While California doesn’t require companies to have regulations, here are six reasons why every business owner should invest in a strategically thought out set of rules for their company:
1. Bylaws are the Legal Backbone of the Company.
A company’s by-laws provide a framework for how the company operates, including the rules for owner relationships.
2. What If Your Company Has No Bylaws?
If your company has no regulations, California law will control how the company is run. It is much better for the owner to determine how the company wants to operate than to rely on state laws.
It is similar to an individual who has no will or belief. If they die, state laws determine how the individual assets are distributed. Instead, individuals must think carefully about how they want their assets to be distributed and to set up legal mechanisms to enforce their plans.
Similarly, it is much better for business owners to strategically think about how they want their companies to operate rather than relying on state laws, which may not always be the best fit for the company.
3. Bylaws Provide Owners With A Piece Of Mind.
Every company ultimately faces challenges. It is better to consider several potential turning points in your company and provide in the by-laws how you would like the outcome of this situation to be determined than to wait to make this difficult decision when interested parties and passion can create the perfect storm. for litigation.
For example, what will happen if there is a legal dispute between the owners? Do you want the company to be tied down in litigation costs and distractions or do you prefer arbitration? What happens if one of the owners dies? What if one of the owners wants to leave the company?
By-laws provide an opportunity to calmly and objectively reflect on these issues before they occur. It’s wiser to answer these types of questions ahead of time and determine what might be the best solution for your company than relying on default rules in state law or trying to solve them when clear thinking tends not to apply.
4. Bylaws Help Protect Your Company’s Limited Liability Coverage.
One of the main reasons for forming a corporate entity is the possibility of having limited personal liability from potential business debt and valuation of your company.
If a company has no bylaws and is sued, plaintiffs can try to “break through the corporate veil” by claiming that the company should not be granted a limited liability protection shield because the owners are not following the company formalities.
In determining whether to break through the corporate veil, the court will evaluate a number of factors to determine whether your company is legitimate, including whether you have the proper company documents and records. By not having regulations, business owners risk not being granted limited liability protection if sued.
5. Bylaws Help Prevent Misunderstandings Between Owners.
Clear communication and expectations are key to any successful relationship, including those between business owners. By-laws clearly govern how the company will be run, which can be very important in preventing misunderstandings about how the owner expects the company to be managed.
6. You May Need Bylaws To Set Up Bank Accounts and To Get Loans And Insurance.
Finally, if you want to open a business account or apply for a loan, most banks will ask you to provide a copy of your household budget. In addition, insurance companies may ask you to provide a copy of your company’s by-laws before granting certain types of policies.
As a business owner, it is often tempting to cut corners to lower costs. A series of strategically thought out local regulations should not be one of these shortcuts. Instead, regulations must be recognized for what they are – one of the wisest investments a business owner can make to ensure the long-term effectiveness of their company.
Disclaimer: This post addresses general legal issues, but does not constitute legal advice in any way. Readers should not act or refrain from acting on any information presented here without seeking the advice of legal counsel in the relevant jurisdiction. Doug Bend expressly disclaims all liability with respect to any action taken or not taken based on any content of this post.
