Has your nonprofit board ever asked, "Can we do this?" That's when your organization's bylaws come to the rescue. Hopefully, you have them handy.
Your nonprofit's bylaws are both a legal document and a roadmap for your organization's actions. A required element when forming a corporation, bylaws are a form of agreement or a contract between the corporation and its owners to conduct itself in a certain way. While for a commercial business the owners are its shareholders, the ownership of a nonprofit corporation belongs to the public as represented by the nonprofit organization's governing body, usually a Board of Directors.
Why a Nonprofit Need Bylaws
Nonprofits apply to their states to become incorporated. A nonprofit is a form of business and is thus regulated by states. To be incorporated, an organization must have a set of bylaws.
There is no requirement that a nonprofit doing charitable work must become incorporated, but there are many advantages to doing so. The most significant advantage is that there is limited liability should anything go wrong.
If you choose not to become incorporated at the state level, you could set up an unincorporated nonprofit association. However, that only works if your organization is quite small with limited income.
Furthermore, if your nonprofit decides to seek 501c3 tax exemption from the IRS, it's much easier if you are incorporated.
Incorporation requires you to set up all the legal requirements such as bylaws that the IRS looks for when granting tax exemption.
What Should Be in Your Nonprofit's Bylaws
Bylaws vary according to the nature of your organization but consider them to be your internal manual for how you will operate. They should address basic activities, such as:
- governance, such as whether the org is controlled by a board or by its membership
- when and how board meetings will be held and conducted
- how board directors and officers will be appointed or elected
- voting procedures, such as what constitutes a quorum so that your board can make a decision
- how committees are created and discontinued
- number of directors for your board, their required qualifications, and their terms of service
- language that affirms the requirements and prohibitions for nonprofit (501(c)(3) organizations as set out by the IRS
- rules that govern conflicts of interest
- how the bylaws can be changed or amended
Reported Changes in Nonprofit Bylaws to IRS
An organization that is exempt from federal income tax, as described in Internal Revenue Code 501(c)(3), is required to report changes to its bylaws and other governing documents annually to the IRS on the organization’s IRS Form 990.
Substantial changes to a tax-exempt organization’s character, purposes, or methods of operation should be reported to the IRS as soon as possible because such changes, if inconsistent with the organization’s tax exemption, could affect the organization’s tax-exempt status. For minor changes, just report them on your organization’s next annual Form 990.
Check with your state of incorporation about its regulations for reporting changes to your bylaws
Bylaws Bottom Line
Bylaws must be completed in preparation for becoming incorporated in your state. Your state office, (usually the Secretary of State) that oversees incorporation will probably have a template for your bylaws that you can use.
Although bylaws are not public documents, it would be wise to keep them available for public viewing. Doing so will help with your organization's transparency.
Bylaws should be used, changed when needed, and examined often. Don't let them gather dust on a shelf somewhere. Make them a working document in every sense,