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Every new corporation needs two important founding documents: articles of incorporation (called a "certificate of incorporation" in some states) and bylaws. In short, the bylaws set forth the primary governance rules for your company. This article will discuss the routine topics you should include in your company's bylaws. It'll also cover the other documents and agreements you can use along with your bylaws.
The areas you cover in your corporation's bylaws and the level of detail you use will be specific to your business. Larger corporations typically have longer bylaws, and you'll usually see these bylaws cover more topics and go into more detail. However, there are common topics that all corporations include in their bylaws—no matter the size of the company.
In general, your bylaws should cover:
Let's look at each of these topics in greater detail.
Bylaws should provide rules for how shareholders (sometimes called "stockholders") hold meetings and make decisions. Your state's laws for corporations will likely have some general requirements for shareholders' meetings. But your bylaws will establish most of your corporation's rules. Your rules should, at a minimum, provide the following specifications.
Date and time of the annual meeting. Indicate when you want the annual shareholders' meeting to be. You can pick either a specific date (for instance, September 15) or day (for example, the last Friday of September). You can also include a designated time for the meeting (such as 9:00 a.m.). If you don't want to commit to a specific time, you can instead say that the board of directors will determine the exact time. Don't forget to plan for holidays. You can simply include a statement that says that if the meeting date lands on a holiday, then the meeting will be held the next business day.
Keep in mind that your state's laws might require you to hold your meeting within a predetermined window of time, such as within 90 days of the close of your corporation's fiscal year. Your bylaws should reflect these requirements.
Meeting place. Determine a location for your annual shareholders' meeting. It can be your corporate office or another central place. Alternatively, you can say that the location will be announced within the meeting notice. However, you should hold the meeting within your state. You should also specify whether the meeting can be held remotely, such as through a video call or conference call.
Special meetings. Most bylaws have a special paragraph for special meetings. "Special meetings" are any shareholders' meeting that's not the annual meeting. In this section, you should specify who can call these meetings and what sort of notice will be given to shareholders. However, because special meetings can be called at any time and disrupt the ordinary course of business, you should be conscientious about the persons authorized in the bylaws to request these meetings. For instance, you can say that a special meeting can be called by shareholders holding at least 10% of the votes.
Meeting quorum. A "quorum" means the minimum number of voting shares that must be represented at a meeting (whether in person or by proxy) in order for the meeting to continue. Without a quorum, the meeting must be postponed and the shareholders can't take any action.
Typically, your state will require you to have a majority of interest in stock present to meet the quorum. In other words, you need to have shareholders that represent more than 50% of the corporation's stock to be at the meeting to hold a vote. Look at your state's laws about quorums to make sure your bylaws reflect your state's minimum requirements. You can opt to have a higher quorum than what your state's laws require.
Meeting notice. Your rules about meeting notices are one of the most important parts of this section. Your state will likely have detailed notice requirements that you need to incorporate into your bylaws. Your notice provision should include:
Voting and proxies. While it might seem obvious, you should indicate how much voting power each shareholder has. For instance, does one share equal one vote? If possible, provide instructions on how a shareholder can cast their vote. You should also say whether a shareholder can use a proxy for a vote. A "proxy" is someone who can vote on behalf of the shareholder. If a proxy is allowed, detail how the shareholder must authorize the proxy (for example, by written consent) and how long the proxy lasts.
Action without a meeting. You'll want to include a paragraph that provides the process for voting without a meeting. Most corporations allow for shareholder action to be taken without a meeting as long as a majority (or higher percentage) of the shareholder vote consents to the action in writing. This option often makes it easier and quicker for tasks to be completed — especially in smaller corporations — because you don't have to hold a meeting or provide notice of that meeting.
Organization of the meeting. It can be a good idea to give instructions for how meetings will work. You can say who will preside over the meeting (for example, the board of directors or the president of the corporation). You can also include the typical order of business for the annual meeting.
You can list out your officer positions, including their duties and roles. You can also designate each officer's place in the reporting hierarchy. Typically corporations will have the following officer positions:
Your corporation might have other positions such as president, vice president, and treasurer. The number and kinds of positions will depend on your corporation's size and operations. It's also common for bylaws to allow individuals to hold more than one office simultaneously (for example, you can be named as both the president and CEO).
