Wardell felt a flush of pride when the mail brought back his articles of nonprofit incorporation from the state corporations bureau, with the state’s identification number and file stamp. He’d done it! Or, at least, he’d started. He had incorporated his charitable organization in a way that he was pretty sure would meet the IRS organizational test. Yet at the same time, he knew he was only beginning with his beginning. Wardell knew he had several other steps to formally qualify his new organization as tax exempt. Looking at his file-stamped articles of nonprofit incorporation, though, made him all the more eager to proceed with those next steps.

Tests

The IRS has a second test for an organization to qualify for 501(c)(3) tax-exempt status, called the operational test. The organizational test discussed in the prior chapter examines how you organized, or formed, your charitable organization to meet the law’s requirements for tax exemption. The organizational test examines your organization’s articles of nonprofit incorporation. The second operational test doesn’t bother with your articles of nonprofit incorporation but looks instead to your organization’s bylaws. Articles of incorporation are the document that forms your organization. Bylaws are the document that governs your organization’s operation. To qualify for 501(c)(3) status, you’ll need to have bylaws that meet IRS requirements satisfying its operational test.

Bylaws

As your organization’s incorporator, you prepared, signed, and filed your articles of nonprofit incorporation with your state corporations bureau. Your state’s nonprofit corporation act likely permits you, as the organization’s incorporator, to also adopt the organization’s bylaws or to defer to the first board of directors whom you appoint to adopt bylaws by their majority vote. The organization does not file the adopted bylaws with the state. Instead, once the incorporator or board of directors adopts and signs the organization’s bylaws, the organization retains the bylaws among its corporate records. A common practice is for the incorporator to prepare the bylaws after preparing the articles of incorporation, to present the bylaws to the new directors for their approval at a first meeting of the board. Template bylaws, in use by dozens of 501(c)(3) organizations I’ve helped form, appear at the back of this guide.

Use

While the IRS requires bylaws in a certain form to satisfy its operational test, charitable organizations tend to use their bylaws, if ever, only at the board level and executive-director level, not among managers or other operational personnel. Bylaws aren’t management documents. They instead tell the board how to function to ensure that the organization carries out its charitable mission. Bylaws don’t tell anyone how to operate charitable programs. Bylaws instead tell the board how to operate to ensure the organization only pursues charitable programs. Even the board may rarely consult the bylaws. Bylaws are most useful when board members and the organization’s executive director who carries out the board’s directions are unsure of how the board is to proceed, for instance, when board members resign or disagree. Many charitable organizations, especially smaller organizations with tight-knit, unified boards, seldom refer to their bylaws. Yet the bylaws can be critical in times of dispute, change, and question.

Purpose

After stating the organization’s name and location, consistent with the articles of incorporation, the bylaws should next state the organization’s charitable purpose, again consistent with the articles of incorporation. The purpose clause should include both the affirmative mission of the organization to help a certain population meet a certain need and the limitations that Section 501(c)(3) places on charitable organizations to qualify for tax-exempt status. Don’t omit the limitations. The IRS will reject your organization’s application for tax-exempt status unless your bylaws expressly limit your organization’s activities to exempt purposes. You’ve already seen in the prior chapter the limiting language the IRS requires to appear in your organization’s articles of nonprofit incorporation. That same language must also appear in your organization’s bylaws, as it does in the template bylaws appearing at the back of this guide. Note that the limiting language in the template bylaws is significantly more elaborate than the concise language, referred to in the prior chapter, suggested for the articles of incorporation, although the gist and import is the same.

Directors

Your organization’s bylaws should vest the organization’s governance in a board of directors, specifying its size such as of nine members or a range of sizes such as from five to fifteen members. New organizations often start with small boards, for efficiency and unity, and then gradually increase the board’s size as the organization grows and has greater needs for wisdom, guidance, and resources. A range of from three to nine directors, or five to fifteen directors, might be appropriate for your organization, depending on its mission and probable growth and size. Larger civic and cultural organizations, such as one supporting a symphony or community theater, may have significantly larger boards of, say, twenty-one members, to ensure community representation. The bylaws should also provide for electing directors at an annual meeting. If the organization is a directorship organization, then the directors would elect or reelect the next slate of directors. If instead, the organization is a membership organization, then the members would elect or reelect the directors at an annual meeting. The first set of bylaws included at the end of this guide are for a directorship organization, while a second set of bylaws at the end of this guide are for a membership organization. 

