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Corporate Bylaws: A Necessity for Every Successful Nonprofit

Facts of Nonprofit Organizations

  • Nonprofit organizations include charities, non-governmental organizations (NGOs), civil society organizations (CSOs), private voluntary organizations (PVOs), and more.
  • They are under the control of federal, state, and local laws.
  • The aim of a nonprofit association or corporation is to carry out business in the absence of shareholders, which is beneficial to the general public but makes no profit.
  • Nonprofits have to be initiated in a similar way to for-profit corporations by filing a statement of purpose, creating articles of incorporation, creating bylaws, paying a fee, holding regular meetings, and satisfying other requirements in order to gain and maintain corporate status.
  • A nonprofit corporation is exempt from paying income tax if it operates in a way that benefits the general public. The Internal Revenue Service (IRS) must give approval for the tax-exempt status of every nonprofit organization except churches.
  • A nonprofit corporation differs from a for-profit corporation in that it cannot operate with the intention of making a profit. Any funds acquired by a nonprofit corporation have to remain in the corporate accounts to pay out for what is seen as reasonable salaries, any expenses, and other corporation activities. If a nonprofit corporation favors an individual financially, apart from salary, then it could lead to the loss of its status as a nonprofit.
  • Nonprofits come in a variety of types, including churches, political organizations, sports organizations, universities, colleges, radio and TV stations, museums, and symphonies.

Documentation Is Important for a Nonprofit

One of the good things about the successful setting up of a nonprofit organization is the advantage gained due to the nonprofit’s tax status. However, you need to get the documentation right first before your nonprofit is on the road to success. This means understanding and using the most important documentation for your business. If you don’t follow the rules, then you may not only lose the advantages of your tax-exempt status but your corporate status too. The most important documents for your nonprofit corporation are the articles of incorporation, the bylaws, and the organizational minutes.

The Role of Articles of Incorporation

The most important corporate documents for all nonprofit corporations are the articles of incorporation. The date that an article of incorporation is filed with the corporate filing office in your state is the date your nonprofit corporation begins to exist.

Articles of incorporation include the basic information about the structure of your nonprofit corporation, which includes its name, its membership structure, its registered address, and its registered agent. A nonprofit corporation often includes the necessary information regarding its tax exemption such as the reason for tax exemption status. In the articles of incorporation it might also include who the assets should be directed to if the status of the nonprofit organization comes to an end.


Bylaws Are How Your Nonprofit Operates Successfully

A nonprofit’s bylaws are the second most important document of a nonprofit corporation. They comprise the nonprofit’s operating manual and determine how successfully a nonprofit is being run. It should be possible to check important details about the nonprofit, such as how long an individual board member can hold his or her position and what is the number of board members required for a quorum.

Anyone seeking answers refers to the nonprofit’s bylaws. The bylaws should include:

  • the procedures and rules for the holding of meetings;
  • the election of directors;
  • the appointment of officers; and
  • how other corporate formalities should be handled.

In a nutshell, bylaws are how internal rules govern the daily running of a corporation, like where and when shareholders' and directors' meetings will take place and what the requirements in relation to voting are. Bylaws are created by accessing instructions laid out in a resource that is designed to give you guidance, or hiring an attorney to help in the drafting of your nonprofit's bylaws. Usually, the corporation’s directors adopt the bylaws at the first board meeting.

What Should Bylaws Include?

Some provisions to include in your bylaws are as follows:

It is important to be sure if the nonprofit is either member driven or board driven. A board driven corporation does not have any members, or if there are any, their rights are limited. A member driven organization means the members can vote and they can remove the board of directors and elect as well. State law gives voting members statutory rights; therefore, it is very important to outline members’ rights so as to avoid the creation of a voting membership where the ultimate control is with the members when you do not intend it.

Overall, no one person has ownership of a nonprofit corporation, but there is control. That means that a decision has to be made whether it is the board or its members. In many states, a nonprofit corporation may be controlled by a board or members appointed by third parties.

The directors’ terms of office need to be clarified.

  • Staggered terms – Typically, directors’ terms that are staggered mean that the directors are divided up into groups. Each group’s terms expire at differing times. This means that the board always includes experienced directors who can help to promote continuity on the board by ensuring they are always there to help newly initiated directors.
  • Successive terms – Directors' terms that are successive mean that they all finish on the same date.
  • Ex-officio directors – The bylaws can also name ex-officio directors who are directors who are not restricted by terms. A board seat is linked to a particular position, such as the president, who might be an ex-officio board member, so whoever holds the presidency will be a member of the board. If a president gives up the role, the new president will become a board member automatically.

It is necessary to clarify the names of the organization’s officers and their method of appointment, their duties and terms, and how removal or replacement takes place. Depending on the state, there are often state laws which say a president, a treasurer and a secretary must be named. The majority of state statutes allow the designation of other officers in the bylaws as well.

This provision has to include information like how many directors have to be present to conduct a valid meeting, or a quorum, and the voting rules that apply to members and directors.

