Bylaws are the written rules of a corporation. They set out how a corporation will operate, including the rights and responsibilities of members, officers, shareholders, and directors. In New York, corporate bylaws are required by statute and should be adopted during the corporation’s initial organization meeting. Below is a discussion of what should be included in a corporation’s bylaws and why they are critical to establishing a governing framework.
What to Include in Bylaws
Bylaws would include information on the organization’s governing body, the board of directors. The board’s responsibilities and fiduciary duties should all be included in the bylaws, as well as how board members can be removed and elected. The titles and duties of officers and managers are also outlined in the bylaws. Delegating power is critical to establishing a chain of command.
Bylaws should also include the classes of stock (common, preferred, etc.) and the rights attached to each class. Meetings and voting procedures, such as how many shareholders are necessary for a quorum, who can call special meetings, and the rules for proxy voting, should all be included in the bylaws.
- Corporate Governance and Structure
There are many different players in a corporation. Establishing robust guidelines defines the roles and powers of directors, officers, and shareholders to prevent internal disputes and confusion as to the scope of power. A system of rules establishes a decision-making framework where the board of directors oversees corporate affairs and declares dividends, officers execute the policies set by the directors, and shareholders vote to approve significant corporate changes. With these roles defined, overstepping is less likely.
- Shareholder Protection
Robust bylaws help maintain shareholders’ rights and assets. A shareholder can be an individual, a company, or an institution, and they own at least one share of the company’s stock. Shareholders essentially own the company and have a right to share in the corporation’s profits. During court proceedings, bylaws are proof of the shareholders’ ownership and the legal separation between the shareholders and the corporation. This legal separation is essential to ensure shareholders benefit from limited liability, meaning their personal assets are not at risk for corporate debts or legal claims. Well-drafted bylaws are evidence that the corporation operates independently from its shareholders.
- Avoids State’s Default Rules
If a corporation does not have rules or omits certain elements in its bylaws, state law will step in and fill in what is missing. Default rules lack customization for business needs, reduce control over corporate governance, and may not provide adequate shareholder protection. To avoid state laws that can burden the corporation by imposing unwanted rules and regulations, it is critical to address all areas of governance in the bylaws.
- Manage Conflicts
Well-drafted bylaws can get ahead of potential or existing conflicts by having rules that outline the resolution path. Corporations may face power struggles, voting deadlocks, or costly legal battles without clear governance. For example, in the event of a deadlock, instead of paralyzing the business, the bylaws can establish tie-breaking mechanisms such as a neutral third-party arbitrator or buyout clauses. By proactively defining conflict resolution mechanisms, well-drafted bylaws help maintain corporate stability.
Takeaway
Corporate bylaws are the backbone of a corporation’s governance, outlining the rights and responsibilities of directors, officers, and shareholders while ensuring smooth operations and legal compliance. In New York, corporations are legally required to adopt bylaws, which are essential for defining corporate structure, shareholder protections, and financial decision-making authority. Ultimately, bylaws are more than just formalities—they are a critical legal safeguard that ensures stability, protects shareholders, and reinforces the corporation’s limited liability status, making them indispensable for long-term success.