Nevada corporations are not required to have bylaws. While not mandatory, bylaws outline the day-to-day rules for the business and can be helpful in providing guidance to directors, officers and shareholders and minimizing disputes. Without bylaws, there could be corporate functional chaos, with no defined rules as to who needs to do what, what actions are allowable and which are not. It also gives those starting the businesses the opportunity to spell out ground rules for the organization.
There’s a difference between the articles of incorporation and bylaws.
• Bylaws normally cover issues like how the board of directors and/or officers are elected, conducting shareholder meetings and the types officers and their duties,
• Articles of incorporation give a basic outline of the company: the name of the person(s) organizing the corporation, the number of shares that can be issued, the names of the corporation's board of directors and the corporate location. They don’t contain details about the corporate operation or structure.
What issues should bylaws address?
Some bylaw provisions that should be included cover:
The name, purpose and location should be part of the bylaws.
2. Shareholders and Meetings
Bylaws can spell out the time and place of annual or special meetings, types of shareholders and which shareholders have the power to vote on corporate matters. Bylaws can also detail how and why a shareholder can be disciplined, expelled and/or bought out by others. Mechanisms to resolve differences among shareholders should be part of the bylaws.
3. Board and Officers
A board of directors is the corporate governing body. In your bylaws, you should state how large the board of directors should be, length of term and how members can be removed and replaced. Which board members will play what roles as officers (president, vice president, secretary and treasurer), their duties and responsibilities, what committees will exist, and who should serve on them, should also be included.
4. Conflicts of Interest
A conflict of interest provision protects the corporation from IRS penalties if the agency concludes the corporation is giving unfair benefits to directors, shareholders or others. A director could be prohibited from voting on an issue with which he or she may have a financial interest. If there is a potential conflict, the director should disclose it and be prevented from voting.
5. Contracts and Loans
Bylaws should spell out who is empowered to bind the corporation in contracts, under what circumstances and who may act as a corporate agent. Whether it’s permissible for the corporation to loan money, to whom, should also be covered.
Who is authorized to sign checks and spend corporate resources? Bylaws can list where money can be deposited and who can make withdrawals. How an earned surplus should be handed can also be included.
7. Sale or Dissolution
A process should be spelled out as to how directors can approve of the sale of the corporation and state how assets would be distributed if the corporation is dissolved.
8. Amending Bylaws
The corporation, its business, shareholders and board members will probably change over time. The bylaws should change with them, as necessary, and contain rules spelling out how they can be amended. Bylaws should at least be reviewed, if not revised, every five years to stay current with statutes, applicable laws and regulations.
Corporate bylaws are critical to the functioning of a corporation. You can purchase one size fits none bylaws on the internet, but these template solutions often fail to address critical considerations and can lead to serious issues for your business down the line. To ensure your business and your shareholders are protected, you need the guidance of an experienced business planning attorney. If you’re thinking about starting a corporation and drafting its bylaws, or are a shareholder in a corporation with bylaws that should be reviewed, contact our office for a free consultation.