Corporate By-Laws

Hello and welcome to this module, corporate by-laws. So at this point you have already formed your corporation. You have your EIN number. Now we need to put some corporate by-laws in place to make your corporation legitimate. So here’s what we’re going to cover. The first thing is what are corporate by-laws and why they’re important. Then we get into what are the top 10 provisions you want to include in your corporate bylaws? So that way you understand exactly what they are step-by-step. So what are corporate bylaws and why are they important? Well, corporate bylaws are a detailed set of rules that are adopted by a corporation’s board of directors after a corporation has been incorporated. So they are basically the legal document for a corporation. So that way they can have that in place to specify the internal management structure and how it will be ran in short corporate bylaws of internal operating manual for corporation.

To get even more detailed, so the corporate bylaws essentially breaking down exactly how things are going to be operating and executing. And then you can get even more detailed and have an SOP, but at the highest level, you wanna have these corporate bylaws. So unlike the incorporation, articles of incorporation, which is public and must be filed with the secretary of state, your corporation’s bylaws are private. They’re an internal document that does not have to be filed with your state of government entity. However, it’s everything about your corporation in terms of how it should operate and how it should govern itself, should something happen. Many people start out in business as individuals, but remember your corporation is an entity outside of itself. So you’ve got to be able to be thinking about the end in mind, so that way your corporation can run effectively and efficiently. Now, on the other hand, even though they’re not required to submit your corporate bylaws to the state, your corporation may not legally exist until its board of directors has formally adopted bylaws or have addressed how the company will run.

Now, this is a key thing. Many people don’t do this. And they’re thinking that they’re operating legally and they may or may not be now, what are the top 10 provisions that you want to include in your corporate bylaws? When number one, you want to have a statement of purpose. Number two, you want to talk about the members. Should you have them, board of directors, shareholder meetings. You also want to make sure you have committees. If committees are associated with your particular corporation in your departments, stock, officers, indemnification, and then conflict of interest. This is huge. And then the last thing is an amendment to the bylaws. So essentially this is going to be everything about how your company should run. Now, statement of purpose. Now, this one’s pretty obvious in many business owners and entrepreneurs don’t even know why they’re in business. So the statement of purpose makes it clear about what you’re looking to do and what you’re looking to serve.

So whatever your niche is, you should fundamentally provide the following information. So, number one, why you are in business, number two, what your primary customers are, who your primary customers are, number three, what you should do, or what you do for your customers. Number four, what makes your service or products extraordinary or different from the competition? You should be very clear about also, how you differ from your competitors and then last but not least, how you would go about reaching your business goals. So essentially a business plan. You want to be clear about this. Now, your statement of purpose. If we go into more detail about this, and many people coming into this program, aren’t going to want to form a non-profit organization or a 501 (c)(3) or a 501 (c)(4) so that way they can get taxes status from the IRS, but this is even more important.

Should you be coming through this program with the intent of getting business credit for your nonprofit organization, or you’re seeking that status? That you’d be very clear with that language on your statement of purpose. So that way you can get that tax exempt status that you’re looking for with that particular place of incorporation. Now members, what are they? Now members, this is a provision that addresses the type of members your corporation has, their voting rights should you have those voting rights, any procedures for adding new members if applicable. So some corporations have members and others do not have members. So if you have members, your corporation should have a formal membership policy and it should specify the following things. Number one, the rights and responsibilities of your members. Also, it needs to get into their qualifications. You want to discuss the voting criteria they have, should they have voting criteria.

You want to also get into how members will meet formally or informally. And then you want to get into how members will be disciplined and last but not least how membership can be revoked or rescinded. Again, this is assuming you put a membership agreement in place with your corporation. When you look at this,unless you have this specified in your bylaws, a member of a corporation can be an individual. It can be a corporation, it can be general or limited partnerships association or any other entities. Like, remember I was telling you guys before, when we break it down, the different types of entities and have you have a corporation, a corporation can be owning other LLCs, other corporations, essentially members, and your corporation can be individuals, corporations, partnerships, or any other entity. So members of the corporation may participate in meetings of either as an individual or, or as one of those entities.

