5 Mistakes Businesses Make While Drafting their Bylaws

Small businesses form the backbone of Canadian economy, contributing over 30% to the country’s GDP. However, we are all aware of the survival rates of high potential start-ups and young businesses. Statistics compiled by Small Businesses Canada reflected that in the year 2013, with the start of 13,820 businesses in the country, 12,590 folded.

These statistics lend start-ups a survival rate of about 10%. One of the key reasons for this low success to survival ratio is the lack of sound legal framework. Lack of clear and concrete bylaws during initiation of the company can lead to ceaseless litigations at a later stage. Your company’s bylaws define your organisational structure and its operations. These regulations are of vital importance for all businesses, small and large, alike.

Here’s a closer look at the common bylaws mistakes that businesses make:

1) Not Selecting the Type of Business Entity

One of the key decisions that owners take while starting their company is selecting the type of their business entity. Deciding which classification your business falls under defines the liabilities of your partners, the taxation laws applicable and the overall organisational structure. The 4 main types of enterprises that your organisation can be are:

  • Sole proprietorship
  • Partnership
  • Limited Partnership
  • Limited Liability Partnership

Your company’s bylaws reflect the type of entity your business is and also determine its daily operations. Consulting an experienced business lawyer helps you select the right type for your business and draft sound bylaws accordingly.

2) Lack of Indemnification Provisions

An indemnification provision protects directors and top-order officials of your company against potential liability that they might be exposed to, due to their association with the business. These provisions need to be included in your company bylaws and your articles of incorporation. Lack of this affects your employee retention rate, especially at the top management level and also exposes your business to excess risk of litigation.

3) Lack of Employee Documentation

Most young businesses do not take documentation regarding their employees seriously. Employee management may seem easier with a lesser number of workers but as your business grows it can become a source of unwarranted litigation. Fair and clear employee contracts and rules are an important part of your company bylaws. Your business lawyer can help you in drafting these documents correctly.

4) Lack of Rules for Shareholders’ Meetings

Lack of transparent rules regarding stock issuance and sale can have serious consequences for your organisation. Rules regarding the shareholders’ meetings determine their annual and periodical schedule and the quorum required to vote in them. The absence of flawless bylaws regarding these meetings can affect your company’s position in the market and tarnish your reputation.

5) Lack of Provisions for Amendment

Laws are meant to be amended. However well drafted and planned your company’s bylaws are, they will need amendments and additions over time. But, amending these articles can be a problematic, expensive and time-consuming process, if your bylaws are not written correctly. Drafting flexible bylaws with room for amendment ensures lack of legal troubles in the future.

These are some of the most common bylaws mistakes that companies make. Consulting a practised business lawyer for writing them ensures their validity and helps you avoid litigation in the future.