What are Nonprofit Bylaws?
Bylaws are a legally binding document of policies that govern nonprofit organizations (NPOs). Nonprofit bylaws outline how the organization (and by extension, the people who run it) will operate on a high level. So what should be in a great set of NPO bylaws? Today, we’ll break down the IRS 501c3 bylaws requirements, along with what many states require. We’ll also throw in a few best practices that will help your organization run smoother on a day-to-day level. A great set of nonprofit bylaws determine how decisions are made, conflicts are resolved, and risks to the nonprofit are avoided. When it comes to big picture concerns, like how to remove a board member, it’s your bylaws that get the final say.
Having bylaws that are too vague or hyperspecific can cause problems like board conflict or even legal issues. Failing to follow your nonprofit’s bylaws can open the door to headache-inducing and expensive liability, so you’ll want to be sure your bylaws are rock solid.
What are the 501c3 Bylaws Requirements from the IRS?
The 501c3 bylaws requirements from the IRS are simple: The IRS requires nonprofits to include the start and end of their fiscal year in their bylaws. Each state also has its own requirements for what needs to be included in your nonprofit bylaws. Those state laws are typically the ones that trip up nonprofit leaders more often.
So what 501c3 bylaws requirements does your nonprofit need to meet to be approved if you’re applying for 501c3 status for the first time? First, let’s talk numbers. Nonprofits are required to keep track of their finances and submit an annual filing with the IRS called Form 990. In their article about 501c3 bylaws requirements, the IRS lays out a key piece of information that must be included: your annual accounting period. Simply put, this is the answer to “when does your fiscal year start and end?” For most nonprofits, your fiscal year is the calendar year: January 1st to December 31st. But nonprofits that frequently work with children or schools will sometimes adopt a fiscal calendar that more closely matches a school year, like July 1st to June 30th.
The other requirements for bylaws are actually set by each state. The IRS has a handy list of the government entities that regulate nonprofits in each state. But there are commonalities between the requirements and best practices. We’ll cover those below.
What Should My Bylaws Include?
Nonprofit bylaws should include information about how your board is structured and run, your fiscal year, members (if your organization has them), conflicts of interest, dissolution and how the bylaws can be updated if needed. NPO bylaws should eliminate guesswork when it comes to high level questions. On the most basic level, your bylaws should be able to answer these practical questions:
How will the board of directors be structured?
Your bylaws are where people can find the basics of how your board is structured and runs. For example, they should go through how new people are added to the board, along with how the officers like Secretary and Treasurer are elected. They also should include how long board members will serve by defining what a board term is (whether it’s one year, two years, etc) and how many terms someone can serve on the board.
You also might want language surrounding how often the board will meet. According to BoardSource’s latest research, 84% of boards report attendance rates of 75% on average for board meetings. The point is you should pick a cadence and timing that works for most people on your board. If you do set a cadence for how often your board should meet, be sure to not box yourself into a narrow frame. For example, we would not suggest outlining that your board meets on the 2nd Tuesday of each month, for example, so that if you needed to meet on another day of the week, you could! However, you can absolutely specify that your board meets monthly or quarterly if you’d like.
Making sure board expectations are established is a tried and true way to avoid board conflict. So you’ll also want to outline the roles of the board and of each officer position. And if and how board members can be paid for their service (which is atypical). And you’ll certainly want to include provisions for how to remove a board member or even the process for board members rolling off the board normally. Pay attention to this language, as your bylaws play a significant role in your nonprofit’s governance and reducing nonprofit board liability.
How do you handle conflicts of interest?
A conflict of interest is when an individual’s duty to serve the nonprofit’s charitable mission is in conflict with their own interests. What does this mean practically? Let’s say Person A is on the board. Person A also owns a company that repairs roofing. If there’s a storm and the nonprofit’s roof is damaged, can the nonprofit use Person A’s company to repair it? The answer is: it depends. The conflict of interest policy helps you navigate these situations in ways that are in-line with the IRS requirements for nonprofit organizations.
Many nonprofits will include their conflict of interest policy in their bylaws, especially if they have or want to file for 501c3 status. The IRS also offers more detail on conflict of interest policies, which you can review here.
If applicable, how do members fit into the organization?
“Member” is one of the most misunderstood terms in the nonprofit world. Members are not just volunteers, donors or even board members. The term “member” has a legal definition in this case. A member, in the legal sense, is a person who has some sort of voting rights that are built into the corporate documents (usually the bylaws). Social Clubs (also known as 501(c)(7) organizations), churches, chambers of commerce, and professional associations often have members. Most other types of nonprofits often do not have members. You can read more about what members are, as well as the pros and cons of having them, here.
If your nonprofit does have members, you’ll need to outline their roles and responsibilities within the bylaws. Establishing what the role of the members are vs what the role of the board is can be crucial in preventing misunderstandings and conflict.
What will happen if the organization needs to dissolve?
Though it’s not a fun thought exercise, most states require you to include information about what happens if the nonprofit ever needed to close. In a study done by Candid, about 4% of the nonprofits they analyzed would need to close their doors in a normal, non-crisis year. You won’t need every aspect of a potential closure mapped out in your bylaws, but you will need some language around what happens to the nonprofit’s remaining assets if the organization needs to close.
