Last week we spoke about the role and responsibilities of the board in business and that these are outlined in the company’s bylaws. Today we will share with you the importance of having bylaws and what they should address.
As a small business you should have a set of written bylaws that designate in advance the ways you will handle a variety of situations that may arise. Bylaws are important from an operations standpoint because they provide benchmarks to refer to as well as protocols to follow.
It is the official game plan on how the business is to be run and operated. They also constitute an indispensable legal document that outlines the rights, responsibilities and powers of the shareholders, directors and officers. They can be brief or lengthy. Contents may vary but they typically include the following:
- The time and place for meetings of officers, directors, and shareholders;
- How many directors, their tenure, and their qualifications;
- Title and compensation of the corporate officers;
- The fiscal year of the corporation;
- Who is responsible and how the bylaws are to be amended;
- Any rules on the approval of contracts, loans, cheques, and share certificates (if any);
- Inspection of the corporate records book.
Bylaws consist of individual “articles” address specific topics. The first several articles should cover general information that describes the character of your company. Identify your company’s name, its organization type — limited liability company, limited partnership or corporation — and its core products or business model.
Outline how the company is owned, as well as how its ownership will evolve over time. Include the legal structure of the company, whether it is a partnership or an LLC, as well as how it will allow new owners to come on board in the future. Address the financial contribution that a prospective owner is required to make, as well as the decision making process for admitting new owners, such as whether current owners have to make this decision unanimously.
Another article should explain the procedure for amending the bylaws in the future. It should also state who can recommend amendments and how these amendments will be voted upon. It is important that bylaws are current and accurately represent the organization and its membership. Therefore, bylaws should be revised every five years, in order to stay current with the most up-to-date rules and regulations.
You should detail the various aspects of the company’s membership, including the different types of members, the membership selection process, members’ voting rights, and the procedures for disciplining and/or removing members. If there are no members, state that in this section. State the role of shareholders in your company. Explain what kind of shares your company will offer, the company’s limitations on capital stock and the rights and responsibilities of shareholders.
The Board of Directors is the primary governing body of an organization and exercises supreme control over the organization, above even the executive leadership. This section should discuss the composition of the Board, which may be a specific number of directors or a maximum or minimum amount of directors. Also, discuss how vacancies are filled, whether they are filled by the Board itself or by the membership.
The bylaws should specify the qualifications for serving as a director, the duties of directors, and the length of a director’s term. Typically the board consists of senior executives, senior shareholders and sometimes industry leaders from outside the company. Specify conditions for convening any annual, regular, or special meetings. This includes the time and place of the meetings, requirements for notifying the Board, committees, and/or members, attendance stipulations and, most importantly, how many Board members are needed for a quorum (the number of directors needed to vote on issues at hand).
Next you explain your company’s leadership structure. First, write an article establishing the executive leadership. Specifically identify each company office. Spell out the officers’ full titles and the responsibilities they must uphold to remain in good standing in that office. Specify their terms of office, or note that they may remain in office indefinitely.
Explain the hierarchical relationship among each office, so everyone understands who reports to whom. Lay out the correct procedures for an officer leaving that office and for the company to install a replacement. Mention the extent to which executives will enjoy indemnity from the adverse consequences of their job performance. If your company will have standing committees, write an article explaining these committees’ names, purposes, composition, powers, membership requirements and procedures for vacating and filling seats.
It is important that a company has a Conflict of Interest Provision in their bylaws. This protects the company from providing unfair benefits to directors, members, or others. For example, a director should not be allowed to vote on a matter in which the director may have a direct financial interest. If a conflict may occur, the director should disclose this conflict immediately in order to be recused from voting.
Because there is potential for customers and even innocent bystanders to be harmed by a small business’ activities, its bylaws should clearly state the limits of ownership responsibility, or indemnification, in situations that involve liability. For example, an LLC’s bylaws might state that owners will not be held personally financially responsible for the company’s debts unless they specifically assume responsibility by offering collateral on a loan. Bylaws may also indemnify owners from financial or legal responsibility for harm done during the course of business activities except in the event of willful misconduct. Consult a lawyer to make sure that the indemnification arrangements in your bylaws are legally defendable.
And finally, even if you love owning and operating your business and can’t imagine ever wanting to do anything else, it is wise to include provisions in your bylaws that state the terms and conditions under which you will leave, sell or liquidate your business. Exit strategies might involve provisions for buying out partners or shareholders who no longer want to be involved with the company, as well as terms for agreeing on whether or not to sell the business. For example, your bylaws might state that 75 percent of partners or shareholders with voting rights must approve a decision to sell the company.