The Purpose and Importance of Bylaws
As corporations throughout the years have found out the hard way, changes to a company’s bylaws and policies can be met with reactions ranging from surprise to anger or disappointment. What can be even more troublesome is if a company does not have bylaws or policies in place. Many businesses that are just starting out are understandably in flux when it comes to “business as usual.” Furthermore, many new company leaders may believe that there is little point to spending valuable time and resources away from their primary goal (to become successful) in order to draft and implement rules to govern how the business will be managed. This is especially true with small businesses who may only have a handful of loyal believers helping them build from the ground up. Despite their seemingly mundane nature, however, establishing rules and bylaws that will be used to govern employees, or board members, is an important step to ensuring the company’s lasting success. Part of this success will come from the added protection these documents provide from government investigators or employee led lawsuits.
Under California law, companies are not specifically required to file a copy of their bylaws with the state. Some argue that a corporation does not need bylaws at all, so long as the business has another document (i.e. articles of incorporation) that outlines the total number of board members the company will have sitting on its Board of Directors. This comes from a provision of the law that states that “the bylaws shall set forth...the number of directors of the corporation…” This portion of the law is preceded by a statement that “bylaws may be adopted, amended or repealed” by the Board, unless the articles of incorporation state otherwise. It is best to consult an experienced attorney when creating a corporation so that this question can be discussed, as well as what exactly needs to go in them if they are drafted. In some situations, the failure to have sufficient guiding documents for a corporation can land a company in serious legal trouble.
A corporation’s governing documents must meet a list of requirements in order to pass under California law. These items should not merely be seen as a checklist, however, as they will be cited to in the event a lawsuit or investigation arises down the road. The documents should outline the “governing principles” that the company will follow when conducting business and may be looked at by state and federal regulators to ensure compliance with all applicable national (and international) laws. Such principles include:
- The rights and equitable treatment of shareholders,
- The interests of other stakeholders,
- The role/responsibilities of the Board,
- What will be considered ethical behavior for corporate officers and board members, and
- Transparency principles.
These must be discussed in such a way that makes it clear to all board members and corporate officers what will be expected of them and what will be prohibited. Vague concepts and unclear direction in the corporation’s guiding documents can lead to liability on the part of the company if it is found that poor behavior was encouraged or knowingly overlooked.
Starting a company can be a stressful, but exciting time in anyone’s life. It takes perseverance, patience, and a lot of hard work to build a successful company from the ground up. Do not let all that work lead to ruin because of poor drafting of your company’s most critical documents. Call the law office of Garcia & Gurney today and speak to an experienced team who knows the law and who can help you and your company stay on a path to success.