What are Bylaws?

Bylaws are an important set of regulations for the internal management of an organisation or company. They form a key reservoir for the effective functioning of corporate bodies, cooperative societies, municipal corporations and a host of similar statutory bodies. Under these rules, the organization, operation, and responsibility of the key participants in such enterprise are described.

Explanation Of What Are Bylaws?

Bylaws are the set of rules that govern a corporation and ensure that it operates properly. The very first job for the board of directors of a newly formed corporation is to create bylaws. It is essentially one document encompassing all the rules required to govern the corporation. You can assume corporate bylaws as the core principles on which a particular corporation functions.

The board of directors gets a lot of help from these principles while making day-to-day decisions in the company's operations. These businesses get in touch with an attorney to formulate these bylaws, but the board must first approve them.   

Moreover, a director or a committee of a corporation sits down to formulate these principles, and after complications, the board reviews the document and then approves it. Without the board's approval, bylaws can not be incorporated into the company's structure. Then these bylaws must be a part of the official records of your corporation. So, whenever the state, IRS, or any state wants to audit your records, they can find the bylaws. It would be best if you also considered the laws and regulations of your state as they are essential in forming bylaws. Let us learn the functions of bylaws.

Why Corporates Need Bylaws?

Bylaws are the corporation's foundation because they provide a structured rule set for making decisions and running a business. They also define the roles and responsibilities of the board of directors, officers and shareholders. Bylaws serve to ensure the proper legal framework and thereby reduce the risk of litigation and the amount of controversy. For companies in India, a legally compliant set of articles of incorporation is a necessary condition for corporate governance and transparency.

Essential Elements Of Bylaws

When drafting corporate bylaws under the Companies Act, 2013, organizations must ensure the inclusion of the following key elements:

1. Name And Registered Office

The bylaws must contain the full legal name of the corporation and the address of the corporation's registered office. This is required to comply with the requirements of the Registrar of Companies.

2. Objectives Of The Organization

The purposes clause in bylaws should set forth the chief purpose for the incorporation of the company. It should be in line with the Memorandum Articles of Association to avoid any legal problems.

3. Membership And Shareholding Structure

The private and public limited companies shall contain provisions for shares in the categories of shareholders, their rights and duties. It should also cover:

• Procedures for issuing, transferring, and forfeiting shares.
• Voting rights attached to different types of shares.
• Rules regarding dividends and profit distribution.

4. Board Of Directors And Their Powers

The governance of a company is entrusted to the Board of Directors, and the bylaws must clearly define:

• The number of directors.
• Their tenure, appointment, removal, and resignation procedures.
• The powers and duties of directors, including financial decision-making authority.

Under Section 149 of the Companies Act, 2013, certain companies must have independent directors, and this requirement should be reflected in the bylaws.

5. Meetings And Voting Procedures

Bylaws should specify the schedule and procedure for:

• Board Meetings – Frequency, quorum, and decision-making process.
• Annual General Meeting (AGM) – Mandatory under Section 96 of the Companies Act, 2013.
• Extraordinary General Meetings (EGM) – Conditions under which they may be called.
• Voting Mechanisms – Whether decisions are made via a simple majority, special resolution, or postal ballot.

6. Financial Year And Audit Requirements

Companies in India must define their financial year as per the Companies Act. The bylaws should include provisions related to:

• Appointment of auditors.
• Preparation and approval of financial statements.
• Tax compliance and statutory filings.

7. Conflict Resolution Mechanism

Disputes within a corporation are inevitable. Therefore, bylaws should include a robust conflict resolution mechanism, including:

• Arbitration and mediation procedures.
• The role of the National Company Law Tribunal (NCLT) in resolving corporate disputes.

Types Of Bylaws

The types of bylaws are as follows:

1. Corporate Bylaws

Corporate bylaws govern private and public companies under the Companies Act, 2013. These bylaws define:

• The composition of the Board of Directors.
• Shareholding structure and voting rights.
• Roles and responsibilities of officers.
• Financial regulations and compliance.

2. Non-Profit Bylaws

Non-profit organizations, including societies and trusts, are governed by the Societies Registration Act, 1860 and the Indian Trusts Act, 1882. Their bylaws cover:

• Membership criteria and roles of trustees.
• Decision-making structures.
• Fund utilization and financial transparency.

3. Cooperative Society Bylaws

Under the Cooperative Societies Act, 1912, cooperative societies must draft bylaws covering:

• Membership and governance structures.
• Profit-sharing and dividend policies.
• Decision-making procedures and dispute resolution mechanisms.

4. Municipal Bylaws

Municipal corporations operate under state-specific Municipal Corporation Acts, regulating:

• Zoning and land use policies.
• Building regulations and urban planning.
• Public safety, sanitation, and waste management.

Process Of Drafting Bylaws

One should follow the following process to draft bylaws:

Begin With The Association’s Mission

Articulate the core mission and objectives of the association clearly. This acts as the fundamental principle guiding the association.

Choose A Name For Your Association

Select a formal and unique name that reflects its mission.

Outline Membership Requirements & Categories

Specify who is eligible to join, any associated fees, the onboarding process, if relevant, describe different membership levels or types and the rights linked to each.

Explain The Governance Framework

Outline the governing body, generally consisting of officers and possibly a board of directors.

Specify Decision-Making Processes

Indicate how decisions will be made, including voting procedures, meeting guidelines, and quorum requirements.

Clarify Officer Roles & Election Procedures

Clearly outline the responsibilities of each official position and the process for their election.

