1.) Bylaws outline how the corporation is to operate or run its business, including procedural guidelines for corporate governance (e.g., shareholder meetings, board of directors meetings, etc.). There are two overarching principles for bylaws. First, like any legal document, they should be clear and precise to avoid interpretation challenges down the road. Second, they should be consistent with all applicable state laws. Any provision in the bylaws that runs counter to a state law will be deemed unenforceable. And, any action made pursuant to an unenforceable provision will be deemed invalid. Having unenforceable provisions and invalid actions is not good business practice for obvious reasons! So it’s essential to follow your state laws. Each state has a corporation statute that requires all corporations to adopt bylaws and specifies what must be included. State corporation statutes often set specific parameters, such as when and how shareholders must be informed about annual meetings, items that must be voted on at annual meetings, how voting must take place and restrictions on who can decide what, etc. These details can vary from state to state. If you decide to draft your own bylaws, be sure to check your state’s corporation statute or consult with an attorney who is familiar with your state’s statute to ensure that your bylaws are fully in compliance with state law. That way, if you follow your bylaws you can rest assured that you are following the law. These bylaws for Mother Earth Farm, Inc. provide a sample of how bylaws look and illustrate the type of issues that are addressed. These bylaws are for an Illinois business. If you use this example as a starting point, be sure to make necessary changes to reflect your state.
2.) Shareholder meetings don’t necessarily have to be held inside the state where the corporation is based, nor do they have to take place at the farm or central place of business. While you could set a firm place for all meetings in your bylaws, it’s often preferred to allow some flexibility in case circumstances change. The important thing is that the shareholders get an invitation to the meeting in advance, or receive “notice” as specified in the bylaws, including precisely when and where the meeting will be held. Here, Section 5 sets the notice or meeting invitation requirements.

3.) Every state requires corporations to hold annual meetings. This is the opportunity for all the shareholders to get together and vote on important items, review the annual report and generally discuss the business affairs or any pressing issues. State corporation statutes often require that specific items are voted on during annual meetings, such as electing the next year’s board of directors. Annual meetings are required by law, so be sure you actually hold them. And, hold it when your bylaws say you will. You don’t necessarily need to specify an exact day or time in your bylaws. Setting a month is fine as long as you properly send out the invitation to your shareholders as specified in your bylaws, here Section 5. When holding annual meetings, be sure to take minutes of what happened, including any decisions or resolutions that were made. See the sample meeting minutes that follow for a guide.

4.) Special meetings are typically called when urgent matters arise and a major decision needs to be made. This could include a decision to significantly expand, or conversely to sell, the farm operation. It could also involve a significant shift in ownership or a decision to amend the bylaws. The same “notice” requirements must be met to properly inform shareholders of the precise time and place of any special meeting as well as the purpose of calling the urgent meeting.

5.) Giving “notice” is the legal speak for sending out an invitation. Basically, the notice or invitation to a meeting must let the shareholders or the board of directors know important details including when, where and the purpose of the meeting. Properly sending out the invitation to a meeting is essential. For example, if a shareholder doesn’t receive the invitation as specified in the bylaws, they can contest what was discussed and all of the actions taken at the meeting can be deemed invalid. This would be a huge waste of time as it would have to be done all over again. The notice must be in writing. This provides a record of it. It’s also a good idea to set a time range for sending out the invitation in your bylaws to allow some flexibility. Here, notice must be given between 10 and 50 days of the meeting, so the invitation can’t be sent before or after this timeframe. The written notice can be mailed, handed out personally or electronically mailed if all individuals agree. Note that including the purpose in the notice or invitation is very important. Some state statutes say that if the purpose is not included in the invitation, the matter can’t be voted or acted on.

7.) A quorum is the amount of represented shares that must be present for the meeting to happen. Note that a quorum is not based on a majority of the number of shareholders, but a majority of the shares of the company. Not all shareholders will necessarily hold the same amount of shares. Many state statutes specify a minimum for a quorum, such as a majority of the shares in the company. If this is the case, your bylaws can set the quorum higher (i.e., two-thirds of the shares) but not lower (i.e., one-third of the shares). Without a quorum, any decision made at the meeting is considered invalid as it could reflect the interest of just a small percentage of ownership interest in the company. Say only 10 percent of the company’s shares are represented at a meeting. Allowing this 10 percent to take actions on behalf of the company wouldn’t be in the best interest of the company.

8.) Most state statutes require a one share, one vote voting rule, so this restates the law. However, some states allow shareholders to receive fractional shares (e.g., 2.5 shares), which can then be matched with fractional voting power (2.5 votes). Small businesses do not usually deal in fractional shares, so the one share, one vote rule will work well for most farm operations.

9.) A proxy is a written authorization signed by a shareholder (or a shareholder’s power of attorney) giving someone else the power to represent and vote on behalf of the shareholder’s shares. It basically allows someone to stand in for a shareholder at the meeting. The shareholder can specify parameters for how the other person, or proxy holder, should vote. Or, they could simply trust and allow the proxy holder to vote based on his or her own conscience. The proxy counts towards a quorum and represents the shareholder’s votes.