Membership

If you choose a membership organization rather than a directorship organization, your bylaws should give substantial attention to the definition of members. The prior chapter has already discussed how to choose between a directorship or membership organization. If you choose a membership organization, the articles of nonprofit incorporation you adopt likely won’t include any detail on who qualifies as a member or how members vote for directors. Those details all appear in the bylaws, not the articles of nonprofit incorporation. Defining members clearly is critical for being able to qualify and count members for the annual vote for directors. That’s generally all that members have the express authority to do: vote for directors. But those votes can be important to resolving disputes among the members as to the organization’s direction and activities. Also take care in drafting your bylaws’ notice and quorum provisions for the annual meeting where members will vote. See the sample membership bylaws at the end of this guide for a useful example.

Terms

You may prefer to have your bylaws provide for overlapping director terms, to promote board continuity and stability. Charitable organizations having a board of nine directors may, for instance, have directors serve three-year terms, rotating election of three directors each year. That way, the board will always have three new directors, three senior directors, and three directors in between. Experienced directors having already served for one or two years tend to serve as the organization’s president, vice-president, secretary, and treasurer offices, drawing on their knowledge and experience from board service. Providing for three-year terms and staggering board elections thus gives the organization fresh directors with new energy and ideas, while also experienced directors prepared to serve in officer roles.

Removal

Your organization’s bylaws should also provide for filling board vacancies when a director resigns and for removing directors who fail to show up for meetings or otherwise give the board reason for removal. Meeting absences can be a problem. Board nominees are often pleased at the offer and happy to accept. But board members may soon lose interest, find the meetings inconvenient, unproductive, or otherwise burdensome, or simply stop showing up because of higher priority matters. Your organization will need board quorums at regular meetings to be able to vote, resolve, and govern the organization. Absences can prevent the board from obtaining a quorum, wasting the time of directors who do attend and frustrating the organization’s governance. Boards rarely remove directors. Directors who don’t get along or respect the decisions of other directors tend to resign. But removal may be necessary or appropriate for a director who disrupts meetings, discourages other directors with disputatious and divisive communications and actions, or simply quits showing up.

Meetings

Your bylaws should also provide for an annual meeting to elect or reelect directors and for regular meetings throughout the year. Your bylaws may leave the number of regular meetings to executive or board discretion, or may prescribe a minimum number of regular meetings, such as semi-annually, quarterly, or monthly. Think of your organization’s need for governance meetings. Semi-annual meetings may be too few and monthly meetings may be too many. Have your bylaws reflect your best judgment, or leave it in your bylaws to board discretion. Your bylaws should also provide for calling special (emergency) meetings, typically requiring fair notice of the special topic. Meeting notice provisions for all meetings, annual, regular, and special, are important to give directors an opportunity to rearrange schedules and prepare to attend. Be sure your bylaws state fair and efficient notice measures, such as seven days notice unless waived by all directors, and notice by email or other writing. See the chapter below on how to conduct productive board meetings. 

Officers

Your organization’s bylaws should also provide for the organization’s officers. Your state nonprofit corporation act likely requires that your organization have a president, secretary, and treasurer. It may permit your organization to combine the secretary and treasurer roles. It also likely permits your organization to have a vice-president or multiple vice-presidents and may also mention a board chair. In practice, an organization’s president typically acts as the board chair. Corporate officers, though, can have duties to the organization, persons or entities with which the organization deals, the public, and state beyond their board duties. For instance, a president may, with the board’s approval and authority, need to sign contracts, tax forms, license or loan applications, deeds, and other official documents. A secretary may have to sign and certify copies of resolutions and minutes. And a treasurer may have to sign tax or account records. The bylaws should describe offices, officer duties, and the board’s means and timetable for electing officers.

Compensation

Officers and directors of charitable organizations generally serve without compensation. Compensation of officers and directors may raise the concerns of the IRS, donors, and others over conflicts of interest, excess compensation, and the general misuse of funds. Officers and directors, though, only govern the organization. They don’t manage or operate it. Their work should ordinarily not entail substantially more than preparing for and attending board meetings and any committee meetings that may aid the board. As soon as financially able, the organization should in the usual case hire and compensate an executive director, meaning a paid staff member, to lead the organization’s management and operation, while acting as a liaison to the board, helping the board president set and conduct the board meeting agendas. A subsequent chapter addresses in greater detail the executive director role and other management roles and issues. 

Committees

Your organization’s bylaws should also provide for board committees. Charitable organizations of any appreciable size can have relatively substantial organizational work. Your organization’s board may not be able to efficiently handle all business at its regular meetings. Many boards rely heavily on committees to do the bulk of the organizational work, bringing reports and recommendations to the board for review, consideration, and approval or modification. Your bylaws may, for example, provide for an Executive Committee of the board’s officers, Nominating or Governance Committee to recruit new directors, and Finance Committee to review finances. Your bylaws may also authorize the board to form other committees, common ones including a Philanthropy Committee, Facilities Committee, and Program Committee. A director should chair each committee to bring committee reports and recommendations back to the board. Non-director volunteers can make up the rest of the committee membership. 