Establish Meeting Frequencies

Specify when and how often the association will meet.

Develop A Procedure For Amending Bylaws

Ensure there is an explicit method for modifying these bylaws in the future.

Set Financial Management Guidelines

Explain how the association will manage finances, from membership dues to expenses.

Outline Dissolution Procedures

In the rare event of the association’s dissolution, it is crucial to understand how assets and liabilities will be managed.

Legal Considerations

In India, the formulation and enforcement of bylaws are governed by several legislations, including but not limited to:

• The Companies Act, 2013 – Governs corporate bylaws for private and public limited companies.
• The Societies Registration Act, 1860 – Governs societies and their operational guidelines.
• The Cooperative Societies Act, 1912 – Governs cooperative societies and their administrative framework.
• The Municipal Corporation Acts (State-specific) – Govern municipal corporations and urban local bodies.
• The SEBI Regulations – Oversee bylaws related to listed companies and stock exchanges.

Real-World Example Of Bylaws

A few real-world examples of Bylaws are as follows:

Housing Societies

Many housing societies in India, especially those that are registered according to Cooperative Societies of their respective states in India rely on Bylaws for day-to-day functions. Such Bylaws often cover several aspects such as membership, management, maintenance, dispute resolution, use of premises, funds & accounts, etc.

Companies

Those companies that are registered under the Companies Act, 2013 also consist of bylaws. Here, such bylaws are commonly referred to as Articles of Association (AoA). The internal management and regulations are defined under AoA. Such aspects include share capital, directors, meetings, dividends, borrowing powers, meetings, etc.

Bylaws vs. Articles Of Incorporation

Articles of association are another type of legal document that can get confused with bylaws. Both documents are playbooks for an association’s operations but have several key differences.

How Do Bylaws Work?

Bylaws of a corporation are formulated during the founding stages by the owners. These principles or laws define several issues such as who will be the corporate officers, the responsibilities of the board members, the election of the board of directors, timings of shareholder meetings, functions of board members, and functioning of the office. As a bare minimum, you should include key identification information in your corporation's bylaws. This information can be the name, address, main office, corporation designation(private or public), and the financial year of the corporation as well. 

Furthermore, bylaws should also include information about stocks and shares that your corporation is permitted to issue. On top of that, you should clearly define the timings of the shareholder meetings, such as when, where, members, annual meeting procedures, notification of meetings, etc. It is crucial to hold at least one annual meeting, considering it an essential aspect of the bylaws. The board of directors is the key pillar of any corporation, so they must be included in the bylaws. You should clearly define the names of board members, their number, powers, terms of service, and their general duties. Defining these helps run the corporation smoothly in the future.

Sample Format Of Bylaws

CORPORATE BYLAWS OF
Name of Corporation: [Corporation Name]

ARTICLE I.  Name and Address

          The name of this corporation shall be ________________________________.  The board of directors may designate other names for specific activities and programs as it deems appropriate.  The principal office shall be located at ____________________.

ARTICLE II.  Purpose

          The corporation's purpose shall be __________.

ARTICLE III.  Membership

          Members of the board of directors shall constitute the membership of the corporation.

 [If the corporation will have statutory members, describe their selection, and authority.  If the corporation will have delegates (participants who are not statutory members), describe their selection and authority here.]

ARTICLE IV.  Board of Directors

          A.  Composition of the Board of Directors.  The number of board members shall be at least _____ and no more than ____.  Directors shall be of adult age.  Directors shall be [Describe appropriate criteria, affiliation, qualifications, etc.]

          B.  Terms.  Each director shall serve for a term of three years, or until a successor is selected.  Initially, one-third of the directors shall serve three year terms; one-third shall serve two year terms and one-third shall serve one year terms.  Terms shall be established so that one-third of the directors may be elected each year.

          C.  Removal.  A director who has missed three or more consecutive meetings may be removed by a majority vote of the board members then sitting.  A director may be removed for any reason by a vote of two-thirds of the members then sitting.

Conclusion

Bylaws can tell you a lot about a corporation, such as its core beliefs, functioning, and a lot more. It helps regulate the members and the activities of a corporation, and they are essential for the continuous growth of any organization. Having clear bylaws can also remove future conflicts within and outside the corporation. So, formulate your bylaws by clearly defining every aspect. It would be best if you always considered the laws of your state before determining your terms in the bylaws, as laws and regulations vary from state to state. 

FAQs

A few FAQs based on what are bylaws are as follows:

Q1. Are corporate bylaws public?

The corporate bylaws are not considered public documents in the same manner as compared to the incorporation documents of the company. A few stakeholders, such as shareholders might have a right to access such documents, however they are not filed with government agencies.

Q2. Are bylaws legally enforceable?

Yes, within a specific context, the bylaws are legally enforceable. The provisions are binding on the members or stakeholders of the companies that draft such bylaws, acting like a contract among them.

Q3. Does a corporation need bylaws?

Although it is not mandatory for corporations to have bylaws, however having such a provision is highly recommended for corporates. They enlist the internal rules and procedures regarding corporate functions covering crucial aspects such as board meetings, shareholder rights, etc.

Q4. What are bylaws for a nonprofit?

Bylaws establish the internal governing rules of NGOs. They outline the mission, board composition & responsibilities, membership structure, financial management, and meeting procedures.

Q5. What is the difference between a bylaw and a law?

Law is the rule enacted by a legislative body at the local, state, or national level. A bylaw is a rule drafted by a company (like a club, corporation, or housing society) to govern its members and internal affairs.