Keep in mind, there are rules surrounding how nonprofits can distribute assets during a dissolution. For example, nonprofits don’t have shareholders, so unlike a for-profit, remaining assets aren’t divided amongst shareholders or board members. Most of the time, nonprofit bylaws include a general statement about distributing the assets of the nonprofit to other charitable organizations if it were to close. This meets most state requirements.
How can you update your nonprofit bylaws?
You’ll want to review your bylaws every few years or so to make sure they still make sense for your organization’s present reality. It’s best to ask a professional to do so, and keep in mind that not all attorneys are well-versed in nonprofit law. If you’d like a nonprofit attorney to review and revise your bylaws, this is something we assist with regularly. Let us know if you’re looking for help.
Think ahead to cover “what if” scenarios. Especially since the COVID-19 pandemic, more and more organizations are going digital, so will your NPO bylaws make provisions for the board of directors meeting via video conference? Can they vote via email? You don’t want your bylaws to be so stringent that they can’t be followed properly in an emergency situation. When a crisis arises, nonprofits are often part of the effort to help. Be sure your nonprofit is ready to jump into action. Great bylaws are often not as specific to your type of organization as you might think to make them flexible enough for these situations.
What are Some Common Mistakes with Nonprofit Bylaws?
There are four common mistakes nonprofits make when it comes to bylaws: including too much detail about day-to-day operations, having unrealistic standards, creating other policies that contradict your bylaws, and letting your bylaws get so out-of-date that you’re no longer able (or willing) to follow them. Let’s break each mistake down so your board and leadership team can avoid them.
Hyper-Specific Requirements
One of the most common mistakes leaders make when writing nonprofit bylaws is making guidelines too specific. You’ll want your bylaws to contain high-level, fundamental information about how your organization runs—not details that are subject to change like paid leave policies, how programs are operated, or grant application guidelines. Your NPO bylaws are the framework by which you can make other policy documents, so don’t limit yourself to granular rules. Bylaws are often tougher to change than other policies and documents because they require board approval to update.
Instead, put your specific policies like a safety rule for volunteers or PTO information for employees in lower level policy documents like a volunteer policy or an employee handbook. Those policies are great places to put your more day-to-day information, as they’re easier to update and typically in more plan language and less legal language than bylaws are.
Unrealistic Standards
A similar mistake is making the nonprofit’s rules too difficult to follow in real-world scenarios. For example, being able to amend your bylaws if needed is an important ability, so make sure you have guidelines that are easy to abide by. If your bylaws require 100% of the board to agree when voting on an amendment, how likely is it that you’ll come to an agreement? In this example, a majority vote or a two thirds vote might be a more realistic standard.
We’ve also seen boards get halted by only allowing in-person meetings. In order to accomplish anything in a board meeting, like votes, you’ll need a quorum. A quorum is the minimum number of board members who need to be present in order to make decisions official in the meeting. For most nonprofits, it’s 60-70%, a number that is also typically set in your bylaws. If someone gets sick, their car has trouble, or there’s something else preventing someone from meeting in person, you’ll likely want an option for them to call in on the phone or use a video conferencing platform. This is especially true if you have a small board, where each member counts for a large percentage of the board.
Contradictory Policies
You’ll also want to make sure that your bylaws do not contradict language or requirements in your other corporate documents, such as your articles of incorporation or policy handbooks. Make sure there is consistency across your documents for best compliance practices and to avoid any confusion.
Your bylaws are the top dog document, like the CEO of your policies. They overrule any lower level document, but the lower level documents still have an incredibly important job within your organization to manage your risk and help your nonprofit run more smoothly. Make sure there’s clarity and consistency along your documents.
Optional or Outdated Bylaws
Finally, one of the biggest mistakes nonprofits make is treating NPO bylaws as if they were optional, or letting them get so outdated that no one follows them anymore. Your bylaws are legally binding—so treat them as such. Failure to comply with your bylaws can result in issues ranging from organizational conflict to personal liability, the rejection or loss of tax-exempt status, and in some cases, lawsuits.
Your bylaws are meant to be helpful and should be leveraged to support your mission, not hinder it. The closer you follow your NPO bylaws in the real world, the sooner you’ll notice if certain clauses in your bylaws have become outdated, cumbersome, or irrelevant. It’s perfectly normal to refresh your bylaws every once in a while to keep them up-to-date. And as a rule, it’s always good to review and refresh your bylaws when your organization undergoes major changes like mergers, adding new program lines or expanding to new geographic areas.
Conclusion
Don’t forget that we’re here to help if you’d like assistance with your nonprofit bylaws. Our nonprofit attorneys can assist whether you’re drafting your NPO bylaws for the first time or want them reviewed and revised. If you’re concerned about navigating 501c3 bylaws requirements, reach out! Having strong nonprofit bylaws is important to ensure the health of your organization. The time and effort spent on improving them makes all the difference in making sure your mission is carried out effectively while mitigating your risk.
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