It’s good practice to create bylaws or a shareholders’ agreement when forming a corporation. It shows that you respect corporate formalities even if you’re on your own. Additionally, it shows professionalism and helps prevent creditors from trying to pierce the corporate veil and get your personal assets. Agreements become even more critical when there’s more than one owner, as they establish rules from the outset.
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Corporate bylaws set the ground rules for your corporation will operate. It is similar to a partnership agreement for partnerships or an LLC operating agreement for an LLC.
One of the primary reason to form a corporation is to shield the owners from individual liability. To keep that protection, you have to follow the formalities to demonstrate that you really are operating as a corporation and having proper bylaws is one way to demonstrate that. If you have more than one shareholder in the corporation, it is also imperative to set forth the ground rules for how you will operate the corporation at the beginning before any disagreements arise.
There is no set rule dictating what must or what cannot be in your corporate bylaws. Generally speaking, the corporate bylaws will cover:
Initial capital contributions of the shareholders
Who gets to vote, how they vote and what percentage of votes are needed to do certain actions
Restrictions on transfer of a shareholder’s interests or the addition of a new shareholder
How profits will be distributed
Designation of officers or directors
Without bylaws, you could lose the personal liability shield that comes with the formation of your corporation. Many states have default rules that will govern your corporation if there are no bylaws, but the lack of clear rules at the outset is one of the primary reasons many disputes between owners end up at the courthouse. As lawyers like to say, you can pay a little to establish the rules now or pay a lot more to have the rules established in court.
Whether this is your first time dealing with corporate bylaws and shareholders’ agreements or its familiar territory, Swyft’s Resource Center offers valuable guides, articles, and case studies that help you navigate the corporate world smoothly.