Does My Business Need Bylaws?
Drafting rules that make Colorado corporations run smoothly
on October 2, 2018
Updated on January 11, 2023
Bylaws are legal documents that outline rules that govern the day-to-day operations of an organization or business entity. They define the responsibilities for the important positions, such as corporate officers, within the organization and explain how the organization can act under a variety of situations. For Colorado nonprofits organizations, bylaws may be required as part of the process for obtaining tax-exempt status from the IRS. Otherwise, for Colorado for-profit corporations, bylaws are not required by law. But, there are many reasons to spend the time putting corporate bylaws in place for your business.
Some of the most obvious include:
- Resolve issues ahead of time to allow the business to run smoothly
- Provide a process for settling disputes within the organization
- Establish and protect the rights of each owner or shareholder
- Spell out the terms of a buy-out when a stockholder voluntarily or involuntarily leaves the company
- Demonstrate more legitimacy to banks, creditors, IRS and others
Once a corporation adopts bylaws, those bylaws become legally binding on the corporation and its shareholders. That means the organization can be sued for a violation of those bylaws. Bylaws are distinct from the business’s Articles of Incorporation, which is the document the business files with the state of Colorado to register the corporation.
Who Drafts the Bylaws?
Bylaws can be drafted by the incorporator—the person or persons who start the corporation—or they can be delegated to the board of directors as part of the board’s initial duties. When a business is incorporated, one of the first tasks is to appoint the board of directors—the people who serve as the primary governing body for the organization. Adopting bylaws is often part of the board’s initial responsibilities at the first board meeting.
What Information Is in the Bylaws?
Businesses are unique, and bylaws should be customized to the specific business’s needs. However, the basic components of bylaws include:
- Organization name and reason for existence
- Composition of the board of directors: how many directors, what their powers and duties are, how many are necessary for voting, and how to replace
- Membership and shareholder rules: the amount and type of shares of stock to be issued and voting rights for members
- Rules on corporate resolutions: the process for making decisions for the corporation by the Board
- Officers: describe the responsibilities for officers and process for selection of officers
- Meetings: the procedure and timing for director and shareholder meetings
- Procedure for record-keeping: describe what corporate records are kept and how they are kept
- Conflicts of interest: require directors and officers to disclose conflicts and abstain from the decision-making process when conflicts are present
- Procedure for amending the bylaws
IRS rules penalize corporations if found providing unfair benefits to directors, members or others, so a conflict of interest policy in the organization’s bylaws will add protection against that possibility.
What About Partnerships and LLCs?
Every business needs rules and guidelines to operate. Partnerships and LLCs have similar types of rules. For a partnership, this set of rules is a called a partnership agreement. For LLCs, it’s called an operating agreement. The contents of both are very similar to bylaws.
It’s important that businesses going through the process of drafting their bylaws or operating agreement have independent and experienced legal services. That can be found with a law firm or an experienced Colorado corporate attorney who can provide legal advice about your company‘s bylaws or forming a nonprofit corporation. For more information on this area, see our overviews of contract law, closely held business, business organizations and business and corporate law.