Mark Briggs Attorney on By-Laws:
Every business larger than a sole proprietor needs written rules to ensure it operates efficiently, cost-effectively and predictably, while minimizing confusion and disputes. For a business that is organized as a corporation (as opposed to a partnership, LLC or other non-corporate structure), by-laws are the primary set of these written rules. By-laws tell you who is responsible for making certain decisions, how big decisions are made, and how the stockholders of the corporation are involved. By-laws are usually developed before or during the founding of the business, but many start-ups ignore corporate formalities like by-laws until they get beyond the self-funded stage. Generally, the earlier you get the by-laws in place, the better, because you never need them until you need them.
What is included in a corporation’s by-laws?
There is no universal standard list of what must be in a corporation’s by-laws, but they almost always address at least these questions:
- Board of directors and officers: How many officers and directors will there be? How are they chosen? How long do they serve? What will their responsibilities be? These are all questions to address in your by-laws.
- Corporate meetings: When, where and how are meetings of the directors and shareholders held? Who is in charge of the meeting? What kind of notice must be given of meetings? Can actions be taken by written consent instead of a meeting?
- Voting procedures: How many people are needed for vote to be taken (the quorum)? How will a vote be counted? Can someone vote by written proxy? How are nominations made? Which issues can be voted upon?
- Stock: Will there be only common stock, or will there be multiple classes of stock? How many shares of each class will there be? What are the rights and obligations of shareholders? If some classes of stock will be designated in the future, who will determine the features of those and how? Can shareholders re-sell their stock to anyone at any time, or are there restrictions on the resale of their stock?
How do I write by-laws?
Including this much information in the early days of your business’ operations may seem daunting, but remember: Just like any other governing document, the by-laws can be amended over time as your business grows and new needs are identified.
Having the right set of by-laws in place helps ensure your business operates the way you want it to, without confusion or error. I recommend getting your attorney to assist you, as by-laws are impacted by the laws of the state in which your corporation is created. So, what may work well in California might be a problem in Delaware. If your budget does not allow you to invest in legal services, you can also try using a self-help service like LegalZoom.com to get a generic template of by-laws that will comply with your state’s laws. When you can afford a lawyer, you should have the by-laws reviewed and revised, because they should be tailored to your company’s situation. Remember: If things get rough at your company, the by-laws can save it from disaster or be the match thrown into the powder room. Waiting until trouble happens is usually too late to fix problems in a shoddy set of by-laws.
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