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Your Bylaws Can Protect Your Business From Lawsuits


Businesses give a lot of thought to their written documents, as they should. Things like employee manuals, business contracts, or policies and procedures are often carefully put in lengthy written documents. Yet, many of those same businesses give little thought to the heart and soul of their business: Their bylaws, and their articles of incorporation.

What are Bylaws?

Bylaws can, but don’t normally describe how your business operates on a day to day basis. Rather, bylaws dictate how your business functions internally. Bylaws and Articles of Incorporation describe the relationships between your shareholders, boards of directors, officers, and how given situations will be handled by your business. Think of your bylaws as the overall rulebook on how your business will operate.

Bylaws are also where courts will look, should there ever be a lawsuit about something your business did or didn’t do, or about whether the business is being properly managed. If a shareholder is upset about a decision the business makes, or about how the business is being run or managed, and that shareholder files a lawsuit, the bylaws are part of how a Court will determine who wins the lawsuit.

Vague vs. Specific Bylaws

The good thing about vague bylaws is that it makes it harder for a shareholder or someone on your Board of Directors to sue your business alleging mismanagement, or alleging that their rights were violated. Vague bylaws provide upper level management, majority shareholders, or owners of a company, room to do what they want, without worrying about violating bylaws.

On the other hand, more specific bylaws discourage lawsuits, so long as the Bylaws are being followed, and can provide a solid legal defense to any lawsuit brought by an officer or director or shareholder. Specific bylaws can give management security to make decisions without worrying about being second guessed (or sued).

What is In Bylaws?

Good bylaws (and articles of incorporation) can set up a number of different items. They can detail how often your officers, shareholders, or board of directors will meet, where they will meet, and how parties will be notified of meetings.

Bylaws can describe how decisions will be made in the case of an emergency, such as a hurricane, civil unrest, pandemic, or government shutdown. Any decisions made during such emergencies will be automatically valid if they are allowed under the Bylaws.

Bylaws can describe how officers are appointed, what their duties are, and how and when they are removed. Bylaws and Articles of Incorporation can describe different classes of shareholders, what their rights are, and what happens if a shareholder involuntarily loses his or her shares.

Your bylaws can also give or take away power from a board of directors, describing whether the Board has overall, general authority, or more limited, specific authority. Specific bylaws can prevent a board from taking more power than they are entitled to use.

We can help your business if it is sued, or help you defend your business against shareholders or others who sue your business. Let our West Palm Beach commercial litigation lawyers at Pike & Lustig, LLP, help you. Call us at 561-291-8298 to get a consultation.


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