Are Bylaws Like Suits? What Nonprofit Founders Need to Know About Drafting Bylaws That Actually Work

I recently had a client ask me how realistic the portrayal of Louis Litt and his bylaws are on the television series “Suits.” While I haven’t really seen bylaws used in that way in real life, it’s probably the most attention they have gotten in a long time, and rightfully so! The key to the operation of your organization, is the set of rules known as bylaws. It is worth the effort to think through each provision as you are working with your lawyer to draft them or as you are filling out the form if you are doing it yourself or with help from another organization.

Not All Nonprofits Are the Same

Nonprofit organizations are not all the same. They are organized for a variety of purposes under 501(c)(3) of the Internal Revenue Code (“IRC”) and can be encompass a variety of missions from classic charitable work like feeding the hungry to religious or civic organizations. Nonprofits can be large or small public charities or they can be family foundations.

Beyond the more commonly known 501(c)(3) organizations there are other types of nonprofits, such as community and welfare organizations like veteran serving organizations that fall under IRS Section 501(c)(4) or 501(c)(6) business leagues.

Bylaws Are Not One-Size-Fits-All

The point is, that while there are certain formalities that must be followed in each state, you can see how the diverse purposes, size, and memberships of various nonprofits benefit from a view that your bylaws should be compliant with the general formalities, but that does not mean they should be cookie cutter.

Using Resources Like SCORE

Here's a general look at the essential components of nonprofit bylaws, please note these can vary based on the specific state in which the organization is incorporated. It’s important to look at the law in your state.

I’m including a link to the SBA SCORE office from the great state of Ohio here as an example of what free tools and resources may be available to you. SCORE Nonprofits These are taxpayer funded services, USE THEM! If you have a rough draft of your bylaws, read along, it may all make more sense if you are looking at the document.

Incorporation of a nonprofit

The first step to establishing a nonprofit is the incorporation process. This involves filing the legal document that contains the basic information about the organization, such as its name, purpose, and the names of the initial directors. This document is usually called the Articles of Organization. This process and the documents required can vary significantly from one state to another. Some states demand more detailed information in the Articles of Incorporation than others, but in many cases it’s bare bones.

The Bylaws are where you fill in some of the detail and create internal rules for your organization. The Bylaws are also easier to amend than the Articles.

Board of Directors for a non profit

The directors are responsible for overseeing the organization's operations and making significant decisions. They define the rights and responsibilities of the members, as well as the organization's purpose. While you may have been vague regarding the number of directors in your Articles (something like “no less than 3” because that is the minimum required in your state) this is the place where you put in the number of directors you have or are seeking to have.

Think about things like how directors will be appointed or elected, term limits, the process for resignation or removing a director. You don’t want to think about this AFTER you have a board member you wish you could get rid of.

Meetings

Your board is required to meet at least annually. Practically it is best to meet at least quarterly or more frequently. While you must include the language regarding annual meetings and may want to choose the date of the annual meeting, the language for other meetings and special meetings can be left more open.

Members

An important decision to make is whether to have members or not. One of the considerations is the purpose of your organization and how much control the board wants to give to members. It doesn’t have to be an all or nothing proposition. You can decide that members will vote on directors and officers only. Members alternatively can have the right to vote on significant matters affecting the organization, as determined by the Board of Directors.

You also want to think about what the term will be for members and what the process for approving members is. It can be by majority vote or unanimous written consent, or something else. While you are thinking about this, you also want to consider how you would remove a member and what kind of reasons would cause you to want to do that.

Regardless of what rights you choose to give members they are also expected to uphold the organization’s purpose and comply with its bylaws.

As you are thinking this through, also decide how you will keep track of members. Initially it may just be an Excel spreadsheet, but we are planning for success so start thinking about what constitutes good standing, maybe it’s payment of dues, and how you will track membership as you grow.

There are so many different things to think through with a membership organization, we’ll address it in more detail in a separate newsletter. What I really want you to take away from this, is that you don’t want to just check a box. Think about why you are making each decision you are making for the nonprofit. It will save you both time and money later.

Dues

The board sets the dues and the responsibilities around dues. This is a subtopic of membership so we’ll talk about it more when we cover membership. The benefits of membership dues include a steady stream of income, buy in from donors, and engagement. Complexities involve determining what benefits your members will receive in exchange for membership and understanding that the deductibility of membership dues depends on the value of the benefits your members receive in exchange for membership. It’s not as straightforward as just receiving a donation. Think through why you want members, what your goal is for membership, and what price or prices you will charge for memberships.

Conflict of Interest

Conflicts of interest within the organization are bound to arise. It is best to plan for these and have a procedure in place to address them when they do. Many states require a nonprofit to have a Conflict of Interest policy, and the IRS requires one in order to obtain tax exempt status.

Each director, officer, and committee member is required to sign an annual statement affirming their understanding and agreement to comply with the organization's conflict of interest policy. This statement also confirms that they are not aware of any personal, financial, or professional interest that would constitute a conflict of interest, except those already disclosed.

Annual Reporting for a nonprofit

Your state’s regulations will govern the annual or periodic reporting requirements, so we look to those to decide what must be included in the bylaws about reporting. These reports often include financial statements and updates on the organization's operations. Setting up a system like Quickbooks can prove to be valuable here. You can generate these reports directly from the software. We will get into software and technical recommendations, but for now know that you will have reporting requirements and plan what you will need to do to comply. It’s easier to start keeping receipts in an organized way either physically or electronically than it is to hunt them down later!

Tax Year

You must choose a fiscal year for your organization. This is a term you should know. The IRS defines a tax year as “an annual accounting period for keeping records and reporting income and expenses.” A fiscal year can begin on the 1st day of any month and it ends on the last day of the 12th month following. It can also be for 53 weeks.

Your fiscal year can of course be the calendar year, starting on January 1st and ending on December 31st, and in fact that works really well for most nonprofits.

An example of a 52-week fiscal year would be one that begins on September 1st and ends on August 31st.

There are reasons to choose a fiscal year that is not a calendar year. The best example I can think of for choosing something other than a calendar year, is schools. Other reasons include grant cycles and timing of programming.

Like most things, this is not set in stone. If you choose a calendar year and later want to change it, it can be done by filing Form 1128 to the IRS and the filing of a short year 990. This is definitely something you should discuss with your accountant or tax professional if you have any concerns or you aren’t sure. A little thought and planning now will save you money later.

Indemnification and Insurance

This is the clause that lets the volunteers who give you their time and efforts know that if they are acting in good faith and something goes wrong, they will not be held liable. This is an oversimplification of what should be included in this section, but that’s the general idea. Additionally, one of your first orders of business should be to look into Directors and Officers Insurance, and include authority to do so in your bylaws.

There are companies who offer this coverage at reasonable prices and I personally would not serve on a board that does not have this type of insurance. Neither should you.

Amendments to Bylaws

What if you find something isn’t working the way you expected or that you want to include more or less information? You can always amend the bylaws. What this generally requires is approval of the board or a majority vote of the members present at any regular or special meeting, you must give them a certain number of days' written notice letting them know that there is an intention to alter, amend, repeal, or adopt new bylaws a the meeting.

In Conclusion

Nonprofit bylaws are critical to the functioning of the organization. However, they are not a one-size-fits-all document. Depending on the state, the incorporation process, annual reporting requirements, and even the process for amending the bylaws can vary. Therefore, it is crucial for those establishing or running a nonprofit to familiarize themselves with the specific requirements of their state.