Corporations enjoy status as separate legal and taxable entities, often being referred to as “persons” in legal briefs. Corporations provide a number of benefits to shareholders, most notably acting as a shield against personal liability and providing tax deductions and credits. Federal law governs corporations, but corporations are created at the state level. A corporation requires a high level of initial and ongoing documentation to properly operate and maintain the structure. These include articles of incorporation, shareholder agreements, corporate bylaws, resolutions and meeting minutes.
Function of Corporate Bylaws
Corporate bylaws outline the rules and regulations that provide the operational and management structure for the corporation. Bylaws specify in detail conditions that require board or shareholder meetings and votes and rules governing elections and committees. Bylaws also specify the rights and duties of shareholders and directors or members, actions that could lead to a corporation’s dissolution, and procedures for dispute settlement. Corporate bylaws are essentially a contract between shareholders and/or officers. All states require that corporations formally adopt bylaws and amend them as applicable.
Corporations are created by filing articles of incorporation with the secretary of state. In Texas an owner or his agent creates a corporation by filing a certificate of formation, which incorporates the articles of incorporation. This filing is mandatory. Without it, a corporation does not enter into existence. Other obligatory filings involve corrections or amendments made to previous filings, including change of registered agent or amending of articles and annual registrations. No state requires the submission or filing of corporation bylaws with the secretary of state.
Since one of the primary benefits of a corporation is the liability shield it provides, shareholders and officers must take all the necessary steps to ensure the maintenance of this shield. If they do not, then an attorney or creditor may be able to “pierce the corporate veil”; that is, if the party can demonstrate that the corporation did not maintain proper records and did not operate the corporation as the law requires, a judge will set aside the corporate shield and allow the pursuit of the personal assets of the shareholders.
Corporate Veil Maintenance
Therefore, it is crucial that owners draw up corporate bylaws and abide by them. Shareholders must document any actions taken that are subject to the bylaws. The easiest way to do the latter is to record it in the meeting minutes. Owners must also formally approve and amend any changes made to the bylaws. None of the related documentation needs to be filed with the secretary of state. Simply keep the information and documentation in a safe, fireproof, readily accessible location.
- Texas Secretary of State: Selecting a Business Structure [http://www.sos.state.tx.us/corp/businessstructure.shtml]
- Free Advice: What Are Corporate By-Laws? [http://business-law.freeadvice.com/business-law/corporations/corporate_by_law.htm]