Nonprofit bylaws are the roadmap for the organization’s officers and directors and in many cases control what they can and cannot do. It is important to take a thoughtful approach when drafting or revising nonprofit bylaws.
Table of contents
- What to Include in Nonprofit Bylaws
- What to Leave Out in Bylaws
- Information that Will Change Frequently
- Processes and Procedures that are Ignored in Practice
- Detailed provisions Outlining the Nonprofit’s Purposes and Activities
- Ambiguous Member Provisions
- Requirements to follow Roberts Rules of Order
- Complicated Due Process Provisions for Removing Directors, Officers, or Members
- Statements Requiring the Nonprofit to Comply with the Law
Boards and board committees sometimes spend months or even years trying to draft the perfect set of bylaws. Too often, they look to the 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.
What to Include in Nonprofit Bylaws
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:
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.
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.
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.
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.
This section should include key information such as the number of directors who must participate to hold a valid 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.
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.
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.
What to Leave Out in Bylaws
Too often, nonprofits include provisions in their bylaws that are old-fashioned, unnecessary, redundant, or that complicate rather than streamline governance. Examples of what to leave out include the following:
Information that Will Change Frequently
The Bylaws should reflect the fundamental rules governing the nonprofit that are not likely to change frequently. Staff job descriptions, detailed committee charters, rules for conducting the annual meeting, guidelines for fundraisers, etc. are better suited for board resolutions or the nonprofit’s policies and procedures manual. In this manner, the board can avoid constantly amending the bylaws when a simple resolution will suffice.
Processes and Procedures that are Ignored in Practice
Many ambitious boards impose numerous procedures with strict deadlines in the Bylaws. Examples include specific deadlines for meetings, notices, reports, committee action, etc. If the Board is not going to carefully adhere to these procedures and deadlines, it is far better to omit them.
If the processes and procedures called for in the Bylaws are not followed, those who disagree with Board action will always find a way to challenge the board’s decisions based on a technicality.
Detailed provisions Outlining the Nonprofit’s Purposes and Activities
I see a lot of bylaws with extensive purpose clauses that become obsolete over time. When this happens, the bylaws have to be amended to reflect the organization’s current activities.
Rather than risk a conflict between the articles of incorporation, the bylaws, and the organization’s actual activities, stick to a broad charitable purpose clause that will permit the organization’s activities to evolve over time.
Ambiguous Member Provisions
Voting members of a nonprofit corporation are analogous to shareholders. While they do not have ownership rights, they usually have the right to select board members and approve key decisions. Many state nonprofit corporation statutes will grant members certain rights unless the Bylaws expressly limit their powers.
Some state statutes even grant rights to voting members that cannot be overridden by the Articles and Bylaws. Once voting members have been created, their consent is usually required to reduce their rights so references to members should be made with extreme care.
Requirements to follow Roberts Rules of Order
It is common for non-profits to incorporate Roberts Rules by reference into their governing documents. Roberts rules can serve as a useful guideline for large boards; however, many people do not realize that Roberts Rules of Order requires much, much more than just a motion and a second.
It is a comprehensive body of work and unless you fully understand and apply Roberts Rules in its entirety, the Board opens the door to those who would challenge their actions on a technicality.
When a dispute develops, the failure for a Board that has incorporated Roberts Rules into their Bylaws to fully follow Roberts Rules leaves their actions open to challenge. The better practice is to reference Roberts Rules as a guideline rather than a requirement or better still, leave it out altogether.
Complicated Due Process Provisions for Removing Directors, Officers, or Members
If a majority of the Board of Directors have determined that an individual needs to be removed, due process provisions only draw out the process and create legal hurdles the individual can use against the nonprofit. This may make sense for an organization where expulsion could lead to economic consequences such as a professional society.
Otherwise, it is in the nonprofit’s best interest to have the ability to remove the problematic individual without cause.
Statements Requiring the Nonprofit to Comply with the Law
This one always makes me laugh. So, without the provision, the Board would feel empowered to break the law? It is redundant and increases the amount of unnecessary verbiage. Leave it out.
Once the key terms related to a nonprofit corporation’s governance structure, control provisions, director’s terms, officers, and voting procedures and clearly articulated and the redundant, overly complex, and frequently changing items are removed, the Board should be left with workable nonprofit bylaws to guide its deliberations.
Nonprofit 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.
Ellis Carter is a nonprofit lawyer with Caritas Law Group, P.C. Ellis advises nonprofit and socially responsible businesses on corporate, tax, and fundraising regulations. Ellis is licensed to practice in Washington and Arizona and advises nonprofits on federal tax and fundraising regulations nationwide. Ellis also advises donors with regard to major gifts. To schedule a consultation with Ellis, call 602-456-0071 or email us through our contact form.