The DNA of your Business: Corporate Bylaws

This article is the third part of a three part series regarding business agreements. The topics covered in this series are Partnership Agreements, Operating Agreements and Corporate Bylaws. This Article deals with Corporate Bylaws.

Corporation Bylaws exist whenever a corporate entity is formed. Like Limited Liability Companies and Limited Partnerships, Corporations can be chartered in Pennsylvania. Corporations encompass a wide variety of businesses, both big and small. One of the biggest differences between Corporations and other entities (such as Partnerships and LLCs) is that a Corporations often have a separation between ownership and management. Corporations can also be non-profit. Most major companies and non-profits that we encounter are Corporations.

In the for-profit world, the two main varieties of Corporations are “C” Corporations and “S” Corporations. While these are technically tax designations, there are also different governing styles which accompany them. S corporations are similar to Partnerships and many LLCs in that they are “flow through” entities in which the owners are taxed directly. This means that an owner of an S corporation will be taxed on its profits, regardless of whether he or she receives any dividends from it. Because of this, most S Corporations should have clauses which guarantee a minimum distribution that is enough to cover tax liabilities. S Corporations were designed for small businesses in which the owner also operates the business and were the predominate legal entity for small businesses before LLCs emerged. For the most part, an S Corporation will function in a manner similar to a Partnership or sole proprietorship.

C Corporations are taxed directly on their income, meaning that shareholders are only taxed for the dividends they receive rather than the net income of the Corporation. Because of this, C Corporations are more “shareholder friendly” and C Corporations will have more passive investors who do not take part in the day to day operations of the company. Most of the companies whose shares are traded on public stock exchanges are C corporations. Because the Corporate tax rate can be high, C Corporations are usually larger companies which make substantial profits and many of the largest and most recognizable companies in the United States are C Corporations.

One of the most important parts of Corporate Bylaws (especially for C Corporations) are those provisions which define the shareholder’s rights and voting practices. Because many Corporations are not owner-operated, shareholders can be vulnerable if a company is mismanaged. Meetings should occur at least once annually and By-Laws should specifically lay out how notice of a meeting is made, and how shareholders can cast votes. Many Corporations will have different types of stock shares which can affect the voting rights of those who own said shares.

If you are starting a Corporation it is imperative that you have well drafted Bylaws. Properly drafted Bylaws can open up new opportunities for a Corporation, including tax and insurance benefits. Well written Bylaws can also help avoid contentious litigation or shareholder derivative suits which can greatly harm or interrupt a business.

THE INFORMATION ON THIS BLOG IS FOR INFORMATIONAL PURPOSES ONLY AND IS NOT INTENDED TO BE LEGAL ADVICE. PLEASE CONTACT AN ATTORNEY LICENSED IN YOUR JURISDICTION BEFORE ACTING ON ANY OF THE INFORMATION CONTAINED IN THIS BLOG.