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Reader Question – Nonprofit Board Not Following Bylaws

Reader Question – Nonprofit Board Not Following Bylaws
Question

Angela asks:

What happens when you have a nonprofit foundation that does not follow their own bylaws, does not vote on anything, and board members are added and deleted at the whim of the President with no votes on anything whatsoever?

What can be done about this by a concerned member of the public ?

Answer

Greg McRay responds:

Unfortunately, what you describe happens all-too-often. Equally as unfortunate, there is very little that you as a “concerned citizen” can do legally.

I have seen situations where a lawsuit has been filed against a nonprofit for failure to abide by one or more tenants of its bylaws. One case that I personally witnessed in a NY court room ended badly for the nonprofit, and the plaintiffs were actually granted board control of the organization by the presiding judge. But the plaintiffs were members of the organization and had legal standing to bring a suit. A member of the general public would not have such standing.

About the only thing you could do is possibly contact your state’s AG’s office, but it’s doubtful you would get them to look into it over an allegation of not following their bylaws. Usually, it would take a credible allegation of financial impropriety, and even then, you would have to have a pretty compelling case.

I wish my answer were more encouraging.  It’s just that I’ve seen this play out this way too many times.

From time to time, we highlight a reader question that was submitted in response to another article. We try to pick questions that will resonate with a broad audience. In other words, if the asker is wondering about this issue, many others probably are, as well!

Greg McRay, EA

Greg McRay is the founder and CEO of The Foundation Group. He is registered with the IRS as an Enrolled Agent and specializes in 501(c)(3) and other tax exemption issues.

This Post Has 10 Comments
  1. Greg, in regards to Angela’s question about what can be done when a nonprofit is not following their own bylaws, how does the answer change about what can be done if the challenge comes from a member of the organization? Can the non-profit be sued for not following its bylaws. Can they be civilly prosecuted? Please advise.

    1. They cannot be “prosecuted” unless a crime is committed. However, they very much can be sued if the plaintiff has legal standing to bring a suit to court.

  2. I am on the board of a Thrift Shop which is a 501 (c3) non-profit. The Treasurer and Vice President are married. This is just the start of the problems. I feel that nepotism should not be around on a board. These two do vote the same way and tell us they are not. (lie)
    The other issue is with the Treasurer. The Treasurer insists she knows how to do bookkeeping. All financials she has done were incorrect. It had take eight months for her to agree upon a CPA. The CPA has told us she had doubled paid sales tax for the past 36 months. The Treasurer feels she has done nothing wrong. None of the board members have any financial background besides myself. There is no z-tape in the register which means no idea what the sale and tax were per day. The cash would be counted, make a bank for the register and bank the rest. That is how she would come up with the sales. They did not keep any batch headers or merchant copies of customer sales, which mean no audit trails. This thrift store has given the first year 90,0000 in grants to other non-profits is the town. The following year was 180,000 and this year 229,000. This is a lot of money. I know the 990’s that were filled over the past few years are also incorrect. As far as the federal form 1023 being filled is unknown. I do not get along with either because I am the one who pointed out the inaccuracy of the books.
    I am not sure if I should report this action to The Dept of Revenue and the IRS. I also am afraid what would happen to myself if I do report it.

    1. What you described is a tough situation to be in. First, don’t call the IRS…that’s not the best way to handle this. For starters, it is highly unlikely they will bother to look into it. And, if they do, you’ll probably wish you never made the call.

      What I would do is continue to press for accuracy and transparency in the financial operations. If there are other board members besides the two related ones, you need the strength of their support to force the issue. Just because the Treasurer has the title does not mean she is in total control. Each board member is equally responsible and equally liable to ensure proper financial conduct.

      If there are not enough unrelated board members (including yourself) to band together to override the other two’s lockstep voting, then you don’t have a compliant board structure for a charity to begin with. The IRS requires public charities to have a majority independent board. The two related members are fine, so long as they can’t control governance alone. To confirm whether or not your nonprofit even has charity status, you can search that here: https://apps.irs.gov/app/eos/

      If you cannot improve the situation and feel it necessary to report to someone, I would suggest your state department of charities instead of the IRS. Hopefully, it won’t be necessary. Good luck with it all!

  3. Our president and spouse treasurer have barred me as an executive committee board member from seeing the bank books. I suspect only bad bookkeeping – our financials are down over 35% since they have been power. How do I correct this?

    1. You definitely have a big problem, and you may have to get aggressive to fix it. It is not legal for these two individuals to refuse financial accountability. 501(c)(3) organizations have to operate open book, especially with other board members. As a member of the governing body yourself, you have a personal fiduciary duty to ensure your org’s finances are in order. You need to vigorously press the point with them, and be prepared to bring in legal help if they do not comply.

  4. Question: Can person(s) have a proxy for an Annual Congregational meeting when voting on the annual church budget.
    Are there any guidelines of when it is permissible to have a proxy if you cannot attend a meeting because of what the
    person deems as an important reason.

    1. Hi, Jo. Great question…

      Whether or not proxy voting is allowed depends on two things: state law and your bylaws. The IRS is silent on the matter. First, you need to know if your state nonprofit corporate law allows proxy voting. Many states, like the IRS, are silent on the issue, but some are not. Assuming it’s OK with your state, your bylaws need to specifically allow for it and spell out how it must work to be legitimate.

      Also, some churches operate as an unincorporated association, in which case state corporate law wouldn’t apply. You would rely solely on the bylaws, if that’s the case.

  5. We are a board of directors of an +55 non profit adult community in Murrells Inlet SC. We have had multiple board members quit and are down to the President &
    Vice-President. With only two sitting on the board how do we make a motion to appoint new members to fill the remaining time left on the board chairs that have been vacated?

    1. The first thing to do is to check you bylaws. It could be that the solution is spelled out directly. If not, it might be more challenging.

      If the officers and/or directors you mentioned resigned prior to the end of their terms, they may still technically be considered on the board. It is not uncommon to see bylaws that state that even in resignation, the effective date of the resignation is when the position is replaced. If you know who you would wish to serve in their stead, you could call a board meeting, extending notice even to those resigned, and hold a meeting to nominate and elect the replacement board members.

      If your bylaws don’t have such an effective date verbiage, and/or you know they won’t show, the issue is really one of quorum. With only two board members, you technically do not have a sufficient number of board members to conduct business. But, the IRS doesn’t really get involved in that, so you don’t have a federal issue. Fortunately, most states will allow the two of you to proceed without a proper quorum, mainly because you don’t have any other choice. You can always check with your state’s AG’s office to make sure.

      BTW, yours is a question we get fairly often, so we created a “Reader Question” post with yours. Good luck with all this.

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