Nonprofit Bylaws: Pitfalls Your Nonprofit Should Avoid

Nonprofit Bylaws: Pitfalls Your Nonprofit Should Avoid

by Edward A. Haman, Esq., September 2018

Creating bylaws for a nonprofit organization is necessary for the orderly operation of the corporation, to comply with the law, and to secure nonprofit tax-exempt status. Not understanding how to write bylaws for a nonprofit organization can create conflicts in management, as well as problems with the IRS and state agencies.

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In addition to learning about nonprofit bylaws best practices, you need to be careful to avoid the following bylaw pitfalls:

1. Violating State Law

The nonprofit laws of the state where your nonprofit is incorporated have an impact on bylaws. There are numerous ways for bylaws to violate state nonprofit laws, so you need to be sure you understand these laws. Your state will have some form of nonprofit corporation act, and there may be other laws governing particular types of nonprofits, such as educational organizations and any that require some type of license.

Nonprofit laws, in relation to bylaws, fall into one of two categories:

  1. Mandates. Some laws unequivocally require certain things, or prohibit certain things. You cannot create bylaws that contradict a legal mandate. For example, if your state requires at least three board members, you cannot create bylaws that only provide for two members. Or, if your state prohibits board members from voting by proxy, you cannot create bylaws allowing proxy voting. Similarly, bylaws cannot authorize any action by the nonprofit that is prohibited by law.
  2. Gap-fillers. Some laws provide that certain matters will be handled in a certain way, unless the corporation's bylaws provide otherwise. In effect, the state laws are the bylaws written for you by the legislature if you don't write your own bylaws. For example, state law may say that three-fourths of the board members must be present for a vote, unless your bylaws provide for a smaller number.

2. Being Inconsistent with the Articles of Incorporation

Because the Articles of Incorporation are controlling over the bylaws of a nonprofit corporation, any proposed bylaws should be compared with the Articles of Incorporation to be sure the two are consistent. This is especially important with respect to the stated purpose of the organization, which is extremely important to obtaining and maintaining tax-exempt status with the Internal Revenue Service. For the IRS, the controlling document is the Articles of Incorporation, so if you decide to include a statement of the corporation's purpose in the bylaws, it should be exactly the same as what appears in the Articles of Incorporation.

3. Making Bylaws Too Detailed and Inflexible

Bylaws should allow for some flexibility. For example, it is better to say that board meetings will be held monthly, rather than to specify they are to be held the second Monday of each month at 7:00 p.m. You don't want to have to amend the bylaws to switch to a Wednesday. Also, too much detail can lead to unnecessary conflict over these details, thereby distracting board members from the real purpose of the organization.

Some details can be handled in other ways. For example, rather than providing details of committees in the bylaws, simply give the board authority to establish and dissolve committees as it sees fit. The committee details can be handled by a board resolution.

Another common example relates to how provisions for conflicts of interest in nonprofit bylaws are dealt with. Rather than put the conflict of interest policy in the bylaws, you can simply state that a separate policy will be established.

You do not want each board meeting to be consumed with arguments and debates about the bylaws. This takes attention away from fulfilling the basic purpose of the nonprofit.

4. Not Tailoring Bylaws to the Needs of the Organization

Each nonprofit has its unique needs, which will often take into consideration the nature and culture of the organization, the expectations and attitudes of the members and directors, and the number of people involved in managing the organization. Well-written bylaws will reflect these differences.

5. Not Considering All the Possibilities

While the bylaws should not be overly detailed, they do need to be complete. For example, if the bylaws state that all members have a right to examine the organization's records, you may want include a statement that access is limited to Monday through Friday during normal business hours.

6. Making Bylaws Difficult to Amend

Bylaws can be established to allow amendment by a simple majority, or can require a two-thirds vote, a three-fourths vote, or some other supermajority. There is no definite number that is best. The requirement for your nonprofit should take into consideration what will further the goals envisioned by the creators of the nonprofit, as well as the internal politics of satisfying the members.

7. Failing to Review and Update Bylaws

The bylaws should be reviewed periodically to be sure they work well, and that they reflect the actual functioning of the corporation. Two ways this can be accomplished are to create a standing bylaw committee that constantly reviews the bylaws and raises any issues at meetings, or to establish a practice of placing the amendment of bylaws on the agenda of each annual meeting of the board members.

Creating good bylaws for your nonprofit is an essential part of securing the desired nonprofit tax-exempt status. To ensure the proper formation of your nonprofit, and that your bylaws meet legal requirements, you may want to consider the potential benefits an online services provider can offer.