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Bylaws

Last modified: December 4, 2018
Estimated reading time: 5 min

DEFINITION:          Governing document for a non-profit organization that establishes and outlines the purpose of the organization and its governing structure, policies, practices, authority, and directives for compliant, ongoing oversight and successful operations of the organization.  The bylaws of an exempt qualifying organization should state the following, at least:

 

  1. Purpose of the organization
  2. Location of offices or operations
  3. Governing Structure
  4. Number of governing members and selection / election / removal of same
  5. Terms of service for governing members
  6. Qualifications for those serving to govern the organization
  7. Methods of conducting business/ Policy Statements
  8. Meeting times / dates (should meet at least annually)
  9. Limitations of the organization and its governing body
  10. Fiscal year (for accounting and reporting this has to be a twelve month period)

 

BEST PRACTICE: 

 

  1. Purpose of the organization:  Ensure it satisfies IRS exemption under code and clearly indicates for others to come alongside as to what the intended purpose of the founders was when initiating the organization and/or amend the bylaws as the purpose and mission changes to keep governance and programs in line with vision.  This is key to helping directors stay on course for the organization.  Be sure this aligns with the articles of incorporation purpose statement, if such is stated.
  2. Location of offices or operations: Typically at least indicate the state of incorporation and/or geographic reach of the organization, again to help lay out good insight for governance and direction of the intended reach and scope of the organization.
  3. Governing Structure: Define whether you will have a governing body of board members (board of directors or trustees) or whether you have members of the organization, who then either vote on all decisions or who may elect a board of directors to manage daily affairs of the organization and bring votes to the general membership as needed for “defined” decisions such as large asset management or hiring of staff or program development affirmations, etc.  If the latter, your bylaws should define the voting privileges of the governing members (whether board only or general members or blended).
  4. Number of governing members and selection / election / removal of same:  For 501(c) status:  Minimum of three individuals to satisfy IRS requirement for accountability and avoidance of self- dealing.  These must be unrelated and/or uncompensated if seeking public charity status; or increase the number of members to comprise that a majority of the governing body will always be unrelated and/or uncompensated.  If majority are related to one another by definition of IRS code – then your organization will not satisfy public charity status and will be considered a private foundation if seeking 501(c)(3) status. Per Pub 557:  Definition of “related” refers to both family and business relationships.
  • “Family relationships” include the individual’s spouse, ancestors, children, grandchildren, great grandchildren, siblings (whether by whole or half-blood), and the spouses of children, grandchildren, great grandchildren, and siblings.
  • “Business relationships” include employment and contractual relationships, and common ownership of a business where any officers, directors, or trustees, individually or together, possess more than a 35% ownership interest in common. “Ownership” means voting power in a corporation, profits interest in a partnership, or beneficial interest in a trust.
  1. Terms of service for governing members: The governing members should be elected for a specified period of time, i.e. one year or two years or up to five years, after which they need to be replaced or re-elected at an annual board meeting or special meeting called for such elections.  This ensures that no one is installed in governing role without consideration for continued service, to ensure good accountability and no self-dealing or private benefit as a result of their tenure on the board of directors or governing body.
  2. Qualifications for those serving to govern the organization: At a minimum, this should state the consideration of the individuals serving to satisfy quorum, as noted in 4. Above, specifically that the governing body will be made up of a majority of non-related and/or non-compensated individuals who can and will govern the organization without conflict of interest or undue influence through relationships.  Additionally, this might be an area where the organization may define what criteria will be used to further vet potential candidates for election to the governing body, to ensure the interests and success of the organization are properly managed.
  3. Methods of conducting business/ Policy Statements:  There are specific requirements of an exempt organization to implement policies and guidelines in the bylaws that ensure the ongoing governing decisions of the organization stay fully compliant as an exempt entity.  These can include at least:
    • required annual meetings,
    • periodic reviews of activities and financial transactions and
    • reports to state and federal agencies, i.e. Form 990 to IRS or state tax reports as may be required
    • registrations with required state agencies, i.e. charitable solicitation agencies or sales tax or franchise tax reporting agencies.
    • review of corporate bylaws at least annually and as new board members are elected
    • executing & reviewing a conflict of interest policy, per Pub 557.  The conflict of interest policy will outline best practices with regard to decision-making, personal benefit, inurement, cash flow to individuals.  The IRS does provide appropriate and required conflict of interest policy samples in the IRS Pub 557.
    • facility or asset use or purchase policies – not required in the bylaws but should have a policy in place.
  4. Meeting times / dates (should meet at least annually): The bylaws should state how often the board or membership will meet, and when that will be.  The bylaws can also indicate how special meetings can be called, and how attendees will be notified of such meetings, for these meetings to be duly called and any decisions made in those meetings to be considered duly decided.  If a meeting is not duly called per the guidelines of the bylaws, any actions taken in that meeting is not a legal or binding action of the organization.  It is required that the governing body meet at least once a year, to oversee a review of the previous year’s activities and financial reports, and to elect or re-elect any governing board members if their terms have expired, and to approve a plan or direction for the year ahead which would include a proposed budget or financial plan for the year.  This is to ensure that the actions of the organization are in line with the direction set by the governing body from the previous year, and there is plan for future success and guidance to those who are doing the day to day work of the organization.
  5. Limitations of the organization and its governing body: In cases where there is need to define any limitations to ensure that the vision of the founding board are defined, i.e. charitable giving will be limited to a very specific purpose or target population, or programs will be limited to a specific type of activity, this should be included in the bylaws.  This will ensure that the passion of the organization is not redirected without due consideration and an action by the board to amend the bylaws should that be decided in future years.
  6. Fiscal year (for accounting and reporting this has to be a twelve month period): The bylaws should state clearly the twelve month accounting period, and this cannot be changed without real attention to ongoing reporting to the IRS and state agencies, since the IRS does require an annual financial report (Form 990 of some series), that is based on the twelve month accounting period.  The default with the IRS is January to December.  Most accounting firms also default to a December fiscal year end, so if your organization has a different twelve month accounting period, be sure to make that clearly known to the person managing your fiscal reports and bookkeeping.
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