10.) This basically says that a majority of the shares present at the meeting will have the final say on any matter that’s taken to vote. This can be a bit tricky. Again, the quorum requires that at least a majority of the shares are present at the meeting.

11.) This provision isn’t really necessary, but it can be helpful to have a sort of working agenda of items that must be handled at every meeting, and in what order. It can help ensure all important matters are covered in an efficient manner.

12.) Most states’ statutes require the corporation to maintain an alphabetical list of shareholders and to have it readily available for inspection at shareholder meetings. This provides a level of accountability and transparency, which can help ensure that none of the shareholders are wrongly left out or being subverted.

13.) Adjournment means to suspend the meeting to another time or place. If the quorum is not met, there’s really no point of meeting, as no official action can be taken. This adjournment provision allows the shareholders present to postpone the meeting to a time they agree will be more suitable for all. If this happens, they must send out an invitation to the shareholders who aren’t present in accordance with the notice requirements in Section 5. When there is a quorum, the people who are present at the meeting can decide to adjourn the meeting and agree upon a date and time to meet again without notifying the people who are not present. This provision also allows the shareholders to end a meeting even if matters are not completed so long as they agree to a time and day to return. This is helpful if the meeting runs late, which often happens!

14.) Most states no longer require corporations to issue certificates of stock. However, it is a custom that many corporations still observe. Many shareholders have come to expect paper stock certificates. Issuing them also provides another layer of proof of who has stock or equity ownership in the company. If your state requires certificates of stock, be sure to look up the section on share issuance in your state’s corporation statute and follow the exact requirements.

15.) If the corporation issues stock certificates, this provision should be included to specify what happens when the stock is transferred to another person. Basically, the transferring shareholder needs to fill out the endorsement section (usually found on the back of the certificate of stock) and then give the certificate to the secretary of the corporation. It is the secretary’s job to record the transfer in the corporation’s stock transfer books and issue a new certificate to the new shareholder. Most farm operations will have a closely held corporation, which means that the shareholders can’t just transfer the shares to a stranger. The shareholders of a closely held corporation typically enter a separate shareholder agreement that specifies some additional restrictions on how shares may be transferred. In addition, if the corporation elects the S corporation tax status, the transfer of shares is restricted in certain circumstances. If either is the case for your farm operation, be sure to follow the shareholder agreement and the S corporation restrictions. See Article 7 in these bylaws for an example of the type of provisions that should be included if you elect S corporation tax status.

16.) This section discusses how lost, destroyed or stolen certificates of stock can be replaced. Following these procedures helps assure that there will be no double selling of the stock if the lost or stolen stock finds its way into the hands of an innocent purchaser who purchases the stock without any knowledge of its lost or stolen status. Basically, the original shareholder must give the corporation notice before the innocent purchaser records their stock with the secretary, otherwise the shareholder may have to cover any damages incurred to the corporation if stock ownership is contested. This is very unlikely to become an issue in a closely held corporation with only a few shareholders such as Mother Earth Farm, but it is important to include in case something happens to the certificates of stock.

17.) Most state statutes require a corporation to have a board of directors. The board makes major management decisions for the company. The shareholders elect the members of the board to play this role. The shareholders can always remove directors if they’re not happy with how decisions are being made.

18.) Some states require a minimum of three board members while others require just one. Additionally, most states require that directors have a one-year term and require elections at the annual shareholder meeting. The same directors may be reelected each year, but the election formality needs to take place. Be sure to check your state statute to see what is specifically required here.

19.) Allowing the remaining directors to fill a vacancy is consistent with the law in most states; however, some states require director vacancies to be filled by a shareholder vote. Again, be sure to check your state statute.

20.) Most state statutes also require the board of directors to have an annual meeting. This provision sets the parameters for notice and a quorum, which is similar to the requirements for shareholder meetings. Note that the quorum for directors is a majority of the number of directors and has nothing to do with the share or stock percentage. This section also allows the board to meet as many times as necessary to deal with corporation issues.

21.) Again, the board plays the role of making major management decisions for the company. If the shareholders aren’t happy, they can go through the process of removing directors.

22.) Most state statutes specify that a director cannot be removed unless there’s a cause, such as illegal activity, unless the bylaws specify otherwise. So if you want to give shareholders the right to remove directors without cause, you need to include this in your bylaws. This gives the shareholders the
absolute ability to act if they feel the company is not being run well. After all, the shareholders are the ones who have a financial stake in the company.

23.) This section includes the generally accepted practice of not paying salaries to directors, but instead paying them for their services (such as the costs for traveling to and attending a meeting). Since mom and daughter will likely be compensated through their roles as officers, and meetings will be held on the farm, they may decide by resolution that directors will not be compensated for their services.
24.) Including compensation and benefits for directors is optional. If you include it, it needs to be customized to the benefits that are being offered to the board.

