When starting any business venture, it is always important to use a business entity. Using an entity like a corporation protects the owner or owners from most types of personal liability. Preventing one’s personal liability for corporate obligations encourages entrepreneurs to take risks.
A corporation is one of the most common types of business entities. Creation of a corporation requires filing of Articles of Incorporation with the North Carolina Secretary of State. The most important information related to the running of the company is usually not public, however. That information is contained in the bylaws. A company’s bylaws are the document that lays out how the company should be run, and potential remedies if there is a problem.
The bylaws are also important because if a business fails to comply with corporate formalities, the business’s owner may be deemed personally liable for corporate debts. Failing to follow the bylaws therefore leads to the undermining of the main reason for a separate corporate existence. Though bylaws are often complex, there are four fundamental parts that form the foundation of any set of bylaws: (1) Shareholder Meetings; (2) the Board of Directors, (3) Officers, and (4) Amendment to the Bylaws.
1. Annual Shareholder Meetings.
The shareholders of a corporation should meet at least once per year. Meetings are generally held to vote on such matters as are within the rights of the shareholders according to the bylaws. An important right shareholders have is to inspect the records of the Board of Directors. At these annual shareholder meetings, they elect the members of the board, who in turn are responsible for choosing the officers of the company.
2. The Board of Directors.
The members of the Board of Directors are elected by the shareholders. Most bylaws give the board the ultimate power over conducting the business of the corporation. This power is not exercised directly. Rather, the board selects the officers, and may remove them if so desired. There is no magic number of members of the board.
Under North Carolina law, the Board of Directors has the power to decide the number of its members, and may reduce or increase that number. The bylaws may also set the qualifications for board members, such as residency within the state, minimum age, compulsory retirement age, or ownership of shares.
3. Officers and Their Powers.
As mentioned above, under the bylaws the Board of Directors appoints the officers. The usual officers are the President, Vice President, Secretary, and Treasurer. That said, there is no required list of officers. A corporation, depending on its size, may have multiple Vice Presidents with different areas of authority, Assistant Treasurers and Assistant Secretaries, or may combine offices (combining the Secretary and Treasurer is not uncommon).
The bylaws will also describe the powers assigned to each officer. For instance, the President is the principal executive officer, has general supervision of the company, and presides over shareholder meetings. The Secretary maintains the company’s records, sends notices of, e.g., shareholder and board meetings, and prepares shareholder lists in advance of shareholder meetings. The Treasurer, as the title implies, is responsible for tracking the company’s finances, managing accounts receivable and payable, and preparing financial statements. All that said, the bylaws may designate any powers to whichever officer is deemed appropriate.
4. Amendments to the Bylaws. Change is inevitable, and the bylaws of a company are no exception. Businesses need to change their organization structure, the rights under the bylaws, or a host of other issues. No change can be made without amending the bylaws.
Some bylaws prohibit the Board of Directors from making amendments, and instead give that power to the shareholders alone. Other bylaws may permit the Board of Directors to amend bylaws, but prohibit any amendment that the shareholders had previously rejected. There are a variety of ways to structure the amendment process, all of which directly implicate who – shareholders or directors – make this ultimate decision.
All of this barely scratches the surface of what can be included in your corporation’s bylaws. There are many other issues, such as indemnification, classes of stock, removal of officers and directors, committees, and distributions of dividends. None of this can happen without shareholders, directors, officers, and a method to amend the bylaws.
If you have a question about business or corporate law, whether it relates to a small business, a franchise, or another entrepreneurial enterprise, contact us at 980-999-3557. DYE CULIK PC is a Charlotte, North Carolina business law firm who helps Charlotte area businesses safeguard and grow their businesses.