The Top Six Reasons Your Company Needs Bylaws

The Top Six Reasons Your Company Needs Bylaws




Although California does not require a company to have bylaws, below are six reasons why every business owner should invest in a strategically thought out set of bylaws for their company:

1. The Bylaws are the Company’s Legal Backbone.

A company’s bylaws provide the framework for how it operates, including rules for the owners’ relationship.

2. What if Your Company Does Not Have Bylaws?

If your company does not have bylaws in place, the laws of California will control how the company is run. It is much better for the owners to determine how it would like to have the company function than to rely on the state’s statutes.

It is similar to an individual not having a will or trust. If they die, the state’s statutes determine how the individual’s assets are distributed. Instead, the individual should thoughtfully think by how they would like their assets distributed and to set up the legal mechanism to enforce their plan.

Similarly, it is much better for business owners to strategically think by how they would like their company to function than to rely on the state’s statutes, which might not always be the best fit for the company.

3. Bylaws Provide Owners With Piece of Mind.

Every company ultimately runs into challenges. It is better to consider some of the possible turning points in your company and provide in the bylaws how you would like for the outcomes of these situations to be determined than to wait to make these tough decisions when interested parties and passions may create the perfect storm for litigation.

For example, what will happen if there is a legal argument between the owners? Do you want the company to be tied up in the expense and distraction of litigation or would you prefer arbitration? What happens if one of the owners dies? What if one of the owners wants out of the company?

The bylaws present an opportunity to calmly and objectively mirror on these issues before they occur. It is wiser to answer these types of questions ahead of time and determine what might be the best solutions for your company than to rely on the default rules in the state’s statutes or to try to resolve them when clear heads are less likely to prevail.

4. Bylaws Help Protect Your Company’s Limited Liability Protection.

One of the dominant reasons to form a corporate entity is to possibly have personal limited liability from the possible business debts and judgments against your company.

If a company does not have bylaws and is sued, a plaintiff could try to “pierce the corporate veil” by claiming the company should not be provided with the protect of limited liability protection because its owners did not follow corporate formalities.

In calculating whether to pierce the corporate veil, the court would estimate a number of factors to determine whether your company is authentic, including whether you have the proper corporate documents and records. By not having bylaws, a business owner is risking not being provided limited liability protection if it is sued.

5. Bylaws Help avid Misunderstandings Among Owners.

Communication and clear expectations are meaningful to any successful relationship, including the relationship between business owners. Bylaws clearly lay out how the company will be run, which can be crucial in preventing misunderstandings over how the owners expect the company to be managed.

6. You May Need Bylaws To Set Up A Bank Account and to get Loans and Insurance.

Finally, if you would like to open a business account or apply for loans most edges will require you to provide a copy of your bylaws. In addition, insurance companies may require you to provide a copy of your company’s bylaws before providing certain types of polices.

As a business owner it is often tempting to cut corners to lower costs. A strategically thought out set of bylaws should not be one of these cut corners. Instead, bylaws should be recognized for what they are – one of the wisest investments a business owner can make to ensure the long-term effectiveness of their company.

Disclaimer: This post discusses general legal issues, but it does not constitute legal advice in any respect. No reader should act or refrain from acting on the basis of any information presented herein without seeking the advice of counsel in the applicable jurisdiction. Doug Bend expressly disclaims all liability in respect of any actions taken or not taken based on any contents of this post.




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