Why You Need Corporate Bylaws (and How They Can Affect Your SBA Loan Application)

What Are Corporate Bylaws?

What are corporate bylaws, and why does your business need them? The term “corporate bylaws” may sound like legal rigmarole that applies only to giant, multinational corporations—and not to your small business. In reality, however, any business that chooses the legal form of a corporation must create corporate bylaws.

Corporate bylaws are a legal document that explains how your business is organized and how it will be operated. Some of the reasons why corporate bylaws could be so important to a new business include:

• By detailing rules for business operations and defining the duties and responsibilities of the various people involved in your corporation, corporate bylaws help your business run more smoothly on a day-to-day basis.
• As your business grows, your bylaws can prove invaluable in helping to resolve disagreements. Just for some examples, those bylaws can specify what will happen if one business partner wants to leave the company, if there is a disagreement among members of the corporation, or if a key member of the corporation dies. Referring to the corporate bylaws would eliminate a lot of conflict in such situations.
• You’ll need to show copies of your corporate bylaws in many situations as you grow your business. For example, you may need to show the bylaws to open a business bank account, to set up a company retirement plan, or to obtain government certification as a minority-owned or women-owned business.

One of the most common situations in which you’d need corporate bylaws is when a small business owner applies for a Small Business Administration loan. SBA loans are essentially the most desirable type of business financing, due to their low interest rates and government-backed guarantees. However, if you don’t have your corporate bylaws ready to include with your SBA loan application, you can seriously delay review and approval of your loan, causing financial difficulties for your business.

• If your business is ever sued, the plaintiff’s lawyer could try to prove that your company is not a legitimate corporation. This might allow the plaintiff to pierce the corporate veil and attack your personal assets. If your business doesn’t have the proper paperwork required for a corporation—which includes corporate bylaws—you’re putting your assets at risk and voiding much of the reason for incorporating in the first place.

What Corporate Bylaws Include

Corporate bylaws serve as a complementary document to your Articles of Incorporation. One is often confused for the other, in fact. However, the Articles of Incorporation is a very short document—typically only a page—with basic information like the date of incorporation, the number of existing and issued shares, the names of the Board of Directors,  and the names of the members of the corporation. In contrast, the corporate bylaws provide details about how the corporation will operate  on a daily basis, as well as how specific situations will be handled.

Unlike Articles of Incorporation, which must be filed with the state as part of the incorporation process, your bylaws are for internal use only—and you’re not required to file them with your state. However, that doesn’t mean they don’t matter or that you can neglect to write them. As mentioned above, attorneys, bankers, companies you’re doing business with, and your investors or stockholders may ask to see your bylaws, and when they do, you’d need to have the document ready.

Most states require corporations to create corporate bylaws, though the requirements for what to include vary. (For a list of which states do and do not require corporate bylaws, check out RocketLawyer’s handy table.) But in most cases, your bylaws should include the following information:

• Business name and address.
• Legal structure of your business.
• The responsibilities of each member of the corporation, including how members are chosen, their voting rights, and different categories of members (for example, voting and nonvoting shareholders).
• How stock is issued and distributed, including the total number of shares, how stock can be transferred or sold, and what happens to a member’s stock if he or she leaves the company.
• Organization of the board of directors, including how board members are chosen and replaced, any qualifications for being on the board, how long board members remain in the role, and any specific roles on the board (like Treasurer or Secretary).
• Organization of annual meetings, such as for directors, shareholders or committees. This should cover how often meetings are held, how attendees are notified and how many members are needed to obtain a quorum — that is, the minimum number of members needed to cast a vote.
• Provisions for amending the corporate bylaws. Bylaws may need to change as your business grows, so be sure that your corporate bylaws specify how revisions to the bylaws should be proposed and voted on.
• How to handle conflicts of interest. Suppose your business is competing for a contract, and one of the people choosing the vendor is a member of your board of directors. Your bylaws should explain how to handle obvious conflicts of interest such as this.

Where To Get Help

In most cases, your Board of Directors will adopt the corporate bylaws at its first board meeting, so putting together your bylaws should be part of starting your business. That makes sense, because your startup period is the time to think through all the issues that may arise as your business grows.

If creating corporate bylaws sounds stressful, don’t worry! You don’t have to be a legal expert or hire an attorney to help. There are plenty of resources that can help you create bylaws by providing easy-to-use templates and tools customized for your state’s requirements. Check out RocketLawyer, The Company Corporation and LegalZoom for a few.

By taking time to create well-thought-out corporate bylaws when you launch your business, you’ll save yourself lots of time, discussion, and stress later on.

(Disclosure: My company has created ebooks for The Company Corporation.)

 

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from Fundera Ledger https://www.fundera.com/blog/2015/11/02/why-you-need-corporate-bylaws-and-how-they-can-affect-your-sba-loan-application/