In a corporation, the board of directors usually selects the officers. The bylaws should describe the appointment process and the vote necessary to appoint an officer —for instance, a majority of the board of directors, two-thirds of directors, or unanimous consent of the board. You should also clarify whether existing officers can fill officer vacancies or hire additional officers without board approval. For example, the bylaws could allow the company's CEO to hire and appoint additional officers.
Your bylaws should lay out the general roles and duties of the different officer positions. You should also include how these officers can resign or be removed. Typically, officers can resign at any time as long as they provide notice, and the board is in charge of removing officers. You might also choose to include information about the officers' salaries, such as who determines the officers' salaries, compensation, and benefits.
Your bylaws should list the minimum number of directors the corporation must have at any given time. Your state's laws might set a minimum. A common number of directors is three. It's a good idea to have an odd number of directors to prevent voting ties.
You should also provide the term length for directors —such as one-, two-, three-, or five-year terms . The term length could be one year and directors could serve until the next election at the annual shareholders' meeting where the shareholders can either re-elect that director or elect a new director. Every director position doesn't need to have the same term length. When directors have different term length, your corporation has what's called a "staggered board." For example, one board member could serve a three-year term and two other directors could serve one-year terms. In this case, shareholders would need to elect two directors every year and one director every three years.
The bylaws should also describe how shareholders elect new board members and how unexpected vacancies should be filled. In most cases, bylaws also allow for the optional creation of board committees and subcommittees that focus on particular aspects of the company's business. For example, you might have a marketing and sales committee or a manufacturing and shipping committee. Alternatively, your committees might represent different geographic regions.
Just as the shareholders have meetings, the board of directors also holds regular and special meetings. During these meetings, board members will vote on company matters that need board approval, review the company's health and finances, discuss the future direction of the company, and make strategic moves that impact company operations.
As with the shareholders' meetings, you'll need to include terms for board meetings, such as:
You'll also need to specify what kind of vote is required to pass a board action. For instance, you could say that all board actions require a two-thirds vote of the directors to pass. You can specify different voting thresholds for special kinds of matters, such as mergers, acquisitions, and dissolution.
It's a good idea to designate a chairman of the board of directors. The chairman can preside over the board of directors meetings, making it easier to run the meeting and record what action, if any, has been taken.
Consult your state's business laws to determine what your bylaws can say about your corporation's board of directors.
Your corporation will accumulate various business records and reports in its existence. These documents can include:
You should designate a location where all these documents can be stored and inspected. Most corporations choose their principal office location.
You should also provide instructions on how these documents can be inspected and by who. For example, you might say in your bylaws that corporate records and documents can be reviewed by any shareholder as long as they provide a written request.
Don't forget to specify which documents the corporation and Board must provide shareholders on a regular basis. For instance, you can specify that the Board provides all shareholders with an annual report and financial statements (balance sheet and profit and loss statement) each year.
In this section, you'll need to address whether the company must issue physical stock certificates to its shareholders. Most companies issue stock certificates for the shares they issue. Check your state's laws to see if your corporation is required to issue certificates and what information must be included on each one. You should also specify which corporate officer must sign the certificate.
In addition, your bylaws should address how your company will deal with lost or damaged stock certificates.
In addition to its bylaws, your corporation should also have a shareholders' agreement (also called a "stockholders' agreement). Your corporation should give this agreement to anyone your corporation sells or transfers shares to. The shareholders' agreement is an important corporate document that outlines how the corporation is run and what rights and obligations the shareholders have to the corporation and each other.
You might also consider using a shareholder buyout agreement, which lays out rules and procedures for when a shareholder wants to sell or transfer their stock.
Finally, there are some additional topics that you'll want to include in your bylaws that don't necessarily require a detailed section. These topics include:
You can include additional provisions as you see fit.
As mentioned earlier, you should be aware that your state's business laws likely contain default provisions for some of the topics discussed above. Your bylaws can either adopt them or modify these default rules as the law allows. If your business has a complicated corporate structure or you want to implement specific rules in your bylaws, consider consulting a business attorney. A lawyer can draft your bylaws for you so that the bylaws are in line with your state's laws. They can also ensure that your bylaws accomplish your corporation's goals now and in the future.
You can also review our section on corporations. This section has information on how to form, run, and dissolve a corporation, answers to frequently asked questions, and shareholder issues. If you'd like further reading, see Incorporate Your Business, by Anthony Mancuso (Nolo).