A nonprofit corporation looks different from other types of corporations. This is because nonprofits do not have shareholders or owners. While some nonprofits hire employees and pay them, they do not pay dividends or issue stock. Nonprofits offer the same limited liability protection provided by a regular corporation. Unlike other corporations whose goal is to make money, a nonprofit's focus is on the betterment of the community.
To qualify as a nonprofit under the IRS rules, specifically 501c3, the organization must exist for the furtherment of one of these goals:
- Testing for public safety
- Preventing cruelty to children
- Fostering amateur sports competitions
If you decide to start a nonprofit, the first step you must take is writing your bylaws. These can look different depending on your organization, and there are many possible additions you may want to make to your bylaws to ensure the organization runs smoothly. However, the following list includes everything you must have in your bylaws, regardless of what type of nonprofit you are looking to start.
The first thing you need to lay out is the structure of your nonprofit. Every nonprofit has a driver behind it and a power structure, which is vital to understand. There are two basic structures for nonprofits: board-driven or member-driven.
In a member-driven organization, the members are voting members who can choose board members through elections, and they can remove those board members. This works well for organizations that want to function as a democracy. Some examples of member-driven nonprofits include: chambers of commerce, churches, social clubs, and trade associations.
A board-driven organization vests the power of the organization in the governing board, and the members have minimal rights, if there are any members at all. If the organization does not have any members, the board is self-perpetuating. This means they do not have elections, and the board members replace themselves. In this structure, board members make all major company decisions, while officers oversee the day-to-day operations.
A nonprofit does not typically have an owner, but they're still must be an individual or group in control. Ultimate control of the organization can be vested in the board, an individual member, or a group of members. However, other outside factors can affect the power structure of a nonprofit. This includes reserved power and supermajority votes, both of which can balance power within the organization or place additional power in one group within the organization. The application of these can be very complicated, and determining if it is best for your organization requires knowing your individual situation. It is best to consult with an attorney to assess your individual needs and whether these control provisions would be a good fit for your organization.
The director's terms of office must be specified in the bylaws. This term is a period of time in which the director holds their position before either re-election of a new director or appointing a new director. This term must also include whether their terms are staggered or successive. A successive term means all director's terms end simultaneously, and an all-new board of directors begins at the same time. A staggered term ensures director's terms end at different points, allowing for a more significant buildup of institutional knowledge and ensuring you always have an experienced director on the board.
The directors hold the power of the nonprofit, but the officers run the day-to-day operations. Your bylaws need to include which officer positions are available in your organization, such as president, vice-president, secretary, etc. Many states have state laws requiring certain positions be filled in your nonprofit. Typically, these required positions include president, secretary, and treasurer. In addition to the positions available in the organization, your bylaws must include who will hold those positions, how they are elected or appointed, their terms, their duties, and how they are replaced.
Here, you will outline how your organization will handle voting on different matters. You will lay out what number of directors is sufficient to constitute a quorum (a quorum is the minimum number of people necessary to take a vote on an issue. For example, if you have eight directors, you may say the quorum is six to ensure there are enough directors present to take a vote). Here you will also layout how you will notify directors of a vote that will take place, ensuring compliance with the notice requirement for a vote.
Including a provision for how committees are created and abolished can help streamline passing amendments if you need to create or abolish committees. Additionally, your bylaws should include what authority is delegated to what committee.
Conflicts of Interest
Improper management of conflicts of interest can lead to IRS penalties and breach of fiduciary duties. Including a specific procedure for handling conflicts of interest can help protect your organization and the individual who has the conflict.
All bylaws should include a provision detailing how you can amend the bylaws themselves in the event they need to be changed. You can choose to have a third party in charge of amending the bylaws or allow for board approval of bylaw amendments. Additionally, you can choose to require a higher degree of consensus to approve the bylaws. For example, most votes only need a majority, but changing the bylaws may require 75% of the board. This higher degree of consensus helps protect the nonprofit from any significant structural changes without ensuring it is best for the nonprofit.
The Bottom Line
If you want to start a 501c3 nonprofit, you will need to begin with your bylaws. This process can be cumbersome, and a mistake on your bylaws could lead to severe issues with the organization in the future. It is essential to have your bylaws drafted by an experienced attorney who understands your organization's needs. If you are looking to start a nonprofit, give us a call to determine what you need in your bylaws.