What are By-Laws?
The By-Laws are the formal rules for how the business operates. There is no set structure indicating what must or must not be in By-Laws. By-Laws are not particularly important for small business with only a few decision makers. By-Laws are not particularly needed for businesses that require a high degree of managerial flexibility.
However, as businesses grow, and stability and a need for a common set of values increases, By-Laws become needed. By-Laws are important for business that expect to face internal conflict. The are the rules by which the business operates. By-Laws set out the method by which conflicts are resolved.
What is the Difference between business By-Laws and an Operating Agreement?
There is overlap between what many consider “By-Laws” versus what others consider the “Operating Agreement.” The majority opinion is that the By-Laws are a more specific, internal codification of how a business solves certain, specific issues. The “Operating Agreement” is a more public document spelling out how major issues are addressed in the business. It is normal for operating agreements to be filed with the Secretary of State where By-Laws are not.
Think of the Operating Agreement as the “bones” or the basic governing structure of the business, how the business is run in the broadest sense, and how the most basic, fundamental decisions of the business are to be made.
Think of the By-Laws as a guideline governing how the business is to be run on a day to day basis.
Can there be and will there be overlap in what is included in By-Laws versus an Operating Agreement?
Absolutely! Neither the law nor industry convention require By-Laws to cover certain topics or avoid other topics. The substance of what is or is not included in business By-Laws are decisions made by the executives with supervisory authority over business operations. Where the broad-strokes, biggest issues are covered in the Operating Agreement, the more specific, technical, tactical framework is covered by By-Laws.
Does a business need By-Laws? Should a business have By-Laws? The answer to these questions lies in the decision making authoriy of the executive committee. Some businessess benefit by having a set, specific framework on what decisions are made, under certain defined situations, and anticipated circumstances. Other businesses require a less defined, more fluid approach, free from the confines of By-Laws. This decision is where the executives and Board of Directors come in. What are the needs of the type of business you manage?
Who Should Draft the Business By-Laws?
The By-Laws should be drafted by a collaboration between the General Counsel (Chief Legal Officer, the lawyer), the President (the CEO), and the Managing Member (Chief of Operations). The By-Laws set out the framework for how the day to day operations of the business is to be conducted. Thus, the persons with involvement and authority over the day to day operations need to be included in this decision making process.
Who Possibly Should Not be Involved in Creating By-Laws?
Some important persons in a business may interfere with the creation of effective By-Laws. Persons who are not involved with day to day business operations, yet have clout and authority may push to add terms to By-Laws that are impractical, inefficient, or even illegal. It may seem diplomatic, or wise to include high level executives in the creation of By-Laws, however, the selection committee needs to omit persons who may interfere with the creation of effictive By-Laws.
What Should be Included in Business By-Laws?
There are a number of topics that are typically included in business By-Laws. These topics include:
The Board of Directors:
- Number of Directors,
- How the number of Directors can be increased or decreased,
- How meetings are called and the typical frequency of meetings,
- Quorum; the number of Directors needed to form a meeting,
- Whether proxy votes are allowed for Directors,
- Loans of money to Directors,
- Remunation for Directors,
- How committees are created for the Board,
- How Directors are removed and replaced.
Officers
- The qualifications needed to be a corporate officer,
- How officers are elected,
- How long officers serve (the time of their term),
- The duties of each officer,
- Whether and how officers may delegate their duties,
- How vacancies in an officer position are filled,
- How an officer may be removed from office,
- Loans to officers,
- Officer salaries.
Stock Equity:
- Total number of company shares,
- How retained stock is treated,
- What comprises a stock certificate,
- How ownership in the business may be transfered,
- Replacement of stock certificates.
Authority:
- What categories of persons have the authority to legally bind the company (Directors, Managers, Officers, Middle-Management, etc.),
- Indemnification: Whether Directors, Officers, or Employees will be indemnified for certain activities,
- What laws (what location/jurisdiction) will be used to resolve business disputes,
- How the By-Laws may be amended,
- Who has the authority to spend the business’ money.
Is a Lawyer Needed to Create By-Laws?
Yes. It is wise to involve a business lawyer when creating By-Laws. People often wonder. Should I download a By-Laws template for the internet? It that not good enough, if the By-Laws template looks attractive and thorough? No, it is wise to employ a professional to draft By-Laws. There are several reasons for this:
- There are legal requirements that need to be met that must be specific to your business. These requirements vary by business entity type (S Corporation vs. C Corporation vs. LLC)
- Legal requirements can vary by jurisdiction. Your business is subject to specific laws and the By-Laws need to comply with the laws that relate to your business, not some other business (close is not the same!)
- The best business lawyers will be able to spot and solve company problems based on their experience; these lawyers can draft By-Laws that will assist in solving the problems your business is expected to face.
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Trial lawyer Matt Hamilton graduated from the University of Missouri – Columbia in 1995 with Science degrees in Logistics, Marketing, and Business Administration.
Matthew J. Hamilton Juris Doctor & Crypto Lawyer