Company bylaws are the rules that govern how a company is run and one of the first items to be established by the board of directors at the time a company is started. Such bylaws are created usually after the Articles of Incorporation are submitted, which is why a lot of people often get confused between the two. They are essentially written as a single document that contains the standards that the company should follow, as well as the operations that it will perform throughout its existence.
The company bylaws specify, among other things, the duties and responsibilities of the board of directors, the procedures that need to be followed whenever a meeting is held or whenever an issue requires action, and the means to modify the existing bylaws if necessary.
Company Bylaws vs. Articles of Incorporation
The Articles of Incorporation are necessary in order for an organization to be created legally and be included among the independent business entities in a given state. Containing the most basic information about the company and outlining what it is about, the Articles of Incorporation are drafted and then filed with the state agency that is in charge of business registration.
The bylaws, on the other hand, need not be filed with the state agency. They are used within the company as a guide for efficient operations. Drafting the bylaws is often considered the board of directors’ first action as a business entity. Company bylaws are more detailed, as compared to the Articles of Incorporation.
Components of Company Bylaws
The company bylaws must contain the following parts:
1. The Board of Directors
The bylaws should contain information on the board of directors, as it is the governing body of the organization, including its duties and powers. The information specifies things like the number of years a member can stay on the board and the number of members needed to form a quorum. The bylaws also define the procedure to be followed when replacing a member or a corporate officer.
2. Statement of the company’s purpose
The statement of the company’s purpose is helpful, especially for the board of directors, because it sets the path that the company should tread. It identifies why the company was formed in the first place. With such a statement, even a change in leadership should not affect the nature of the company’s operations because its objectives have already been identified. It may also be helpful in attracting investors because they will be able to easily understand what the company is about just by looking at the bylaws.
3. Management structure
Change in management is inevitable in every organization, but its management structure is already defined in the bylaws. They also make clear the procedure for filling a higher vacant position in a way that will not disrupt the company’s leadership.
4. Information about the company
One of the most basic parts of the bylaws is the identifying information of the company. This includes such things as its registered name and address, and whether it is a private or a public company.
5. Shareholder and board meetings
The bylaws should indicate when shareholder meetings are held and how each shareholder is to be notified of these meetings. Also indicated should be how often and where board meetings are to be held.
6. Call for other meetings
The bylaws set the rules on how meetings are called and scheduled, as well as how they should be conducted. This provides a way for the board to remain updated on the company’s status and to address issues that concern the organization.
7. Contract and loan approvals
The company should also put in place a set of rules for approving contracts and loans and other processes that the company may engage in.
Changing the Company Bylaws
One of the provisions in the company bylaws is making amendments to the bylaws themselves when deemed necessary. The process can start with a member of the board raising the issue of modifying the bylaws.
The length of time the changes can take effect depends largely on the board and may take more than two meetings to complete. For legality, the changes should first be approved and documented before they are adopted.
The bylaws make it easy for the board of directors to function, for employees to perform their work, and for investors to understand the business. Having a set of bylaws can save time and help make the company a more trustworthy organization.
Thank you for reading CFI’s guide to company bylaws. CFI offers the Financial Modeling & Valuation Analyst (FMVA)™ certification program for those looking to take their careers to the next level. To keep learning and advancing your career, the following CFI resources will be helpful: