Rules that govern how a company is run
Rules that govern how a company is run
Company bylaws are the rules that govern how a company is run and is 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 with the two. What is essentially written as a single document contains the standards that the company should follow, as well as the operations that it will perform throughout its existence?
The company bylaws specify 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, to name a few.
The Articles of Incorporation is 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 is drafted and then filed with the state’s agency that is in charge of business registration.
The bylaws, on the other hand, need not be filed with the state agency but is used within the company as a guide for efficient operations. Often, it is considered as the board of directors’ first action as a business entity and is more detailed compared to the Articles of Incorporation.
As mentioned, the company bylaws are more detailed and must contain the following parts:
The bylaws should contain information on its board of directors as it is the governing body of the organization, including the official members and their duties and powers. Moreover, it also limits the number of years that each member can stay in the board, as well as 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.
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, helping it to achieve its purpose. With such a statement, even a change in leadership will not affect the company’s operations because its objectives have already been identified. It is also helpful in attracting investors because they will already be able to easily understand what the company is about and what its goals are by just looking at the bylaws.
Change in management is inevitable in every organization, but if its management structure is already defined in the bylaws, then it wouldn’t be difficult to understand its chain of command. The authority of the superiors is identified, and subordinates understand their obligation to answer to their superiors. It also makes clear the procedure of filling in a higher vacant position that will not disrupt the company’s leadership.
One of the most basic parts of the bylaws is the identifying information of the company such as its registered name and address, as well as whether it is a private or a public company.
The bylaws should indicate when shareholder meetings are held and how each shareholder is notified of these meetings. In terms of board meetings, it should also be made clear as to how often these are held, as well as the location of these meetings.
The bylaws set the rules on how meetings are called and scheduled, as well as how they are conducted, as a way for the board to consistently be updated of the company’s status and to address issues that concern the organization.
The company should also put in place a set of rules for approving contracts and loans and other processes that the company is involved in.
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 any part of it and conducting a vote among the members.
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, and then the bylaws are revised.
Bylaws need not be filed with the state’s agency, but it doesn’t mean it should be skipped by the company. The bylaws make it easy for the board of directors to function, the employees to perform their work, and the investors to understand the business they want to get involved in. It saves time and makes the company a more reliable and trustworthy organization.
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 resources will be helpful:
Get world-class financial training with CFI’s online certified financial analyst training program!
Gain the confidence you need to move up the ladder in a high powered corporate finance career path.
Learn financial modeling and valuation in Excel the easy way, with step-by-step training.