Before you play a game, you read the rules you’ll be operating under. Before you start a business, you create the rules you’ll be operating under. These are called by-laws, and every organized entity--be it business or nonprofit--has them. By-laws are important for keeping order when things go bad. Writing a good set of by-laws is critical whether you’re running a small business or a very large business.
Determine in which state you’d like to formally establish your small business; this need not be the state you’ll be doing most of your business in. Obtain the forms you’ll need to legally organize your entity. Some states will require articles of incorporation. (These are different from by-laws and are not covered here.) Check with the relevant state’s department of state to determine if you are required to file your by-laws with that state.
Enumerate the rights and responsibilities of the stockholders in the first article. (The term "article" refers to a specific portion of the by-laws, often several numbered sections dealing with a particular point within the article.) This will include where stockholder meetings are held; when the annual meeting is held; and how special or extraordinary meetings can be called and how the notice for special or extraordinary meetings will be given. You may want to establish the guidelines for determining a stockholder’s record date. Finally, you need to define what establishes a quorum of a meeting; who presides over the meeting; how voting takes place (including proxies); and how the meeting is adjourned.
Address issues concerning the board of directors in the second article. These include the number of directors (including any minimum or maximum), their tenure and eligibility requirements; a provision on how to deal with board vacancies; instructions on how to increase or decrease the number of directors; where the directors will meet, how often regular meetings occur and how special meetings may be called (including notification); the definition of a quorum; whether you’ll have any standing or ad hoc committees; how informal actions may be taken; and how the business will compensate the directors.
Define the parameters relevant to officers in the next article. These include a delineation of the executive office positions, eligibility requirements, their terms of office and their powers and duties.
Address, in a new article, all issues surrounding capital stock, including, but not limited to, share certificates, transfer of shares, stock ledgers and how to address lost, stolen or destroyed certificates.
Provide instructions regarding a suitable corporate seal in the next article.
Define the company’s fiscal year in the subsequent article.
Devote one or more articles, if necessary, to special circumstances unique to your business.
Provide instructions regarding how to amend the by-laws in the last article.
Contact your legal counsel and have your lawyer review the by-laws before they are formally adopted.
The above steps show you what you need to write a comprehensive set of by-laws for a small business. While you can write these yourself, you should contact appropriate legal counsel and have them review what you write--especially if you expect your business to ultimately grow to have many owners. Having legal counsel proof the final draft of your by-laws will help prevent potential problems down the road. The above structure of articles is merely a suggestion. Take a look at other by-laws; there’s no reason to reinvent the wheel. Use your by-laws as an opportunity to reflect the nature of your company. Use easy-to-understand language. When in doubt, have an unsophisticated third party review your wording to make sure he understands it the way you intend it to be understood.
By-laws and articles of incorporation are two different forms. Limited liability companies generally do not have by-laws as they have operating agreements that provide a very similar function. Avoid merely copying another firm’s by-laws, even if it’s in the same area. Try not to make the by-laws more complex than they need to be but don’t cut any corners either.