And that can either be physically present at the meeting or via conference call or any other means of communication by the persons in which should be participating here at that time. So even with certain particular banks or credit unions, I just recently joined a specific energy company. And they made me a member of that energy corporation. And they asked me, would I like to have my voting rights to be able to vote publicly? I mean, vote electronically or VML, why am I bringing that up? Because that’s a corporation. And then as that corporation, they have members, me that I, they asked me if I wanted to vote, but there’s so many other places I know Navy Federal does this, in different insurance companies. Essentially I have members and they give you as a member a clear communication as to how you can participate, as an example.

Then you have a board of directors. Now, this one’s pretty big. So corporate bylaws commonly include information that specifies for example, the number of directors, the corporation has how they will be elected their qualification, their length of terms, and also specifies when, where and how your board of directors can call and conduct meetings and voting requirements. So essentially the corporation’s board of directors is an important role in corporate governance. So they oversee the officers of the company and who will be involved, how often it being involved, strategy, planning the corporation. So just like, unlike officers of a corporation, they usually are not employees. And they only report to the shareholders. So the board of directors is above the officers of the corporation. And then the shareholders, when we’re looking at raising funds or money specifically, if we’re getting investors, the board of directors reports to them.

So nine times out of 10, if you’re not going down the road of getting outside investors, then you may or may not need to have this, but you want to have a provision in it because you want to begin with the end in mind. Also when we’re considering a board of directors who are initial directors are going to be your corporations, initial directors who may or may not be members will, and they will typically be named in your articles of incorporation. So remember I was showing you before in your initial articles of incorporation, you really only had to put three people there, the CEO, the treasurer, and the secretary. However, on that particular, when you were creating it, you can also include the board of directors or any other directors. And that articles of incorporation. Nine times out of 10, many of you guys, aren’t going to be doing that, but I’m just giving an example of how they can be included when you’re forming the articles of incorporation.

Alternatively individuals may be appointed or elected to the board of directors by the member of your corporation. Likewise, any other director elected by these members may also be removed with or without cause by the members of your corporation. So essentially you’re setting up a organization and this provision should also specify the number of directors needed to constitute a quorum. And the number of directors you need to have present to vote on an issue in, or your board of directors can take action. So again, you’re setting this up, so should something happen. It can continue to operate without you becoming a bottleneck in your corporation, which is a huge thing for most entrepreneurs and business owners. So, typically the majority of directors will constitute a quorum. And as long as this consists of at least one third of the total number of directors for them, or any action taken by the majority of directors present at the board meeting at which a quorum is present should be deemed an act on behalf of the entire board.

So what’s interesting about this is, I was recently the president of alumni association and we use our corporate, but we didn’t call them corporate bylaws. We call them alumni bylaws, but we use our bylaws all the time. And then I was acting president and I had to make decisions. And I really didn’t, we didn’t have a board of directors, but essentially the bylaws made things very clear in terms of how we should or should not operate, especially with our community chairs and our elected officers. So when we have shareholder meetings, again, shareholders are investors, nine times out of 10, you will be the only investor unless you bring on other investors for your corporation, but corporation shareholders as well. What I have noticed about the meetings when there’ll be given and in order to be conducting business, how they’ll be followed, and then when the quorum is in place, and then what specific provisions are included with those shareholder meetings.

So arguably the most important requirement of a corporation is annual shareholder meetings. So this is the take place and the physical gathering of shareholders held in any location that has been approved by the board of directors. On the other hand, your corporation has more than just a few shareholders. You can just, you can conduct this on paper instead. And please forgive that beautiful firetruck in the background, but we’re going to keep on pressing forward. Now also, when we’re considering, the state specific requirements, some states have very specific requirements for shareholder meetings and these requirements can differ according to the type of shareholder meetings that type of corporation is having. Now, that being said, your corporation shareholder meeting should be called no later than 18 months after the corporation and sub sequentially no later than 15 months from the first annual meeting, furthermore, your shareholders are entitled to receive a notice at the time, the place of shelter meetings, and this notice should be sent in no more than 50 and no more than 21 days after the meeting.

