When you’ve identified a business idea, written a business plan, and obtained capital, the next step is registering the business. Articles of incorporation are the documents you’ll file with the relevant state authority to register and legally form a corporation. After formation, the board of directors will create a set of rules to oversee the corporation’s internal structure and management, known as corporate bylaws.
Entrepreneurs starting a new business venture must understand the fundamentals of articles of incorporation and bylaws to help build a solid foundation for their company.
This article explores the differences between bylaws vs. articles of incorporation, their legal roles within the corporate structure, and the common mistakes to avoid when creating each document.
Differences Between Articles of Incorporation and Bylaws
Articles of incorporation are documents filed with the state to register a corporation in that jurisdiction. They tell the government basic facts about a business, including the name, business address, registered agent’s address, and tax information. The articles of incorporation also establish the business as a legal entity distinct from its owners, in a process known as incorporation.
Your state may use other names like corporate charter, certificate of incorporation, or articles of association when referring to articles of incorporation.
Corporate bylaws are like house rules that govern the business formed through the articles of incorporation. The board of governors develops these rules to determine how the company will be managed and operated internally. This includes guidelines on processes like voting, meetings, removal of members, and dissolution. While corporate bylaws are optional in some states, companies with them will likely have streamlined business operations and less internal conflict.
The major differences between corporate bylaws vs. articles of incorporation are:
| Category | Articles of Incorporation | Bylaws |
|---|---|---|
| Purpose | Establishes the formation of a corporation | Outlines a corporation’s internal management and operation rules |
| Filing requirements | Corporations must file the documents with a state agency | Corporations don’t have to file bylaws unless explicitly stated by law |
| Main content | Contain basic information about a corporation including the name, purpose, and address | Contains rules that govern internal procedures like decision-making, shareholder powers, and voting rights |
| Legal state | Mandatory in all states for the establishment of a corporation | Optional in some states but all corporations should have bylaws in lace for smooth internal operations |
| Amendment process | Amendments must be filed with a relevant state agency | Amendments are done internally when all members agree on the changes |
| Creation timing | Created during the formation of a corporation to institute its legal existence | Created after incorporation or approval of the articles of incorporation |
| Focus | The focus is forming a corporation | The focus is creating governing rules and material |
| Key users | Used by incorporators to file to the secretary of state | Used by board members, shareholders, and other relevant internal parties |
| Authority levels | Holds more legal weight because a state agency has to approve the documents | Holds less legal weight but has authority within the corporation’s internal operations |
| Common names | Also known as corporate charter, articles of association, or certificate of incorporation | Also known as corporate bylaws |
Filing Requirements
Articles of incorporation must be filed with a state agency, often the secretary of state. They must contain details of the company being formed, such as the name, business address, purpose of the business, and the names of directors. Bylaws are internal documents and don’t require filing with any legal authority. The details to include often depend on the company, but bylaws generally include matters like shareholder rights, voting powers, how meetings will be conducted, contract approvals, and so on.
Legal Importance
Creating articles of incorporation is a legal requirement to form a corporation and ensure compliance with state regulations. Corporate bylaws govern the internal operations and management of a corporation and can be used in conflict resolution.
Amendment Process
Making changes to the articles of incorporation requires filing with the state to officiate the updated document, whereas amending bylaws can be done internally by the board of directors.
Creation Timing
Businesses create the articles of incorporation during the formation of a corporation to enact its existence. A board of directors creates corporate bylaws after incorporation to oversee internal operations and management.
Public vs. Internal Document
After approval by the state, articles of incorporation become a public-facing document accessible to anyone through the secretary of state’s office. Bylaws oversee internal governance, and therefore, the document is only accessible to internal parties, including board members, shareholders, and investors.
Authority Level
Articles of incorporation carry more authority because they set the foundation for the formation of a corporation. Without this, there’s no legitimate corporation. Bylaws are equally essential but hold less legal weight because they operate within the framework established by articles of incorporation.
Why Both Articles of Incorporation and Bylaws Are Essential
The articles of incorporation and corporate bylaws complement each other in ensuring legal compliance and smooth governance of internal operations. Both of these functions are essential to running a successful and legitimate business.
While articles of incorporation establish a business’s legal existence, bylaws provide additional details and procedures for running it. One is a legal requirement for forming a corporation, while the other governs how board members run the company.
How Articles of Incorporation and Bylaws Impact Corporate Structure
Bylaws and articles of incorporation influence things like decision-making, business structure, taxation, and shareholder rights within a company.
The articles of incorporation establish and recognize a corporation as a distinct legal entity. This protects you as a shareholder or board member from company liability and allows the business to raise capital through stocks. Incorporation may also come with tax advantages for the company, such as deductions on health insurance premiums and annual report fees.
