How do you legally protect yourself and others when organizing a network?
The fact is, you could do everything right and still run into problems. But establishing bylaws outlining how your network will operate will offer safeguards.
"Bylaws outline the rules of the game. When you don't determine those rules before the business begins, a lot of toes will get stepped on along the way," says Brent Bostrom, attorney for the Minnesota Pork Producers Association, St. Paul, Minn.
Bylaws cover anything from member voting rights to mission statements. Here's a list of some items that your bylaws should address.
- Purpose of the network
Begin with a common goal that's outlined in a written mission statement.
This is especially helpful if the business goes astray. If your purpose is written in black and white, you can use it to put your organization back on track.
- Member voting rights
Determine how your voting system will work. Do you want a one-person, one-vote system, or will you vote in proportion to ownership?
Also, determine voting responsibilities for members and board of directors. It can be summarized on two levels:
1. Member: Outline which issues members will vote on. Examples may be amending the bylaws or electing the board of directors.
2. Governing board: Its voting responsibilities might include hiring management and establishing policies for the organization.
- Board of directors organization
Outline the number of members that will serve on the board.
This will depend on the size of your network. Suppose there are less than eight members, you may not need a governing board. However, if there's more, select four or more members to represent the group.
Outline any special qualifications a board member needs. Perhaps board members should hold a certain level of ownership. Remember to include term lengths as well.
- Board responsibilities
Because the governing board makes most of the network's policy and operating decisions, it's important to clearly outline its duties and limitations.
For example, specify which officers are able to buy and sell real estate or who is responsible for hiring management.
- Board of directors election procedures
This includes who is eligible and the number of votes needed for election.
- Removal or replacement of board members
This addresses circumstances under which a person would be removed from the board and replacement procedures. An example could be when someone dies or decides to leave the business.
- Member responsibilities
This could include things, like membership requirements or committees.
Suppose that anyone who wants to become a member must be a corn and pork producer. The network's objectives should guide those requirements.
- Profit and loss distribution to members
Most businesses don't make a profit until a few years into the venture. Establish a system to distribute profits and losses among investors.
Suppose you financed 10 percent of the venture and you decide to leave. That doesn't mean you get that 10 percent back. Often members don't realize it's an investment, not a loan.
- How to dissolve the entity Detail things like how many votes are needed for termination and how the debt or income would be distributed.
- Which issues require a higher proportion of votes for approval
Normally, you might need majority or two-thirds votes to approve a regular motion. However, more emotional cases or those with greater business impact might demand more votes.
One such case could be if you are voting to take on more debt. You may want unanimous approval.
This list is a starting point. The information your network bylaws should include will vary depending on its goals, organization and operation.
Bylaws must be consistent with the governing state laws. State laws usually supercede any bylaw rules. To avoid inconsistencies, Bostrom advises cross checking the two.
The issues surrounding ownership – such as approval of new members, who can purchase shares and what to do when a member retires or quits – can be addressed in a separate document called a buy/sell agreement.
The buy/sell agreement addresses purchasing issues and sales of shares. It should be arranged prior to beginning business operations, says Bostrom.
One thing is true regardless: Bylaws should be established, in detail, long before network operations begin. This will prevent you from making unfair, biased decisions – or making up the rules as you go along.