Development

Board development can be helpful to a charitable organization’s success. Get the right directors onto your board through a sensible and sensitive recruitment process guided by the Nominating or Governance Committee. Help directors understand the organization’s needs, challenges, and opportunities and the board’s role, using a thoughtful orientation process. And help directors grow in their own knowledge, skills, and commitments. Make board service not a burden but a privilege and growth opportunity. Recruit, prepare, and evaluate board candidates through volunteer and committee service. Help your directors complete their board service and retire having greater respect and passion for your organization’s work, not less passion and respect, and greater knowledge, insight, and skill. Former directors can remain substantial contributors to your organization. Your organization will do well to honor directors, treat them respectfully, and value their service.

Conflicts

Directors must take care not to engage in conflicts of interest. A conflict of interest involves having two masters to serve, each with their own interests, thus dividing the director’s loyalties. When a director volunteers for charitable organization board service, the director commits to putting the organization’s interests first. The director owes the organization a duty of loyalty not to favor anyone else’s interests, even the director’s own interests, over the organization’s interests. Directors thus generally shouldn’t own businesses, for instance, that intend to contract with the charitable organization. In that case, the director might favor the director’s business over the charitable organization. Indeed, the director would have conflicting duties to favor each interest. The IRS requires that your organization adopt a conflict-of-interest policy like the sample policy at the end of this guide. That policy prohibits conflicts of interest. It also provides for a process to disclose and resolve potential conflicts when, for instance, a director offers the organization substantial goods or services on favorable terms but still has an unavoidable conflict. Adopt and adhere to a conflict-of-interest policy.

Property

Your organization’s bylaws should also provide for your organization to acquire, own, manage, and dispose of real and personal property. Those powers may include the authority to borrow funds to buy property, to mortgage real property, and to receive and sell gifts of donated property. Importantly, to qualify for 501(c)(3) status, your organization’s bylaws must restrict the disposition of property, upon the event of your organization’s dissolution, to another 501(c)(3) organization with a similar mission. Your organization must not amass assets and then give those assets to you, other individuals involved in the organization, or a for-profit entity, when your organization ends its operations. Your organization holds assets in public trust. The legal doctrine of cy pres provides for disposition to the nearest purpose carried out by another 501(c)(3) organization. In practice, your organization will likely exhaust most or all assets before closing its operations. But expect to treat remainders responsibly, with transfer to a like 501(c)(3) organization. See the last chapter on organization dissolution.

Indemnity

Indemnity is a common clause in charitable organization bylaws. Your state nonprofit corporation act likely permits and may require that your organization indemnify officers and directors under certain circumstances. The state common law (caselaw) applicable to your organization’s activities may likewise offer indemnity to your organization’s officers and directors under certain conditions. Your bylaws can clarify, confirm, and adjust those indemnity rights. Indemnity means in this case that your organization would defend its officers and directors against liability claims arising out of their lawful conduct on the organization’s behalf and pay any judgments against them. Your organization may be able to defend and indemnify directors and officers through its purchase of liability insurance. Indemnity is a common right of officers and directors, aiding in their recruitment and retention.

Amendment

Your bylaws should also provide for their orderly amendment. Because bylaws are important governing documents, amendment clauses often require a supermajority vote, such as a two-thirds vote, to approve an amendment. Check your state nonprofit corporation act to see if it requires a supermajority vote for bylaw amendment. Amendments of bylaws may also have to take place at a special meeting called for that purpose or with special notice of the proposed amendment. Your state nonprofit corporation act should grant your organization authority to include these provisions on bylaw amendment, in your organization’s bylaws. Bylaw amendments are generally not a frequent occurrence but may be necessary or appropriate to improve your organization’s governance and operation.

Key Points

• Your organization’s bylaws must meet the 501(c)(3) operational test.

• Your organization should use its bylaws to guide board operation.

• Your organization’s bylaws should include the charitable purpose.

• Bylaws should provide for the election of directors.

• Bylaws provide continuity with three-year, staggered director terms.

• Bylaws should clearly define members of a membership body.

• Bylaws should address annual, regular, and special meetings.

• Bylaws should address director attendance and removal. 

• Bylaws should identify offices and name officer duties.

• Officers and directors receive no compensation. 

• Bylaws should authorize and empower committees. 

• The organization must prohibit officer and director conflicts. 

• Bylaws should authorize property purchase, sale, and disposition.

• Bylaws may address officer and director indemnity.

• Bylaws should provide for their orderly amendment.

Read Chapter 8.