Once signed by the required shareholders, bylaws are legally binding. Board members refer to them as a guide for business operations and when resolving conflicts, including court cases. Corporate bylaws impact business structure by preventing internal disputes and acting as a roadmap during key processes.
Example
If Company A is interested in doing business with Company B, they may verify key details by accessing Company B’s articles of incorporation. If the two companies come to an agreement, company B’s bylaws will determine things like meetings, profit sharing, and which board members can sign a contract.
Common Mistakes When Handling Articles of Incorporation and Bylaws
Articles of incorporation are official documents that must be filed with a legal authority. The secretary of state will not approve the application if you make a mistake when filling out the forms or filing. While bylaws are not filed with any authority for approval, a mistake may expose the corporation and its shareholders to conflict that could be avoided.
Some common mistakes to watch out for when handling bylaws and articles of incorporation include:
- Using vague language: The articles of incorporation and bylaws must use clear and concise language to avoid any confusion that can cause conflict.
- Filing amendments improperly: Making amendments to the articles of incorporation requires filing with the relevant state agency and waiting for approval. The rules for making changes differ across states, and failure to follow stipulated guidelines can cause legal complexities later on.
- Including too much information: While it’s ideal to provide comprehensive details that leave no room for confusion, too much information can confine the corporation and its shareholders. For instance, when filling out the purpose of a business in the articles of incorporation, it’s best to provide just a short general description that doesn’t limit business operations.
- Leaving out important information: The secretary of state may reject articles of incorporation filed without important details, such as the full list of board of directors or company stock details. Bylaws that aren’t comprehensive enough may fail to cover certain operations, exposing the company to internal conflict.
- Ignoring the need for updated documents: Board members and shareholders must amend provisions in the two documents when necessary, and this should be reflected in the official copies by updating them as soon as possible.
- Repeating provisions across the two documents: Ensure each document covers separate and specific business issues to avoid repeating provisions. In case of amendments, repetition may force you to amend all the documents, instead of one.
How to Keep Your Corporate Documents Up to Date
As your business grows, keeping your corporate documents current is essential. Changes such as a new company name, expansion of business purpose, or a new address require updates to your articles of incorporation.
Bylaws should also be updated as internal processes evolve, including voting, elections, and management strategies. When any changes happen, ensure they are reflected in the articles and bylaws.
Don’t forget to file updates with the state to stay compliant. Regularly review your bylaws and distribute updated copies to all shareholders and board members. Ensure these documents are accessible at your corporation’s main office.
Frequently Asked Questions
Can You Make Changes to Articles of Incorporation and Bylaws?
Yes, you can make changes to the articles of incorporation or corporate bylaws whenever the need arises. However, amending the articles of incorporation may be a lengthier process because it requires filing the amendments with the secretary of state. To modify bylaws, shareholders or board members discuss, agree, and sign the changes into new guidelines internally.
Do Bylaws and Articles of Incorporation Apply to Non-Profits?
Non-profits must also create bylaws and file their articles of incorporation. Articles of incorporation recognize the organization as tax-exempt, outline its mission, and list the persons responsible for managing the non-profit.
Bylaws outline how shareholders and directors will run the non-profit and are a requirement when applying for the 501(c)(3) tax-exempt status with the IRS. During the 501(c)(3) application, the IRS will confirm that the company’s earnings are not distributed to shareholders and that the organization doesn’t plan to participate in any legislation or political activities.
Do I Need Both Articles of Incorporation and Bylaws for My Corporation?
Articles of incorporation are a mandatory requirement when establishing a corporation in all states. While bylaws are not compulsory in every state, having them in place ensures the smooth operation of key internal processes by offering guidelines and a roadmap, as well as avoiding conflict.
Which Document Has More Authority: Articles of Incorporation or Bylaws?
Articles of incorporation may offer more authority to a corporation because they set the foundation for its existence and must be filed with the state. However, bylaws also offer internal authority because they are manuals for internal processes, such as policy-making, voting, and management.
What Happens if My Corporation Doesn’t Have Bylaws?
Unlike the articles of incorporation, corporations can legally operate without bylaws, especially in states where they’re not mandatory. However, doing so exposes a corporation to numerous conflicts among shareholders and board members because there lacks an internal operating manual to govern key processes. In case of internal conflicts, corporations without bylaws must follow the conflict resolution guidelines provided by the state, which may be limiting.
Who Is Responsible for Creating and Maintaining Bylaws?
The board of directors creates and maintains a corporation’s bylaws. Members agree and sign these guidelines into legally binding rules. Each member keeps a copy of the bylaws and in case of amendments, the board updates the document accordingly.
Can I Operate a Corporation Without Articles of Incorporation?
No, you cannot operate a corporation in any state without articles of incorporation. These documents aim to apply and gain a corporation’s legitimacy from the relevant state agency. Opening and running a corporation without articles of incorporation is illegal.
