Included with this document is advice on the law in each state on various matters. This information is extracted from statutes and case law in each state, and is general only. Contact the state corporation office or an attorney to confirm the information is correct.
One important matter usually addressed in the corporation's bylaws is indemnification of the corporation's directors, officers, employees and agents. Here, the corporation agrees to indemnify (pay the expenses of) officers, directors, employees and agents who are sued in the course of performing corporate duties.
An indemnification clause is vital for the protection of corporate officers. A shareholder who believes a director, officer or employee has not managed the corporation's affairs in the best interest of shareholders or has otherwise not exercised appropriate "business judgment" may file a "shareholder's derivative" lawsuit. These lawsuits are extremely uncommon in small, closely held corporations. However, as the corporation grows and shareholder investors are added, the risk of these lawsuits increases.
Whether a "shareholder's derivative" suit is justified or not, defending against it in court can be very expensive. A growing company may find it difficult to hire new officers (or persuade people to serve on the board of directors) unless these individuals can be assured that the corporation will indemnify them from claims arising out of their corporate activities. Without an indemnification provision, the director or officer might have to pay their own court costs in a "shareholder's derivative" lawsuit.
Many corporations buy insurance to protect against potential liability to indemnify officers and directors. This kind of insurance is commonly referred to as Errors and Omission ("E & O") or Director and Officer ("D & O") insurance. While the new corporation is not likely to need insurance immediately, particularly where there are only a small number of related stockholders, it is common for the corporation's bylaws to nonetheless include the appropriate indemnification provisions.
As with all matters in the law, statutes regulating corporations vary from state to state. Delaware style corporation law is popular in a number of states, but other states have adopted different statutes.
The bylaws of a corporation are vitally important to the operation of the corporation. Before the corporation adopts a set of bylaws, you should make sure an attorney familiar with the law of the state where the corporation was formed is comfortable that the bylaws are appropriate.
Remember to have the bylaws reviewed by an attorney after you have completed them.
Who May Adopt Initial Bylaws
Alabama - Shareholders
Alaska - Directors (more below)
Arizona - Incorporators or directors
Arkansas - Incorporators or directors
California - Incorporators, directors or shareholders
Colorado - Incorporators, directors or shareholders
Connecticut - Shareholders (more below)
Delaware - Incorporators or directors (more below)
District of Columbia - Incorporators or directors (more below)
Florida - Incorporators or directors
Georgia - Incorporators or directors
Hawaii - Directors
Idaho - Directors
Illinois - Incorporators or directors (more below)
Indiana - Incorporators or directors
Iowa - Incorporators or directors
Kansas - Incorporators or directors (more below)
Kentucky - Incorporators or directors
Louisiana - Incorporators or directors (more below)
Maine - Directors (more below)
Maryland - Directors
Massachusetts - Directors (more below)
Michigan - Incorporators, directors or shareholders
Minnesota - Incorporators or directors (more below)
Mississippi - Incorporators or directors
Missouri - Directors
Montana - Incorporators or directors
Nebraska - Shareholders
Nevada - Shareholders (more below)
New Hampshire - Incorporators or directors
New Jersey - Directors
New Mexico - Directors
New York - Incorporators or directors
North Carolina - Incorporators or directors
North Dakota - Incorporators or directors (more below)
Ohio - Shareholders (more below)
Oklahoma - Incorporators or directors (more below)
Oregon - Incorporators or directors
Pennsylvania - Directors (more below)
Puerto Rico - Incorporators or directors
Rhode Island - Incorporators or directors
South Carolina - Incorporators or directors
South Dakota - Directors
Tennessee - Incorporators or directors
Texas - Directors
Utah - Directors
Vermont - Incorporators or directors
Virginia - Incorporators or directors
Washington - Incorporators or directors
West Virginia - Directors
Wisconsin - Incorporators, directors or shareholders
Wyoming - Incorporators or directors
In the District of Columbia, Illinois, Louisiana, Minnesota and North Dakota, the power to adopt the initial bylaws is vested in the board of directors, unless the power is reserved for the shareholders in the Articles of Incorporation.
Maine, Massachusetts, and Pennsylvania grant the authority to adopt initial bylaws to the shareholders, but permit the Articles of Incorporation to vest the authority in the board of directors.
Delaware, Oklahoma and Kansas allow the directors or incorporators to adopt the initial bylaws, but only as long as no stock has been purchased. After the first stock purchase, the authority to adopt the bylaws is granted to the shareholders, unless the articles expressly vest the authority in the board of directors. These states also provide that even if the power has been conferred upon the directors, the stockholders also retain the power to adopt, amend or repeal the bylaws.
Alaska provides bylaws may be adopted, amended or repealed by approval of shareholders or the board, subject to restrictions or limitations in the Articles of Incorporation.
Connecticut requires the initial bylaws to be adopted at the organizational meeting provided that if there are no shareholders entitled to vote at the time of that meeting, the incorporators adopt the bylaws.
New York and Puerto Rico expressly provide that the initial bylaws are to be adopted by the incorporators at the organizational meeting.
In Ohio, the bylaws type documents are called "regulations" and are adopted by the shareholders.
In Nevada, directors may make bylaws only if none have been adopted by the stockholders.