Although your state may not require your company to have written bylaws, below are five reasons why every business owner should invest in a strategically thought out set of bylaws for their company.
- The bylaws are the company's legal backbone. A company's bylaws provide the framework for how it operates, including rules for the owners' relationship.
- Not having bylaws means having no control over how your business is run. This is similar to when an individual fails to develop a will or trust. If they die, the state's statutes determine how the individual's assets are distributed. Instead, the individual should thoughtfully think through how they would like their assets distributed and to set up the legal mechanism to enforce their plan. Similarly, it is much better for business owners to think strategically about how they would like their company to operate rather than to rely on the state's statutes.
- Bylaws provide owners with piece of mind to help avert misunderstandings among partners. Every company eventually runs into challenges. It is better to consider some of the potential turning points in your company and use the bylaws to outline how these situations should be handled. Don't wait to make these tough decisions in the heat of the moment, when interested parties and passions may create the perfect storm for litigation. The bylaws are a pro-active way to calmly and objectively reflect on difficult decisions and issues before they arise.
- Bylaws help support your company's limited liability protection. One of the primary reasons to form a corporate entity is to limit your personal liability with regard to potential business debts and judgments against your company. If a company does not have bylaws and is sued, a plaintiff could try to "pierce the corporate veil" by claiming the company should not be provided with the shield of limited liability protection because its owners did not follow corporate formalities. This enables the court to evaluate a number of factors to determine whether your company is legitimate, including whether you have the proper corporate documents and records.
- You may need bylaws to set up a bank account for receiving loans and securing insurance. Finally, if you would like to open a business account or apply for loans most banks will require you to provide a copy of your bylaws. Insurance companies may also require you to provide a copy of your company's bylaws before providing certain types of polices.
As a business owner it is often tempting to cut corners to lower costs. A strategically thought out set of bylaws should not be one of these cut corners. Instead, bylaws should be recognized for what they are -- one of the wisest investments a business owner can make to ensure the long-term effectiveness of their company.
Disclaimer: This post discusses general legal issues, but it does not
constitute legal advice in any respect. No reader should act or refrain from
acting on the basis of any information presented herein without seeking the
advice of counsel in the relevant jurisdiction. Doug Bend expressly disclaims
all liability in respect of any actions taken or not taken based on any contents
of this post.
Doug Bend is the principal of The Law Office of Doug Bend, a law firm focused on start-up and small businesses. He is also the General Counsel for Modify Industries, Inc. and tIFc LLC and a Legal Mentor in The Hub Ventures Program.
The Young Entrepreneur Council (YEC) is an invite-only nonprofit organization comprised of the country's most promising young entrepreneurs. The YEC promotes entrepreneurship as a solution to youth unemployment and underemployment and provides its members with access to tools, mentorship, and resources that support each stage of a business's development and growth.