An S Corporation differs from a regular corporation in only one way: taxation. In all other respects, an S Corporation is simply a corporation that is governed by the laws of the state of incorporation. An S Corporation is required by state law to adopt bylaws that govern the corporation’s internal management and the rights of the shareholders. (In contrast, an LLC does not have the state-mandated requirement of bylaws; instead, the members of an LLC can (and should) adopt an operating agreement to govern their company.)
Although bylaws are required by the state, there is considerable latitude regarding the provisions included. In general, bylaws may contain any provision that is not inconsistent with state’s laws or the corporation’s Articles of Incorporation. The provisions that are usually included spell out the rules for:
- shareholders’ meetings (including date, place, and notice requirements)
- directors’ meetings (including date, place, and notice requirements)
- voting rights of shares and fractional shares
- proxy voting
- quorum requirements and procedures for waiver of quorums
- powers, duties and qualification of directors and officers
- removing directors; filling vacancies on board of directors
- appointing director’s committees
- restrictions on transfers of shares—particularly transfers that could cost the corporation its S Corporation status
- amending the bylaws
Bylaw provisions often follow the language of the statutory provisions. Doing this helps protect the wishes of the shareholders if the default provisions are changed. In addition, the bylaws permit the shareholders to adopt provisions that are not covered by statute or to vary the default provisions to better reflect the owners’ wishes.
The initial bylaws are adopted at the organizational meeting held after the Articles of Incorporation are issued by the state. Once adopted, they continue in effect until they are amended. Most state laws provide that bylaws are amended by shareholder vote, but the bylaws themselves can provide otherwise.