers
- Policies and procedures for resolving conflict of interest
- Ways through which grant monies will be distributed
- Different corporate governance matters
Why Should an Organization have Bylaws?
An organization should use bylaws for guiding the board’s actions and decisions. They also assist in resolving and impeding conflict and disagreements. Different potential problems are prevented by them as they clearly define and outline rules for the organization.
It helps all types of organizations no matter what their size or purpose is. It tells how your organization will be operating that enables all the operations to function smoothly. It enables in saving enormous amounts of time and defining the structure and mission of your organization. It is also crucial for you if you want to apply for nonprofit status for your organization.
How do Bylaws work?
The company or corporate bylaws are written in the earliest stages of setting up and finding a company as they involve directives for corporate officers, responsibilities of the board of directors, terms of office, when and how important meetings need to be conducted, and how the overall company works and operates. The minimum information that should be present in a company’s bylaws is name, address, principal place of business, whether or not the company is private or public, and the company’s fiscal year.
The bylaws typically include the number and type of share or stock the company can authorize, information related to shareholder meetings like voting procedure, annual meetings, meeting notifications, requirements, etc. It also should have information pertaining to the company’s board of directors like the number, their general powers, duties, responsibilities, terms of service, the number for a quorum, meeting procedure, etc. It is crucial to mention the process of removing or replacing a board member or corporate officer in the company’s bylaws.
Bylaws v/s Articles of Incorporation
Whenever a new company or corporation is set up to go into a specific business, it must get registered in the state where it will be doing business; this documentation for registration of a company is called the Articles of Incorporation.
This document contains some basic information about the company, like the name and address of the company, date of opening, whether the company will sell shares and stocks or not, and the names of the board of directors. After the formation of any company, a set of directors for the company are appointed who further decide the company’s bylaws, which helps in directing the operations throughout the company.
The bylaws of a company or corporation are all about the board of directors and how they should function to run the company. Another significant difference between them is that the Articles of Incorporation must be submitted mandatorily with the state where the business is established. Still, company bylaws are not mandatory to offer with the state, but they should be kept with other corporate records in an audit.
Components of Company Bylaws
Every company needs to have company bylaws to have written guidelines for running a company.
This company bylaws have some crucial parts and components to it, without which it is considered incomplete.
As mostly company bylaws are a legal document, it is essential to carefully examine them and make sure it has the following components or parts to them.
1. The Board of Directors
The board of directors is a very integral part of a company or corporation as they are the governing body of the company, and so they are also an essential component of company bylaws.
The bylaws contain information of the board of directors like their duties and powers, membership tenure, number of maximum and minimum members, number of members required to form a quorum, etc. The bylaws also contain a definitive and specific procedure for removing any board member or the replacement.
2. Statement of the company’s purpose
The primary purpose of the statement of the company’s goal is to help the board of directors set up a path on which the company will tread its business. It states the company’s intention, and even if there is a change in the board of directors or primary leadership, this statement helps keep the nature, operations, and objectives of the company and business clear.
A view of the company’s purpose can attract investors because the report gives an overview of what the company stands for by looking at the bylaws.
3. Management structure
Changing any company’s management is an unpreventable situation, but the management structure is defined clearly in company bylaws. In the management structure, the straightforward procedure of filling the vacant higher position is written in a way that doesn’t disrupt the company’s leadership.
4. Information about the company
Information of the company is one of the basic features of the company bylaws as they are crucial in identifying the company. The three essential things included in this part of company bylaws are the registered name of the company or corporation, the address, and whether or not it is a private or public company.
5. Shareholder and board meetings
Information related to the board of directors’ meetings is also mentioned in the company bylaws. It states when the shareholder and board meetings should be held and how each of the members is to be notified about these meetings. It also has information about how often the board of directors or shareholders should meet and whether to call such meetings for essential issues that need immediate attention and action.
6. Call for other meetings
Another component of the company bylaws includes the set rules on how and when meetings are called and scheduled and a protocol or procedure that mentions how it should be conducted. This helps the board in keeping updated about the status of the company and when or how to address the pressing and concerning issues of the organization.
7. Contract and loan approvals
The company needs to put a set of rules which will indicate towards the approval of contracts and loans and other processes that the company may engage in. Contracts and loans can be tricky to get; therefore, it is an integral part of the corporations’ bylaws and a guiding line to the board of directors.
The bylaws of the company should include a clause related to a provision indemnifying the directors and officers from any liability that they may have to face due to their association with the corporation. This provision can be given in either company bylaws, the articles of incorporation, or both. The directors and officers of your company can be indemnified to the maximum extent permitted by law.
9. Conflict of Interest
Under this component of company bylaws, the directors are required to disclose any kind of conflict of interest that they will face while working for the company and from any discussion of related matters that may be under consideration by the board of directors.
This provision is critical to function smoothness of working in the higher positions and compels the board members to take their responsibilities seriously. This procedural safeguard will also help the company in securing trust with people.
How to Change the Bylaws of the Company?
With time a company changes a lot; therefore, it is necessary to make amendments to the company bylaws whenever it is deemed necessary. This provision for the flexibility of the company bylaws to make amendments in it should be mentioned in the bylaws beforehand. This process starts when a member of the board of directors raises an issue regarding the modification in the company bylaws.
Everything related to the modification of the bylaws, like the length of time needed to implement new rules or the number of meetings required to make definite changes, completely depends on the board of directors. For legal purposes, the changes must be first approved and documented before they are adopted or implemented into force.
How Do You Write Bylaws?
For starting it, you need to be clear whether your organization really needs bylaws and why.
For a non-profit organization, they behave like a legal document that the organization is supposed to uphold while for the organizations that are involved in providing direct services, instead of getting applied to the organization as a whole, bylaws delineate the board’s powers as opposed to those of the Director.
Some of the easy steps you need to take here are-
1. Gathering examples of Bylaws of Similar Organizations
You need to check how other similar organizations have written their bylaws. You should go through examples from several different organizations or corporations, as this will guide you about a good variety of styles and ideas. You should use them as a good rough guide.
2. Finalizing how and who should write and approve bylaws
You should decide whether your board of directors, steering committee, officers, or some combination of these groups will write and approve your bylaws. It is important to be clear about these decisions, and then accordingly you may choose the individual who can write up the first draft. In case your bylaws are becoming lengthy and complex, or convoluted, you should try to divide up the writing tasks to two or more people for writing specific sections.
3. Writing the first draft of your bylaws
Now, the group you have finalized for approving the bylaws needs to meet at least once for finalizing the rough outline for the writer before draft writing commences.
As per your knowledge about how your organization is going to function, it would be good for one individual to write the first draft. You may also meet other members and collaborate as a group and work together.
It is essential here to provide enough and generally agreed-upon information to the writer for composing the first draft of the bylaw. Some of the items that you should include in the bylaws of your organization-
- Name and location of organization
- Board structure (size and standing committees)
- Election, roles, and terms of board members and officers
- Statement of purpose
- Membership issues (categories, responsibilities)
- Role of chief executive
- Meeting guidelines (frequency, quorum)
- Compensation and indemnification of board members
- Amendment of bylaws
- Dissolution of the organization, etc
Setting up company bylaws is important as it makes the work for the company directors easy to look after the function and operation of the company.
It is also helpful to the employees to perform their work and for investors or clients to understand the values, intentions, and standards of your business. Bylaw can help in saving time and making the company a more trustworthy name in the industry.