Monday, June 17, 2013

About the Nonprofit's Governing Documents, Especially the Bylaws and How They Can Be A Powerful Tool for the Organization's Success

The Bylaws and the Articles of Incorporation are the two governing documents that any nonprofit must create when it is being started up, and then it must have on hand as it conducts its business over the life of the organization.  Nonprofit organizations, when they are started, are required by the Internal Revenue Service (IRS) and often states and other jurisdictional governments or agencies to have specific governing documents finished in order to receive official charity or nonprofit status from them (thus being allowed to, depending on the type of nonprofit being formed, perhaps legally raise tax free dollars, among other rights, for example).

As each nonprofit is its own unique entity so must the founding documents be of each organization.  Similarly, each jurisdiction that oversees each nonprofit is different and has different requirements of what the founding documents are and what they must contain.  Research your federal, state, and local (i.e. county, Parish, borough, city, Tribal, etc.) governments and understand what each requires of a start up nonprofit (charity) where the organization is going to operate (the office location and also whatever geographic region the organization's services will be provided) and on what timetable, so you know before you begin.

[Disclaimer: As is true of every single thing included in this blog, in no way is this post intended to be either legal advice, legal direction, or any kind of substitute for consultation with an attorney.  Do not take it as such.  Instead, this post is merely educational: an introduction to what documents govern nonprofit organizations in a general overview, and it gives some instances (not all) in which they maybe either necessary or helpful and how so.  If you need to understand anything pertaining to the law or legal documents, consult with a qualified credible attorney.]

In a general sense, the Articles are a public document stating what that specific nonprofit is accountable to the public for.  In addition to the IRS, all states require that they be filed.  Articles may be called other things (i.e. the organization's Constitution, Charter, etc.) depending on what type of organization the nonprofit is going to form as (i.e. unincorporated association or corporation), but the phrase "Articles of Incorporation" covers most types of nonprofit organizations.  There are many sections to an Articles document, and I am not covering them here, but the IRS is most interested in the Purposes and Powers clauses. The Purposes clause restricts the organization to pursue only those activities it is allowed to conduct according to the exempt purpose, it has chosen to form under, according to the IRS charity code of all of the IRS's charitable organization exempt purposes.  Today, the current IRS exempt purposes are "...charitable, religious, educational, scientific, literary, testing for public safety, fostering national or international amateur sports competition, and preventing cruelty to children or animals...".  Each nonprofit that forms must select one of these as the exempt purpose it is forming under.  As the nonprofit organization is filing as a "not for profit entity", the Powers clause is where the organization promises not to pay a profit to its members, officers, directors, or anyone; and it also promises here that if the organization is dissolved its assets will be disposed of only for tax exempt purposes or to another nonprofit.

Much more relevant to nonprofit operations and fundraising (which is what I focus on in this blog) are the nonprofit bylaws.  Bylaws state how this specific organization will operate internally based on its mission statement and values and they are legal and binding.  They direct the organization's leadership (specifically its board and as appropriate the executive director) on how to conduct the organization's business now and in the future.  So, it is very helpful to work with a nonprofit attorney familiar with drafting nonprofit bylaws and listen to them.  (If you are needing affordable attorney services see WomenOnCall listed (in the right hand margin of this blog) under Other Nonprofit Resources and Sites I Recommend.  It offers volunteer attorney services, to nonprofits among other services).

Bylaws are not required by every state but they are required by the IRS when a nonprofit applies to become a legal charitable entity.  More than just fulfilling compliance requirements, though, bylaws can be a powerful tool if they're created to be clear, on point (based on the mission statement), and focused.  They are ideally backed by sound recent research and deliberation and consideration among knowledgeable and passionate members of the start up.  Well drafted bylaws can enable a nonprofit to operate more efficiently, effectively, raise support (including donations and volunteers) easier and cheaper, and most importantly can assist beneficiaries more effectively than other organizations that do not take as much care when creating their bylaws. 