25.) Committees are a way for the board to delegate decision-making to smaller groups rather than requiring all members of the board to vote on a matter. This is particularly useful for larger boards that want to divvy up the tasks based on interest or expertise (such as a committee for finances or personnel). State statutes specify that some issues may not be delegated to a committee, such as amendments to the bylaws. For a small corporation like Mother Earth Farm, it is unlikely any committees will be set up. However, including this clause sets up the infrastructure in case more directors come on or if there’s a particular issue that the board decides only one board member needs to be present to make decisions on.

26.) A dividend is when the company hands out or distributes the company’s earnings to shareholders. Dividends are not required and can only be made if the company turns a profit. It’s often preferred to keep the money in the farm operation to spur growth. In these bylaws, it’s up to the directors to decide whether, when and how much of the earnings should be given to the shareholders in the form of dividends. All state corporation statutes require that dividends be distributed based on shares of stock in the corporation.

27.) Most state statutes require corporations to have at least a president and a secretary. This section creates positions for a president, vice president, treasurer and secretary. It is good business practice to divvy up the roles. If your corporation prefers to call the president the chief executive officer (CEO), you can replace the term in the section. The same goes with chief financial officer (CFO) in place of treasurer. This section also gives the board of directors the flexibility to create other officer positions should the need arise.

28.) This clause describes the president’s duties, which include presiding over all meetings of both shareholders and directors, as well as running the day-to-day business of the corporation. There is no state-required definition of what a president does, and wording the clause generally gives the corporation flexibility with regards to what the president can and can’t do. As it’s laid out here, Mom (the corporation’s president) has flexibility to do what needs to be done for the company to succeed day to day. This makes sense for a small farm operation like Mother Earth Farm. It’s important to craft the roles and responsibilities of the officers in a way that’s most suitable for your farm
operation.

29.) This clause also is designed to allow the vice president’s role to be as flexible as possible.

30.) Generally, the treasurer, or chief financial officer if you prefer, is in charge of all the money flowing in and out of the corporate accounts. This provision provides a level of accountability by requiring that whatever the treasurer receives must be put into the proper corporate account. In addition, the treasurer must keep accurate books and records of all the corporate accounts.

31.) The secretary is generally in charge of making sure that the notice or invitation to meetings is proper, that the meetings are held in accordance with the bylaws and state law, and that minutes are taken and kept in the corporate binder along with the articles, bylaws and any amendments. Here, the secretary is also in charge of keeping non-financial books, including the stock register. This register must include information like the names of all the shareholders, their addresses, the number of shares held, the date of certificates issued for the shares, any transfers of stock certificates and any cancellation of stock certificates (i.e., by a shareholder who transfers their stock to another). The secretary’s job can be very detail oriented, including being sure that deadlines for sending meeting invitations are not missed. Some of the secretary’s responsibilities can be delegated to other directors or employees by resolution of the board of directors.

32.) Both directors and officers may receive compensation for their service in the role. Here, the board of directors has the authority to determine whether and how much compensation to pay the officers and directors. Note that all states require directors and officers to abide by a “fiduciary duty.” This is a legal term that says that the director or officer must act solely in another party’s interest, which here is the corporation’s interest. A director has a “conflict of interest” if they can vote on their own salary. They may personally have an interest in a huge bonus, but that would not be in the interest of the corporation. It’s good practice to have a clear conflict of interest policy that all directors and officers abide by. Adding a voting restriction in the compensation provision of the bylaws serves as a reminder of the director’s fiduciary duty to act first and foremost in the interest of the corporation.

33.) It’s up to you to decide how long you want officers to serve in their role. Here, it’s one year.

34.) The bylaws should specify who has the authority to appoint and dismiss officers and how this process takes place. Here, the authority is in the hands of the board of directors. Of note, even though dismissal can be “without cause,” the board of directors must still be careful to abide by state and federal employment law. For example, dismissal of an officer cannot be based on discriminatory reasons.

35.) An indemnification provision is simply a promise by the other party to cover your losses if he or she does something that causes you harm or causes a third party to sue you. Indemnification provisions can vary quite a bit. Here, this indemnification clause means that if someone sues a director, officer or employee of the company for something they did on behalf of the corporation, the corporation has to pay to defend that lawsuit. The caveat is that if the action is attributed to the negligence or intentional bad acts of the director, officer or employee, the corporation does not have to pay to defend the lawsuit. In general, if the individual was acting in good faith and with the corporation’s best interests in mind, the corporation will need to indemnify or pay them for any legal costs incurred. A corporation should consider carrying insurance for this–without insurance, the business probably can’t afford to follow through on this provision. Farm liability insurance may or may not provide this coverage. A commercial policy might be necessary.

36.) It’s important to include explicit provisions for how the bylaws can be amended. Many state statutes speak to these as well, so be sure to check any specific requirements in your state’s statute. In these bylaws, either the shareholders or the directors can amend the bylaws by a majority vote at a meeting (i.e., one share, one vote for shareholders and one person, one vote for directors). You could require a different voting threshold such as a supermajority (three-quarter approval) or unanimous consent to amend the bylaws or any other “big” decision that needs to be made, such as selling the company or closing the business. It’s up to you. Just be sure to check your state’s statute to ensure whatever you decide is in line with the laws of your state.