What are Corporate By-Laws?
UPDATED: February 7, 2020
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Corporate by-laws are a corporation’s operational blueprint. By-laws outline the structure of a corporation, and they should be customized for each individual company's situation. By-laws set forth the rights and powers of shareholders, directors, and officers, and they determine how those in charge are nominated or elected. They also help settle any disputes among parties that may arise. Finally, a corporation's by-laws must be formally adopted and amended as necessary.
Contents of By-Laws
The content of corporate by-laws varies, but typically includes the time and place for meetings of officers, set up of the board of directors, officers and committees, and any other provisions deemed necessary. Because the Board of Directors is the primary governing body of the organization, this section should cover its composition and the number of directors. It should also discuss the length of a director’s term and how vacancies are to be filled. There should be job descriptions for the officers (i.e., president, vice president, treasurer). The same goes for any committees; there should be clear direction about the composition of committees and their role in the organization.
The by-laws should discuss meetings and define whether they will be annual, quarterly or at some other pre-set time. The by-laws must also lay out the time and place of the meetings, attendance requirements and how many board members are needed for a quorum (the number of directors needed to vote on a decision).
It is important that a corporation has a Conflict of Interest Provision in its by-laws. This protects the corporation from Internal Revenue Service (IRS) penalties, which may occur if the IRS finds the corporation is providing unfair benefits to directors, members, or others. For example, a director should not be allowed to vote on a matter in which that director may have a direct financial interest.
Because rules and regulations governing corporations change frequently, it is important to make sure by-laws are amended to reflect the most up-to-date changes. Another important aspect of drafting by-laws is to include a section on how to amend them and when they should be amended.
While this can seem daunting to someone drafting corporate by-laws for the first time, it is easy to get started. You can purchase computer programs to assist with drafting by-laws or find examples online. Or, consult an attorney with experience in setting up business entities.