Although California does not require a business to have bylaws, here are six reasons all business owners should invest in a set of bylaws that are strategically thought of for their business:
1. The Bylaws are the legal backbone of the Company.
The statutes of a company provide the framework for its operation, including the rules for the relationship of the owners.
2. What if your company has no statutes?
If your business does not have statutes, California law will control how the business is run. It is far better for owners to determine how they would like the business to operate than to rely on state statutes.
It is similar to a person who does not have a will or trust. If they die, state statutes determine how the individual’s assets are distributed. Instead, the individual should think carefully about how they would like their assets to be distributed and establish the legal mechanism to enforce their plan.
Similarly, it is far better for business owners to think strategically about how they would like their business to operate than to rely on state statutes, which are not always the best fit for the business.
3. The statutes provide peace of mind to the owners.
Every business eventually faces challenges. It’s better to consider some of the potential tipping points in your company and provide in the bylaws how you would like the outcomes of these situations to be determined than to wait to make these tough decisions when stakeholders and passions can create the perfect storm. for litigation.
For example, what will happen if there is a legal dispute between the owners? Do you want the company to be involved in the expense and distraction of litigation, or do you prefer arbitration? What happens if one of the owners dies? What if one of the owners wants to leave the company?
Bylaws provide an opportunity to calmly and objectively reflect 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 business than to rely on the default rules in state statutes or to try to resolve them when clear ideas are less likely to prevail.
4. Bylaws help protect your company’s limited liability protection.
One of the main reasons for forming a corporate entity is possibly having limited personal liability for potential business debts and lawsuits against your company.
If a company has no statutes and is sued, a plaintiff could attempt to “pierce the corporate veil” by claiming that the company should not receive the limited liability shield because its owners did not follow corporate formalities.
In determining whether to pierce the corporate veil, the court would evaluate a number of factors to determine whether your business is legitimate, even if you have the proper corporate documents and records. By not having statutes, a business owner runs the risk of not receiving limited liability protection if sued.
5. Bylaws help avoid misunderstandings between owners.
Clear communication and expectations are key to any successful relationship, including the relationship between business owners. The bylaws clearly state how the business will be run, which can be crucial in avoiding misunderstandings about how the owners expect the business to be run.
6. You may need statutes to open a bank account and obtain loans and insurance.
Finally, if you want to open a business account or apply for loans, most banks will ask you to provide a copy of their bylaws. Additionally, insurance companies may require you to provide a copy of your company’s bylaws before providing certain types of policies.
As a business owner, it is often tempting to cut corners to cut costs. A strategically thought-out set of bylaws shouldn’t be one of these shortcuts. 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 business.
Disclaimer: This post discusses general legal issues, but does not constitute legal advice in any respect. No reader should act or refrain from acting on the basis of the information presented here without seeking the advice of an attorney in the corresponding jurisdiction. Doug Bend expressly disclaims all liability with respect to actions taken or not taken based on any content in this publication.