What Are Bylaws?

July 19, 2022

Bylaws are an essential element of corporate governance. You can think of them as machines that ensure a company meets its legal obligations. Whether your location or state legally needs bylaws, you should draft a customized document because they can help your company handle concerns, questions, or disputes as they arise. What Is the Purpose of Bylaws?

Bylaws are legally binding rules that govern your company. The bylaws of a corporation address vital matters, such as board member terms, quorum requirements, annual meetings, and other top-level administration matters.

The purpose of bylaws is to create rules that govern a company’s internal operations with board members. These rules address administrative functions, dividends, and board composition. In addition, bylaws contain vital information about an organization’s location, share capital, and nature of business. 

Bylaws date back to when the prerequisite for commercial operations focused on establishing powers, goals, legal plans, and resources.

A common mistake most organizations make is to ignore the wording of bylaws, with some companies even copying and pasting bylaws unlikely to meet their legal situation. Ensure you consider standard provisions and different bylaws available in your industry to avoid this oversight. 

How Bylaws Can Be Changed

Because a company's bylaws are the governing rules by which it operates, your board of directors and staff likely know your company’s bylaws by heart. But how does your company change its bylaws when it’s time to make changes? Often, the process of adjusting bylaws ultimately rests with the board. For example, if the board realizes that bylaws conflict with the company's mission, strategic vision, or direction, a motion is made to adjust them.

After that idea is put in motion, the AADE board of directors discusses and approves it. Once accepted, the proposed amendments are sent out to board members for a vote. This process varies depending on the company and its bylaws. 

It’s crucial to note that the bylaws themselves normally define voting and how to conduct the voting process. Although policies and procedures vary from organization to organization, here is how you should propose amendments to your company’s bylaws:

Review and Propose

If your governing body or board of directors finds your organization’s bylaws need to be updated, expanded upon, modified, or deleted, follow the procedures in your bylaws for making changes. If a vote is required on the proposed changes, your bylaws will have details of how voting should happen. During the proposal stage, the board collects input to modify the proposal if necessary.

Amend the Bylaws

If the bylaws need to be amended, a document communicating the amendments should be sent to board members. Again, you must follow the defined procedure for voting, and you must follow appropriate steps to ensure your company is making bylaw revisions correctly. 

Take a Vote on the Proposed Changes

Your company’s bylaws outline a precise framework on how bylaw amendments should take place, a framework that should be followed closely. Next, you must notify board members of what’s happening and the proposed amendments, so it’s important to ensure you send an appropriate notice. Finally, offer your board a clear and convenient way to vote that adheres to your organization's procedures. 

One of the vital things the bylaw amendment process outlines is the number of votes needed to make the bylaw changes valid. Often, bylaw amendments need at least a two-thirds majority to be passed, and if at least one-third of the voting members disagree with the modifications, it shouldn’t be passed. While it might seem like a high number of approval votes or a low number of disapproval votes are needed to pass a bylaw modification, there’s a good reason for that. Because bylaws are rules governing how a company operates, any changes made to them will change the agreement that all board members have already agreed to, so it’s vital that the revisions are clear and that most members are on board with the amendments. 

Further, bylaw changes must have three fundamental pieces of information when proposed to the members:

  • The proposed amendment
  • The current bylaw
  • How the bylaw will read once the intended amendments are adopted

This gives the voting members all information required to make informed decisions on whether the bylaw modification works for your company. 

Final Thoughts

A company’s bylaws are legally binding rules that govern how it operates. They address critical matters, including board member terms, quorum requirements, and annual meetings. Bylaw changes need at least a two-thirds majority to be valid, and if at least one-third of the voting members oppose the amendment, it must not be passed. 

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