To simplify the role of ad hoc committees, it is usually enough to state in the bylaws how a committee should be created and how it should be abolished. It is important to include in the bylaws the authority that may be delegated to a committee and the actions that a full board takes responsibility for. Committees can be formed and abolished through a board resolution and not by a cumbersome amendment to a bylaw amendment.

Modern bylaws usually include provisions indicating how the nonprofit corporation will handle any transactions if a conflict of interest occurs between the nonprofit corporation and someone inside the corporation. An improperly managed conflict of interest is one of the fastest ways to incur IRS penalties and fiduciary duty breaches. Therefore, it is basically common sense to include a procedure for the handling of conflicts in the bylaws. Also, the bylaws could require the corporation to take on a separate policy in relation to a conflict of interest.

Bylaws Can Resolve Issues

If tension does start to show among stakeholders who have competing interests, bylaws can help to resolve the issues.

The bylaws must indicate how amendments can take place and if it is through the board, the membership, or by getting approval from a third party. Some boards select a vote of a super-majority—such as at least 66 percent—to pass any bylaw amendments as this ensures that the consensus for doing so is high.

Avoid Nonprofit Bylaw Problems to Be Successful

Even if the nonprofit has been running for a number of years, the bylaws need to be checked regularly to ensure they are not out of date. It is surprising how bylaws can be easily forgotten. When there is a need to refer to one, such as in relation to a voting issue or a poorly performing director, it is often discovered that the bylaws no longer conform to state law and no longer reflect the current practices of the organization.

A nonprofit is overseen by the statutes of its state of registration. The corporation act covering nonprofits normally contains default rules that the nonprofit might not have taken into consideration in any of its bylaws. A well-known default is the number of people required to reach a quorum before a vote can take place either at the director or member level. It is possible to override default provisions set in a state statute if a provision is made in a bylaw to cover the default. Nonprofits must ensure their bylaws conform to the state nonprofit corporation act.

If your nonprofit organization is licensed or governed by any other state agency, like a state’s banking department or department of education, there may be other state laws that might provide mandatory bylaws for your organization.

Sometimes, certain scenarios are overlooked, such as how to replace a board member who has been removed from holding the position. Double check your bylaws to make sure they account for any potential problems.

A bylaw committee is present in order to review bylaws when the need arises and make any useful amendments. It should represent a cross section of the nonprofit organization. If it doesn’t, then any amendments to the bylaws might not get approved easily when they are sent to the full membership to be approved or to the board of directors.

When bylaws are being rewritten, the law can become overwhelming at times, so getting legal help in the early stages avoids future problems.

This will depend on what comprises your nonprofit and if members are part of it and the board of directors. Sometimes newer nonprofits set up designated bodies that are delegated their own powers within the organization. The type of governance permitted may depend on your state of registration, so you should check this before allocating power to any one group or setting up any designated bodies.

Nonprofits that are not newly formed change practices over time and the corporate bylaws should represent current practices for the type of organization. That could mean scrapping bylaws that are out of date and replacing them with more practical ones which better reflect the work and function of the nonprofit.

Being flexible when establishing new bylaws saves time in the future. This could include such facts as providing a range for board member numbers and permitting the board to allocate roles to additional officers who have not been named in any of the bylaws.

Details concerning such things as committee operation, the criteria for membership, and dues for members can be written into the nonprofit policies as these are easier to alter in the future. Bylaws should cover features that are less likely to require amending.

There are often inconsistencies with state laws, so a nonprofit should make sure that its organization matches the set criteria as laid down in its state. Corporation acts for nonprofits in many states disallow voting by directors to be done by proxy, and the directors must be present at the meetings and be counted in the quorum and for the purpose of voting. Sometimes, making contact via a telephone is accepted as present but by email to show presence is not.

Some state corporation acts for nonprofits are specific when determining who is able to serve on a board committee and how appointments can take place. For example, in D.C. and a few other states, “committees of the board” may only consist of directors, and the committee members have to be appointed by most of the directors who hold office and not just those who are at a meeting that meets quorum because this could mean too few members voting than the requirement of the majority of directors. This requirement particularly relates to any committees that exercise board powers, like the executive committee or the audit committee. In the case of a fundraising committee these requirements are not applicable.

For those nonprofit organizations that have voting members, bylaw amendments will normally require approval by members. It might be necessary to get the board of directors’ approval too. The pitfall to look out for is the notice that needs to be given for the meeting where the approval will take place. The approval process may take longer than expected if a timeline for amendment review and approval is not accurately calculated beforehand.

There are some bylaws that might require any amendments to be approved by a two-thirds vote of the members, if there are members. This is far too burdensome and the amendment of bylaws should be far more flexible and represent the politics, history, and culture of the organization.

Summary

Bylaws that have been well drafted in the first place should be so flexible that regular amendment can be avoided and the emphasis should be on the successful running of the organization.

LegalNature can help you with all of your personal legal form needs. Let us help you get started today. Click here to create your corporate bylaws now.

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