Corporate bylaws are an essential tool for every corporation and define how the corporation will operate as well as its rules for governance. The following information outlines important considerations when creating this document.
First, you will choose the entity type for your bylaws. Bylaws are the internal corporate governance documents for both for-profit and nonprofit corporations. However, there are distinct differences between how for-profit and nonprofit corporations are structured.
A for-profit corporation is registered with a particular state of your choice to engage in commercial activity for a profit. You can check with your Secretary of State to confirm your company's for-profit status.
A nonprofit corporation is registered with a particular state of your choice to engage in activities and purposes specifically approved by the Internal Revenue Code (IRC) as exempt from federal and state taxes. There are many different IRC tax exemption statuses, the most common of which is the 501(c)(3) nonprofit corporation. 501(c)(3) nonprofit corporations may be established only for the following purposes:
You should select the 501(c)(3) nonprofit corporation entity type if your organization is established for one or more of these purposes and is recognized as tax-exempt under 501(c)(3) by the IRS. You can check with the IRS to confirm your tax exemption status. USE LEGALNATURE'S DOCUMENT ONLY FOR 501(c)(3) TAX-EXEMPT CORPORATIONS. It is not suitable for any other 501(c) tax exemption statuses.
Enter the corporation's name and address exactly as it appears on your articles of incorporation filed, or to be filed, with the state.
(Note, this section applies to nonprofits only.)
When specifying the specific purpose or purposes of your 501(c)(3) nonprofit corporation, provide a general description of what the company seeks to accomplish through its operations. For example, a charity established to help the homeless might write, "The specific purpose of the corporation is to help the homeless." Alternatively, the charity could include more details such as, "The specific purposes of the corporation are 1) to recruit and train volunteers; 2) to solicit and accept donations to be distributed to the homeless in Fresno, California; and 3) to exercise any and all powers suitable, proper, and in furtherance of the nonprofit's purposes." It is a good idea to keep your purposes broad enough so that you will not need to amend the bylaws each time the organization expands its operations.
You may choose for your nonprofit to have voting members that oversee the board of directors. More often than not, nonprofits do not have voting members. Select the membership description that best matches your nonprofit's structure.
Next, you will specify the number of directors for the corporation. The board of directors oversees the activities of the corporation and may be otherwise known as the "board of governors," the "board of managers," the "board of regents," the "board of trustees," or simply as the "board." The directors' duties generally include establishing broad policies and objectives, selecting and reviewing the performance of the company officers who run the day-to-day operations, and approving annual budgets.
When considering the size of your board of directors, remember that different board sizes have their advantages and disadvantages. For example, a board with too few directors may not have sufficiently diverse expertise for the corporation's needs. Or perhaps a small board of two or three related directors may run into a problem when there is a conflict of interest between the directors and the corporate interest that leaves decision-making to only one director. On the other hand, it may be hard logistically for a board with too many directors to organize meetings. Also, there may be so many diverse opinions that it becomes unnecessarily difficult for the board to make decisions.
If your for-profit corporation is organized and registered in California or Utah, you will need to select the number of shareholders first because state law specifies the number of directors you may have depending on the number of shareholders.
If your 501(c)(3) nonprofit corporation is organized and registered in Idaho, Louisiana, or Oregon AND has voting members, then you will need to select the number of members first because state law specifies the number of directors you may have depending on the number of voting members.
The corporation may choose to pay the directors, and any committee members appointed by the board of directors to assist the board, a reasonable compensation for the services and duties they perform for the corporation. The corporation may also choose to reimburse the directors and committee members for expenses paid on behalf of or in service of their corporate duties.
This section addresses the unfortunate situation when a corporate director, officer, employee, or other company representative may be sued personally by an outside party for their role or affiliation with the corporation. For example, a director or employee of the corporation may be sued along with the corporation by an unsatisfied customer, or an employee may be sued along with the corporation for being involved in a car accident while traveling for work.
Naturally, there will be costs associated with being named in a lawsuit, whether the lawsuit has merit or not. The corporation can specify in its bylaws whether it will automatically indemnify and compensate the sued directors, officers, employees, or other company representatives for costs incurred under those circumstances as follows:
This section deals with two important dates that a corporation needs to be aware of every year.
First, shareholders are required to hold an annual meeting of shareholders once a year to vote on the board of directors and conduct other permissible business. This date may be changed by board resolution to suit the corporation's needs.
Second, the corporation needs to select a fiscal year for tax purposes. The fiscal year is a period of 12 consecutive months ending on the last day of the month of your choice. If you choose to end the fiscal year in December, then your fiscal year will align with the normal calendar year. Corporations may choose different months for the end of their fiscal year depending on what works best for their payroll, business cycle, and tax situation.
This section deals with two important dates that a nonprofit with voting members needs to be aware of every year.
First, if there are members, they are required to hold an annual meeting of members once a year to vote on the board of directors and conduct other permissible business. This date may be changed by board resolution to suit the nonprofit's needs.
Second, the nonprofit needs to select a fiscal year for tax purposes. The fiscal year is a period of 12 consecutive months ending on the last day of the month of your choice. If you choose to end the fiscal year in December, then your fiscal year will align with the normal calendar year. Nonprofits may choose different months for the end of their fiscal year depending on their tax situation and what works best for their payroll, fundraising cycle, and donation cycle.
Bylaws can be adopted for official use by the corporation either by the incorporator(s) or by the board of directors. An incorporator is an individual or entity that initiates the incorporation process for the corporation and files the formation documents with the state. Generally, the incorporator(s) may adopt the bylaws for a newly formed corporation if the first board of directors has not been appointed or elected. Otherwise, any board of directors can adopt bylaws for official corporate use by majority vote or unanimous written consent.
If the incorporator(s) is/are adopting the bylaws, then enter the name(s) of the incorporator(s) and the date for adoption. If adoption is by the board of directors, then enter the secretary's name and the date for adoption.
If the bylaws are being adopted by incorporator(s), then they should sign the Adoption by Incorporator. If the board is adopting the bylaws, the secretary should sign the certificate confirming and recording that the board of directors adopted the bylaws for official use. The incorporator(s) or secretary may have this page notarized using the notary acknowledgment page. Using a notary is optional unless required by a bank or other entity requesting a copy of the bylaws.
The original or a copy of the corporate bylaws along with the signed Adoption by Incorporator should be stored and maintained by the secretary at the corporation's principal executive office or such other place as the board may decide.
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