The Small Business Basics of Bylaws

What Are Bylaws?

the importance of adopting bylaws

Bylaws are legal documents that comprehensively outline the rules, regulations, and guidelines of any organization.  Bylaws are often filed along with a corporation’s Articles of Incorporation when the business is first formed.

Bylaws include the structure of the organization, and they are primarily established to protect the rights and itemize the duties and responsibilities of  the directors, CEO, stockholders, and various committee members. Well-written bylaws can help an organization run smoothly by providing for every contingency, including elections, nominations, and settling disputes between parties. Organizations must formally adopt bylaws and may amend them as needed.

Although most often associated with corporations, associations, and partnerships can also have bylaws, as well as nonprofit organizations, since they typically manage grants and subsidies that have to be strictly monitored. Regular reports must be made to their stakeholders, who have their own duties and powers outlined in the bylaws. The bylaws describe how a nonprofit addresses the issue of governance. Other types of organizations, such as clubs and societies, often have bylaws as well.

Each member of the organization should have a copy of the bylaws and should become familiar with its contents.

Components of Bylaws

Bylaws are customized to suit the needs of a particular organization, but generally contain the following sections:

  • Corporate or organization name, purpose, and premises.
  • Amending Bylaws – this section establishes rules on how the bylaws may be amended and who may recommend amendments.
  • Board of Directors – this is the governing body of the organization, and this section details the qualifications to become a director, composition of the board, how vacancies are filled, duties and responsibilities of each member, and length of term.
  • Committees – these guidelines codify the formation, appointment, and duties of each special committee, if any.
  • Conflict of Interest – this important provision in the bylaws prohibits any director from having an unfair advantage as a result of his or her position.  Typically, any director who would benefit from an issue should not have a vote regarding the matter.
  • Meetings – this specifies the schedule of regular and special meetings, including the time and place; notification of the board, committee members, and regular members; and attendance conditions. The quorum is also specified in this section.
  • Members – this specifies the different types of members, membership acceptance and removal criteria, rights, and sanctions. Some organizations have no members, in which case it should be stated in this section.
  • Officers – these are board members who have specific functions such as the President, Vice President, Treasurer, etc. The bylaws document also outlines how they are selected and removed, their duties, responsibilities, powers, and term length.

Importance of Bylaws

A company’s bylaws are essentially a blueprint for how the corporation will be managed and run, and they should not be written, filed, and forgotten. These documents spell out what a corporation and its members can and cannot do in any given situation.

For example, corporation officers may have to consult the bylaws to settle a dispute on procedures or decisions that may impact the corporation’s finances or damage its reputation. This becomes painfully clear when a dispute leads to litigation and the courts base their rulings on the wording of the corporate bylaws.

Because bylaws are a crucial and dynamic aspect of any organization, they should contain current and accurate information. Organizations forming bylaws should review and revise the document every five years or as needed.