Bylaws are living breathing documents. They should be reviewed and considered regularly, probably annually, by a nonprofit's leadership.  As organizations grow over time, their leadership grows wiser or keener, or a beneficiary groups' needs change, or something governing the organization's mission changes, and so on - and sometimes so much so that updates or clarifications are needed in the nonprofit's bylaws.  Guess what dictates how updates or changes may be made to a nonprofit's bylaws?  It's current bylaws!  This document may be updated or changed (to a limit - and to understand this consult with an attorney if your organization is considering changing or updating its bylaws).  Any new or updated bylaws, though, must be provided to the IRS for its records of your organization.  So, to save time and money, ideally, submit the updated bylaws to the IRS before the changed bylaws are formally ratified by your board. Get their authorization of the new bylaws before affirming the new draft.  If the IRS has concerns about fundamental differences between the changes and the organization's mission or other key attributes of the organization in comparison to the proposed updated or new bylaws, they will communicate that and then your leadership can go from there.

Templates exist, of course, of generic outlines of bylaws for any start up nonprofit to utilize as an outline to be filled in by the new organization's key leadership after they meet, deliberate, and determine (clearly and specifically) what the new nonprofit's mission statement is, who or what the beneficiaries are (and why), and how the mission will be delivered to the beneficiaries (or what the organization's programs will be).  Once these paramount organizational principles are finalized and ratified by the board, they become and always remain the backbone of the nonprofit.  As such they are always the first consideration any of the organization's leaders now and forever.  Amid day to day operations questions, challenges, or concerns and while contemplating overarching, oversight, organizational growth and directions, programs, fundraising, and everything concerns or issues that pertains to the nonprofit the mission, the beneficiaries, and the best interests of the beneficiaries and the nonprofit itself are always first - before any personal interest or agenda.  These three fundamental concerns are the raison d'etre for the organization.  As such, these are always first the guiding principle in all decisions for this organization including formulating its governing documents.  These are not any small or minor detail.  These are the reason the organization receives nonprofit charitable status (when it does) and why any entity ultimately seeks assistance from, donates to, volunteers with, or partners with this nonprofit now and in the future.  Before any one's ego, personal agenda, politics, personal insecurities, conflict avoidance, and anything else that this nonprofit's current or future leaders may consider or place first (yes, even before the interests or request of the founder/s) - in professional, nonprofit, best practice, first always comes the missions statement, the organization's beneficiaries, and the best interests of the nonprofit, on its own, and the best interests of the beneficiaries of the nonprofit - always.  A public charity is public.  It is not a private company.  So, personal agendas have no high ranking place in the public interest like the decisions made on behalf of a nonprofit charity.  As such, any nonprofit's mission and beneficiaries and their needs should be studied, understood, deliberated about, suggestions considered, deliberated further, and then clearly defined and ratified by the board before the start up organization creates either its Articles or Bylaws. 

Since a nonprofit's bylaws are "the ground rules for internal operations" (A Nonprofit Organization Operating Manual, Olenick and Olenick, The Foundation Center) what the bylaws will do (and frankly, what they won't do) should be determined before they are created.  Before considering what to include in the bylaws Michael Seltzer in Securing Your Organization's Future advises when about to form a partnership nonprofits should consider the following first but I think it's also terrific advice for those about to create bylaws:

"Legal and fiscal matters take time, but they should be given the highest priority.

"Draft bylaws with extreme care; they determine the rules by which your organization operates and provide the final word in the organizational challenges that inevitably arise over time.  Using boilerplate bylaws may be faster, but working deliberately and seeking advice from managers of seasoned nonprofits is wiser."

I add to Michael's suggestions that day to day policies (i.e. day to day internal operations policies) can be recommended, accepted, and then compiled and kept together (i.e. in an internal policies manual or notebook) and then easily added to or discarded with reason, on the fly, in the future, without having to involve the IRS every time a policy is added or changed, and without having to repeatedly ratify some new bylaws only for an operations policy change.  So, operations policies need not be included in the bylaws.  Operations policies tend to be more under the oversight of the executive director, anyway, and more day to day business so it is probably more efficient and effective that the operations policies as a big binder or as a virtual document be kept in the executive director's office or in their computer and under their purview. 