Shareholder Meetings. So with shareholder meetings, this is the business that’s conducted at the annual meeting of shareholders and use a consist of a few things. Number one, reviewing the performance of the corporation. This is when we’re looking at the financials and such, I’ll also, there’ll be covering, reviewing with the corporations financial statements, like I was saying, appointing any type of auditors and then having somebody audit the auditors. And then addition to that, we’ll be electing officers and directors confirming, amending, and rejecting bylaws for that particular corporation. And then regardless of what the voting of shareholders at that meeting each shareholder is usually entitled to one vote for each year. He or she holds, unless your articles of incorporation says otherwise. Furthermore, a shareholder is normally allowed to appoint someone else, i.e a proxy to attend the shareholder meetings and vote on his or her behalf. Alright, so next we have committees.

Now, committees are pretty, pretty important. So your board directors will play an important role in your corporate governments inside your board of directors. You can also have smaller groups of directors, i.e committees to perform very important or specific tasks. And these provisions include normally what kinds of committees your corporation should have. So corporation committees could be departments. Also how often they’ll meet, you’ll get into the weeds of how they will operate. That’s what I was talking about, the SLPs and the standard operating procedures, what they’re authorized, what they’re authorized to do. And so the way it’s very, very clear. And with these committees, they’re usually established and dissolved by the corporate resolution consisting in the board of directors who also put together a put, put these together for a specific purpose. So essentially the idea of your corporation is to take advantage of the expertise possessed by a certain board of directors and or members in order to solve problems or address issues that require a certain amount, a specialized knowledge.

So that’s why, when you say you have specific people, you to have the right butts in the right seats as an entrepreneur, this is something I had to learn and making sure that, Hey, look, I’m good at what I’m good at, but you want to have specific people in your corporation or in your business that are good at what they do. This could be a form of committee or department or a sector of your corporation. So there may be certain members of your board of directors. Also, when you start forming a board of directors, you can look at your board of directors as like almost like a set of mentors. So, it’s very valuable skill sets to have. So for example, if you have a financial expert on your board, you may also want to put him in her on a committee that deals with financial problems.

Likewise, if you have a fundraising expert on your board, you may want them to lead a fundraising committee. Okay? So this is why committees are so important in making sure that because the committees are getting into the weeds of the specifics that need to be executed. So therefore it can be treated around a board member who has a specific skillset needed to solve a particular problem. Its function may not be the binding decision, but it’s recommended to the board. And then the board ultimately makes that decision. Now, nine times out of 10, you will be the only board but I’m helping you expand your mindset past just you, alright. And there are essentially two types of committees that can be established by your board of directors, standing committees and or ad hoc committees. So standing committees are committees that are running all the time and ad hoc committees are those that are created around a specific problem or in specific issue.

And then once they’re dissolved that you no longer have to have that specific committee, almost like a team, Hey, look, I’m going to hire a team for this specific issue. Boom, we get it done, knock it out once it’s done, we can dissolve that particular committee and or team. Alright. So when we keep going down this whole things of committees, so executives act on behalf of the board during the periods between the board meetings. So executive is doing what the board request them to do or require them to do. Then you have the finance. So this oversees the budget operation and ensure that financial reports are handled correctly. Then you want to also make sure you have fundraising. So involvement in these soliciting new fundraising opportunities and creating materials around fundraising, i.e getting money. We can say fund raising any money from the banks or getting invested to invest specifically in a corporation or form of stock.

Then you have compensation. So this decides, for example, how the board director of the company to be compensated. We also want to have an audit committee and essentially this is like has to do with your financial team. So oversees audit to make sure that happening periodically and then research form around any given issue the board of directors need to know more about. So these are just some, and then ethics can, you know, convey and discusses, ethically sensitive issues brought up by the executive board members just to make sure we’re on the same page. So these are just, they don’t have to be these committees, but these are the suggested committee. So if you wanted to have, you know, a committee around, you know, whatever, you could have that community, if you want to have a marketing committee, for example, you can have a marketing committee.

If you wanted to have a sales committee, if you wanted to have a design committee, all of these could be additional committees that are specific to your corporation. Alright, then you have stock. And again, stock is a way that you can raise capital for your business. So your corporation should not do business until it is issue stock to one of its shareholders. So here, I’m going to explain the issuance of stock certificates and how they proceed. And then when they are entitled to receive stock of a company and then different classes of stock and how there’ll be issued into whom and how can it be transferred and made to other individuals. So, stock or equity in a corporation comes from shares. Each shares represent a percentage of ownership in your corporation. There are fundamentally two types of stock. You have common stock and then you have preferred stock.

