What Is A Corporate Bylaw And Why Do Corporations Need Them?

What is a Bylaw?

As far as the word “bylaw” goes, most people tend to think of them as the rules that a city or town creates and adheres to. In some capacity one wouldn’t be wrong in thinking this, because technically a municipality is a corporation. Corporate bylaws are simply the rules of the corporation. Corporate bylaws are established by the people who own and manage it during the start of the corporation process.

How Do Corporate Bylaws Work?

To think about how corporate bylaws work, it may be useful to approach it from the analogy of a municipality. A city’s bylaws govern how the city and its residents interact with each other, themselves and outside actors. Corporate bylaws operate in a similar way. Corporate bylaws are the rules established to run the inner workings of the corporation, including the relationships between the Corporation, its shareholders, directors, officers and many others.

Just like the City of Edmonton can make its residents register and license their pets, a corporation can also make rules determine how its shareholders, directors and officers (or residents, if we are sticking with the analogy) interact with each other and the world about them.

Essentially, corporate bylaws are there to guide corporations by giving them the internal structure necessary for decision-making. Corporate bylaws outline the rights, powers and responsibilities of the shareholders, directors and officers, and when they can choose to exercise those powers, and when they can choose not to.

Why are bylaws necessary?

There is no legal requirement for a corporation to pass its own bylaws, and many of the items that a corporation’s bylaws address are already covered under the Alberta Business Corporations Act. A corporation can still validly exist without bylaws, although it is not recommended. In the absence of corporate bylaws, the provisions of the BCA may kick in and provide for some undesirable outcomes for your corporation. Imagine if a municipality chose to not enact any bylaws, just because the Criminal Code already deals with some of the rules a municipality might wish to have.

Corporate bylaws are necessary for a corporation to run smoothly just like a municipality’s corporations are necessary to ensure that a city is not overwhelmed by packs of stray dogs and cats. Corporate bylaws are there to make everyone involved in the corporation aware of the rules that the corporation will play by, and is legally binding on the corporation.

Most, if not all, banks will want to see your corporate bylaws before lending money to your business. This bylaw is typically referred to as “Bylaw Number 2”, which authorizes the Corporation and its directors to borrow money, usually without the prior authorization of the shareholders. Because most business’ will need to borrow money from time to time, and most lenders will need to see the corporation’s authorization to borrow money, it means that corporate bylaws are a necessary part of most corporations.

Whose responsibility is it to create bylaws for a corporation?

Strictly speaking, it is no one’s responsibility to implement corporate bylaws because there is no legal requirement for a corporation to have bylaws. Despite that almost all corporations have bylaws. It is typical for the corporation’s board of directors to initiate the process by following the procedures outlined in s.102 of the BCA, although a shareholder can also initiate the process by following a differed set of procedures. The director(s) (or shareholder(s)) will present the bylaws as a form of resolution that the shareholders will then pass, usually by a simple majority. The bylaw becomes effective immediately upon passing without any further requirements.

Are you thinking about incorporating a new company?
Are you wondering about the pros and cons of adopting corporate bylaws?

Contact the lawyers at Ahlstrom Wright in Sherwood Park, Alberta and Yellowknife, Northwest Territories
Call us toll-free 1-844-558-8750
or Email us at lawyers@ahlstromwright.ca