Creating a Corporation: Articles of Incorporation and Bylaws

Up to the Blue Sky

The Importance of Corporate Documents

By Andrew J Thompson

Perhaps the most common reason corporations are dissolved is because of a failure to maintain the proper corporate documents. This is truly a shame because nearly every state provides a very simple framework for maintaining and updating the documents that are necessary for the existence of a corporation.

Yet because there are annual registration requirements, and there may be subtle changes from year to year, many corporate business operators fail to do the simple document maintenance that is required to ensure the corporate form remains in tact and operational. This is one good reason for keeping an attorney on retainer from year to year - even if it is only a minimal arrangement that provides for an annual review of the legal structure of the business.

But corporate documents serve a more important purpose as well. As the business grows and changes, articles and especially bylaws provide an important framework for governance that instruct the directors and officers how to manage their affairs going forward. As an incorporator, you have the opportunity to shape this structure from the beginning, and then to use it to serve the efficient operation of the business on an ongoing basis.

Articles of Incorporation

Every state has its own requirements for articles on incorporation. Essentially, these articles are required to identify the most essential elements of the corporation for operation as a business.

In Indiana, for example, articles of incorporation must contain at least:

(1) a corporate name;
(2) the number of shares the corporation is authorized to issue;
(3) the street address of the corporation's initial registered office in Indiana and the name of its initial registered agent at that office; and
(4) the name and address of each incorporator.

In addition, the articles of incorporation may set forth:

(1) the names and addresses of the individuals who are to serve as the initial directors;
(2) provisions not inconsistent with law regarding:
(A) the purpose or purposes for which the corporation is organized;
(B) managing the business and regulating the affairs of the corporation;
(C) defining, limiting, and regulating the powers of the corporation, its board of directors, and shareholders;
(D) a par value for authorized shares or classes of shares; and
(E) the imposition of personal liability on shareholders for the debts of the corporation to a specified extent and upon specified conditions; and
(3) any provision that under this article is required or permitted to be set forth in the bylaws.
(c) The articles of incorporation need not set forth any of the corporate powers enumerated in this article.

For a professional corporation, nonprofit or LLC, the requirements are slightly for different for each. Generally, however, it's fair to say that the articles of incorporation contain basic identifying information, and not too much more - with any type of corporation.

Making Bylaws Work for Your Corporation

Bylaws are much more subjective, and provide a much greater range of freedom than articles of incorporation. Their purpose is to enable the directors and officers of a corporation to effectively manage corporate business in order to accomplish their objectives.

Under Indiana law, "the bylaws of a corporation may contain any provision for managing the business and regulating the affairs of the corporation that is not inconsistent with law or the articles of incorporation." Emergency bylaws may also be established to provide for the governance of the corporation during an emergency, and which establish: (1) procedures for calling a meeting of the board of directors; (2) quorum requirements for the meeting; and (3) designation of additional or substitute directors.

Establishing directors' meetings, quorum requirements, and appointment or replacement of directors are three of the most important functions of the bylaws of a corporation.

There is one other function I believe to be very important, and somewhat neglected: the bylaws are a place where the intersection and interactions between the governance of the directors and the managerial authority of the officers of the corporation can be clearly defined and delineated, but often they are not.

Perhaps worse, in many cases the lines are clearly drawn under the bylaws, but in practice, these lines and channels of authority are neglected or ignored. This is very risky, but a corporation can operate profitably for many years without ever noticing the effects that managing in oppostion to the bylaws will eventually have.

So often it is said that directors are involved in "policy", while officers manage the "day-to-day operations" of the business. This all sounds rather tidy, but as soon as it becomes unclear who are officers or who are directors, or what the difference is between policy and daily activity - trouble follows.

I suspect that the majority of employment litigation, shareholder lawsuits, and other litigation that involves questions of a corporation's own governance - could all be avoided if bylaws were in place that did what they should, and if every director of the corporation was educated and familiar with the terms of those bylaws.

It is quite common in smaller corporations to identify officers of the corporation in the bylaws, and to require these officers to be directors as well. This is fine in a small organization where the day-to-day governance actually is handled by directors of the corporation by default - because they are often also the officers of the corporation at the same time.

But the minute you hire a CEO, President, Treasurer, CFO, Executive Director, or any kind of Vice President as an employee-officer of the corporation, and who does not also serve on the board, you have a separation of responsibilities that is not likely to have been contemplated in the original bylaws.

At that point, it is possible or even likely that the bylaws continue to vest directors only with authority for the management of the organization, yet practically speaking, that authority is being turned over to hired professionals who are not directors.

This becomes a very odd paradox - the directors intuitively desire and anticipate hiring profesionals who are not on their board to manage and drive efficiency for the organization, yet the bylaws they memorialized contemplate a wholly different structure - ugh! As long as the bylaws can be effectively ignored, business may hum along splendidly, but the exact second, a board member, employee, customer or vendor raises a question that requires adherence to the bylaws, the heaping pile of errors and omissions that has been mounting is uncovered and demands immediate clean up. Unfortunately, most smaller organizations are ill equipped to perform the clean up without extraordinary cost and disruption of business.

Thankfully though, the answer is quite simple. Plan ahead! Write bylaws that anticipate doing what you anticipate doing anyway. Be prepared for the contingencies you hope, or may even know, will come along.

Contact an experienced attorney to help you with this process. Attorney Andrew J Thompson has 19 years experience in working with newly formed and growing corporate entities, helping them create governance structures that enable their success and protect them from unnecessary risk. If you would like assistance with this or similar matters, contact Mr. Thompson toll free - (877) 365-`776 - today for an initial consultation.


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