After filing your articles of incorporation, bylaws are drafted as a method of defining specific organizational processes and responsibilities within a Colorado corporation. They are dictated by the board of directors and serve as an important legal document. In the event that you are forming a nonprofit organization, bylaws may be required by the IRS to obtain your organization’s tax-exempt status. In the case of a corporation, however, bylaws are not a required step by the state of Colorado. Nonetheless, bylaws can be a very helpful tool for your business. Taking the time to draft them in the initial stages of forming your business could save you the headaches and expenses of legal disputes and other disagreements down the road.
Benefits of Drafting Bylaws
When your corporation adopts a set of bylaws, they become a legally binding document that hold members and shareholders to a set of processes, protections, and more. Here are some of the benefits that bylaws can provide:
- Avoid foreseeable issues before they happen by outlining how to manage day-to-day business operations and handle certain scenarios should they occur.
- Implement a process to deal with disputes when they arise. The process should be easy to understand and provide a pathway to resolution for members of your organization.
- Define the various responsibilities and rights of owners, shareholders, and members.
- Outline the terms of a shareholder leaving or being bought-out and discuss terms for both voluntary and involuntary departure scenarios.
- Demonstrate a higher degree of prestige and legitimacy with banks, partners, vendors, creditors, the IRS, and more. While bylaws are not a public-facing document, they can be shared with these parties to present a commitment to professional good practice.
Benefits of Drafting Bylaw
When your corporation adopts a set of bylaws, they become a legally binding document that hold members and shareholders to a set of processes, protections, and more. Here are some of the benefits that bylaws can provide:
Drafting Bylaws
In the early stages of forming your corporation, the board of directors are the ones responsible for drafting the bylaws. This is often an initial responsibility of the board once they are appointed. However, if your corporation does not have a board of directors, it is also possible that the incorporator drafts the bylaws, instead. Also, keep in mind that it is not necessary that you file your bylaws with the state. Unlike with articles of incorporation which do require filing with the state, bylaws are a private document written for your company’s benefit and use.
What to Include in Your Bylaws
Bylaws will differ from business to business, as each organization has its own procedures, priorities, and other interests. However, there are typical elements that businesses often include in their bylaws.
Corporation Information:
Include information about your corporation such as its name, office address, and if there are any matters to address in terms of stock ownership. Also included in this information should be your corporation’s purpose. Your corporation’s purpose should outline its reason for existence.
Officers & Members:
The officers in your corporation perform roles like President, Secretary, and Treasurer. Your bylaws should outline the responsibilities of these roles and any guidelines for performing them. There should also be a detailed process in place for elections and replacement of these officers. Also, include information about membership in your bylaws. For example, note if there are different membership types, voting rights, or any processes in place for selection or removal. If your corporation does not have any members, simply state this.
Meetings:
Note the meeting information for all board meetings that take place. This information should include location, meeting time, attendance requirements, as well as director and membership requirements. Also, if a vote is scheduled to take place, be sure there is consensus on what constitutes a quorum.
Board of Directors:
Your board of directors serves as the governing body of your organization. When drafting your corporation’s bylaws, the board of directors should include their names, length of tenure, number of directors and number required to signal a quorum. The bylaws should also outline the roles and responsibilities of the board and how vacancies are to be filled.
Committees:
List if your organization has any committees and the roles they perform. For example, your organization may have committees for nominating, membership, investment, and more.
Conflicts of Interest:
If there are any conflicts of interest within the organization, be sure to list these in your bylaws. Doing so will help to protect you from potential IRS penalties. For example, if any member of your board has financial interests in a voting matter, that board member should recuse him or herself from the vote.
In conclusion, bylaws can be a very important addition to your corporation. They define organizational processes and responsibilities so that the board of directors of the Colorado corporation can avoid conflict down the line. Bylaws are only one of the important considerations you must keep in mind when forming your corporation. You should also make sure you understand Colorado corporate taxes and decide if you want to be taxed as an S-corp. You should also be sure that a corporation is the right entity type for you by reading up on the differences between a Colorado LLC and a Colorado S-corp.