What are is included in the average set of nonprofit bylaws?  The rules that govern:

"Meetings of members
"Voting members and quorums
"The aspects of the Board of Directors (number of members, length of terms, vacancies, etc.)
"Committees of the board
"Officers of the board
"Provisions for adopting and amending the bylaws"
(Securing Your Organization's Future, Michael Seltzer, The Foundation Center)

None of these topics' governing rules should be added willy nilly - perhaps copied from another organization's or copied from a template.  These procedures are legally binding and will last the duration of the organization's life - hopefully long after you are affiliated with it.  As such, these procedures and rules must be researched, debated, considered, brought to a nonprofit attorney, further debated, and so on until decided upon by the start up's leadership.

Also, the bylaws usually include the following articles:

"1. Purposes stated in the charter elaborated in greater detail.
"2. Qualifications for membership, methods of admission of members, rights and privileges.
"3. Membership initiation or admission fees, dues, termination of membership for non-payment.
"4. Rules for withdrawal, censure, suspension, and expulsion of members (including appeals).
"5. Officers' titles, terms of office, times and manner of election or appointment, qualifications, powers, duties and compensation, if any (for each office, respectively).
 "6. Vacancies in offices or on the board of directors: when they shall be deemed to require action, and the method of filling such vacancies.
"7. Voting by the members, including what number shall constitute a quorum.  This may include cumulative voting, voting by bondholders on the basis of the number of bonds held, and other such special provisions, in many states, but not in all.  Voting procedures should be carefully detailed.
"8. Meetings for elections and for non-election proposes, including notice, quorums and agendas (general and special meetings).
"9. Voting qualifications, individually or by groups, proxies, etc.
"10. Directors' qualifications.
"11. Classification of directors into two, three, four, or five classes, each to hold office so that he terms of one class shall expire every year.
"12. Executive committees of the board of directors to exercise all (or certain) powers of the board between board meetings.
"13. Directors' titles, terms of office, times and manner of election, meetings, powers, and duties.
"14. Convention and assembly rules.
"15. Property holding transfer.
"16. The seal: its adoption, custody and method of use.
"17. Bank of depository, and which officers may act for the organization.
"18. Bonding of the treasurer and other officers and agents.
"19. Fiscal details: fiscal year, regular (at least annual) audits of books.
"20. Principal office and other offices.
"21. Books, records and reports.
"22. Amendment methods and rules for the charter as well as for the bylaws.
"23. Principal committees.
"24. Dissolution procedures.
"25. Disposition of surplus assets on dissolution." (Securing Your Organization's Future, Michael Seltzer, The Foundation Center)

After looking over the common contents of any nonprofit's bylaws, you can understand how, as Olenick and Olenick in A Nonprofit Organization Operating Manual say, "While the articles represent promises to the outside world, a group's bylaws are tools of internal accountability. [emphasis theirs']"  Bylaws minimize oversight and organizational confusion and disputes.

Current bylaws should be given to all members for strong internal operations, but too, to new board members and employees at least upon request if not made public on the organization's website in the spirit of transparency (which builds confidence among a nonprofit's current but also potential members, clients, donors, volunteers, community partners, and the community at large).

Bylaws are helpful not just to comply with various jurisdictions' rules to affiliate and then to remain in good standing, organizational development, organizational operations, efficiency, effectiveness, but too, bylaws are helpful in gathering support by demonstrating the organization's professionalism and accountability to itself and therefore potential supporters of all kinds.  The bylaws may seem like a major hoop to jump through, when an organization starts up, but in fact - it can be a very powerful opportunity - a tool for the organization to spend less, avoid some internal bickering, create clarity, create order and leadership and their roles, and so on.  If the time is taken to really ally a new nonprofit's bylaws with its mission statement and its values and a lot of time, consultation, study, deliberation and consideration, and more of those are involved in creating them - the resulting new bylaws will be powerful and enabling.

1 comment:

Anonymous said...

I agree. I also think it helps to have a quality nonprofit software to help keep things organized!