So generally speaking, when people are purchasing stock in the stock market, they’re typically buying common stock, but your corporation can issue stock as well. You can get people to purchase it when you get to that point in your business. Now, when we look at stock preferred stock name, you know, is just like its name implies. So generally it comes with a lot more preferences than common stock. So some of these preferences include, Number one, voting rights and voting on company issues. Dividends, so the right to receive accumulative or non-accumulative dividends. Also, if you have preferred stock, you have redemption rights. So the right to sell your shares back to the company, if you choose. Also you have an anti-dilution. So to protect against the value of shares being diluted when a company loses value.

Then rights of first refusal. So when a company offers shares for a sale, you have the right to buy first. Preferred stocks holders generally have way more power than common stock holders in terms of corporate involvement. Furthermore, when a company has issued or liquidated, preferred stock holders will be paid before common stock holders see any money. So essentially preferred stock is preferred stock, and these are all the reasons of why you have preferred stock versus common stock. Common stock exists. You know, anybody can get common stock of a corporation right. Now, let’s talk about some of the officers. So your officers are gonna basically be the elected officers or the people that are appointed to your company. And some of the responsibilities essentially is being able to operate the day-to-day of your corporation. So these are going to be specific, roles in your particular corporation, and then they reports to the board of directors.

So a few officers you want to look at, or titles, we should say is president or CEO, you’ll want to have a vice president. Also you’ll want to have a chief executive officer. The chief executive officer and president can be the same, or they can be different. Then you’ll have a chief financial officer CFO, or someone in your particular finance department to handle that type of transaction, a treasurer. You also want to make sure you have any other type of officers, but these are the common ones. You can have a chief IO, you can have a CMO chief marketing officer. You can have a chief technology officer, depending upon what your business niche is, but you’ll have that persons whose role is to be able to oversee that information of that particular department. Right? And then if it’s not specified, otherwise your bylaws can be both individual or officer and a director, and they may hold more than one office as long as it’s not president and secretary.

Right. So that’s a really, really, really good one so that I want to make sure I’m outlining that as long as it’s not both president and secretary. Okay. And indemnification, as we wrap this up. So corporation’s bylaws should be generally include the provision of indemnifying its officers and directors from any liability that can be exposed because of their association with the corporation. So essentially kind of making sure you’re good to go, should something happen or hit the fan. So directors and officers are typically the ones that would like to be indemnified to the maximum extent by law. This may include your bylaws and articles incorporation or both. So this is like one of those key things. And also talking about an LLC versus an Inc. This indemnification clause really protects you if you are a director or any type of important person, that particular corporation, because again, the corporation should be viewed to operate as a separate entity outside of you.

So you don’t want this corporation to only be totally dependent upon you, and then you have conflict of interest. So this one is huge. So in your bylaws, you want to make sure that you require directors to disclose both actual and potential conflicts of interest and exclude themselves from any issues of related matters that may be considered by your board of directors as a conflict of interest. So this provision is very important because it demonstrates to prospective board members, what is inherent in fiduciary responsibilities that they will be undertaking when they decide to go down that road and fiduciary essentially means making the best interest of the corporation or the money you’re managing over your own best interests. And then any type of amendment to the bylaws. This provision is basically just walking you through exactly how you can make an amendment to your bylaws.

And then if an amendment rises, what specific requirements are needed in order for a bylaw amendment to take place, and then under whatever your particular state you’re operating, you’re staying in. I mean, you were operating your corporation and then any type of internal rules in order to make that happen. So that’s why I outline the specific corporations to states to incorporate in, because not only does it, do they probably avoid tax and have simple, ways to set them up. It also gives you a lot more treatment with that particular state when it comes to dealing with your bylaws. Then while the states corporate bylaws may be written and thoughtfully, take into account with your corporations for a long-term outlook outlook.

You also want to think about most corporations find it necessary to review the bylaws and changing with certain provisions have become absolutely unforeseeable or no longer desirable. So essentially if you need to remove that stuff out, you can. So that’s essentially it. So these are 10 things you want to make sure you have in your corporate bylaws. I will include a template below and you can essentially just, just say, look, this is my set of corporate bylaws. And just, you could just move forward with this. Should you decide to put some additional information in there? You have a free rein to be able to do so, but just make sure you have these 10 sections.