It is important to take a thoughtful approach when drafting or revising nonprofit bylaws. Boards and board committees sometimes spend months or even years trying to draft the perfect set of bylaws . Too often, they look to bylaws of other nonprofit organizations or samples gleaned from the Internet with no regard to whether the bylaws match the structure and style of the organization or comply with state and federal law. Unfortunately, this approach usually leads to confusion, delay, and conflict on the board. The better practice is to work with a knowledgeable attorney from the beginning, starting with a compliant template, and tailoring it to the needs of your organization.
Attorneys often have differing opinions and styles when it comes to drafting nonprofit bylaws. Some attorneys like to throw in rules addressing nearly every statutory requirement in an attempt to provide a complete manual for operating the organization. Others, like myself, prefer to draft bylaws that are simple to navigate by including only the most important statutory requirements.
Every state has a slightly different corporate law, so while the details will vary from state to state, the essential elements tend to be the same. Bylaws should include, at a minimum, the following:
- Governance Structure. It is important to understand whether the organization is board driven or member driven. If the corporation is board driven, there are typically no members or the members have very limited rights. If the organization is member driven, the members are typically voting members who have the power to elect and remove the board of directors. Voting members have statutory rights under state law; therefore, it is important to clarify the right of members to avoid inadvertently creating a voting membership class and vesting ultimate control in the members when that is not your intent.
- Control provisions. Generally, no one owns a nonprofit corporation; however, there is always control. Once it is determined whether ultimate control will be vested in the board or one or more members, there are some additional considerations that impact who will exercise influence over the organization. In many states, a nonprofit corporation can have a board or members that are appointed by third parties or whose positions are ex-officio because they are tied to an office or position that they hold. Reserved powers and super-majority votes can also be used to balance power among competing interest groups in a nonprofit corporation. For example, reserved powers require the approval of one or more members, delegates or stakeholders to take certain actions such as removing a director, appointing a replacement, amending governing documents, etc. Super-majority votes require directors holding more than a majority of the votes (e.g., 66%) to agree before certain actions can be taken.
- Director’s terms. It is important to clarify the directors’ terms of office. Typically, directors terms are successive or staggered. Successive terms are terms that all end at the same time. Staggered terms mean that directors are divided into groups whose terms are up at different times. The benefit of staggered terms is that they can promote continuity on the board by ensuring there is always a group of experienced directors on the board while the new directors are getting up to speed. The bylaws may also specify ex-officio directors. Ex-officio directors are not subject to terms. Instead, the board seat is tied to a particular office. For example, the President may be an ex-officio member of the board. If so, whoever holds the office of President will automatically be a member of the board. If the President steps down and a new President is appointed, the new President would automatically become a member of the board because the board seat is tied to the office rather than the individual. Ex-officio members can be voting or non-voting. The bylaws should also address how directors are removed and replaced.
- Officers. It is important to clarify who the officers of the organization are, how they are elected or appointed, their terms, their duties and how they are removed and replaced. State laws often require a President, Secretary, and Treasurer. Most state statutes permit other officers to be designated in the bylaws as well. It is also important to state whether all officers must also be directors or whether staff members can serve as officers.
- Voting procedures. This section should include key information such as the number of directors who must participate to hold a valid a meeting (i.e., a quorum), the number of votes required to be an act of the corporation, and should restate many of the statutory requirements such as notice requirements for ease of reference. Note that a corporation with voting members will need to spell out the voting rules applicable to members as well as directors.
- Committees. Rather than outline the rules for ad hoc committees, it is generally preferable to streamline the bylaws and reduce the need to pass amendments by simply stating how committees may be created and abolished. It is also important to state in the bylaws what authority may be delegated to committees and what actions must be taken by the full board. Committees can then be created and abolished by board resolution rather than a cumbersome bylaw amendment. Many organizations like to provide a provision authorizing advisory committees that can be used to involve additional members of the community in a less formal way or to groom future leaders of the organization.
- Conflicts of Interest. Modern bylaws often include provisions stating how the corporation will manage transactions where there is a conflict of interest between the corporation and an insider. Improperly managed conflicts of interest are one of the quickest routes to IRS penalties and breaches of fiduciary duty. Accordingly, it makes sense to provide a procedure for handling conflicts in the bylaws for easy reference. Alternatively, the bylaws can require the corporation to adopt a separate conflict of interest policy.
- Amendments. The bylaws should clarify how they can be amended. They may be amended by the board, by the membership, or with the approval of a third party or some combination of these. Some boards choose to require a super-majority vote (e.g., 66%) to pass bylaw amendments to ensure a high degree of consensus before changes can be made.
The bylaws may never become the center of controversy. However, when tension does develop among stakeholders with competing interests, the bylaws will be front and center. By clearly articulating the rules for decision making in the bylaws, the board will be free to focus on the substance of their decisions rather than their decision-making process. Next, learn what to leave out.
Ellis Carter is a nonprofit lawyer with Caritas Law Group, PC. To contact Ellis, call 602-456-0071 or email us at email@example.com.