IRS Bylaws: Everything You Need to Know
IRS bylaws are a type of contract or agreement between a corporation and its owners to operate in a particular way.3 min read
2. What should my nonprofit organization's bylaws include?
3. Can my nonprofit organization amend its bylaws?
4. Does my tax-exempt organization need to submit changes in its bylaws to the IRS?
IRS bylaws are a type of contract or agreement between a corporation and its owners to operate in a particular way. No matter if your corporation is for-profit or nonprofit, the IRS requires bylaws to be included in the formation of the corporation. Bylaws are both a legally binding document and a plan of action for your organization.
Should my nonprofit organization incorporate?
While the owners of a commercial business are its shareholders, nonprofit corporations are considered to be owned by the public and represented by a board of directors. At the same time, a nonprofit organization is a type of business subject to state regulation. It's not a requirement that a charitable nonprofit incorporates, but there are numerous beneficial reasons to do so.
The most important advantage to incorporating your organization is that there is limited liability, which means that if anything goes wrong, your personal assets will not be at risk. In addition, it's easier to seek tax-exemption as a 501(c) (3) organization from the IRS if your organization is incorporated.
If you decide not to incorporate at the state level, you can still set up a nonprofit association. This is best only if your organization is very small and generates limited income. Should your organization decide to legally incorporate in order to apply for tax-exemption status through the IRS, you must file your organization's bylaws with your state government. The IRS examines all the legal requirements of a corporation, including bylaws, when determining whether to grant tax-exemption.
What should my nonprofit organization's bylaws include?
Bylaws of nonprofit organizations will vary depending on the nature of the organization, but they are essentially an internal manual for the organization's operation. Bylaws are meant to address basic operational activities, including:
- Governance, such as how the organization is controlled (membership and board of directors).
- Board meeting schedule and protocol.
- Board decision-making and voting procedures, including what comprises a quorum.
- Committee creation and dissolution procedures.
- Number of directors, required qualifications, and responsibilities.
- Procedure for resolving a potential conflict of interest.
- Procedure for changing or amending bylaws.
- Language affirming the necessary terms for 501(c) (3) status, as determined by the IRS.
Nonprofit organizations have a high degree of flexibility when it comes to what can be included within their bylaws, but state laws cover essential governance procedures and these laws must not be violated.
Can my nonprofit organization amend its bylaws?
Each board member should have a copy of the organization's bylaws. A copy should also be present at each board meeting. This allows board members to get to know the bylaws and consult them during meetings. The board of directors and top administrators of the organization should attend meetings from time to time to review the bylaws and determine whether they need to be updated.
When the bylaws are initially drafted, they typically include a clause about how to amend them. Should the bylaws need to be updated, the bylaws themselves will state the proper procedure for amendment. As a nonprofit grows in size, it may make sense to increase the number of board members and update some of the members' duties.
Nonprofit organizations must be able to demonstrate that actions taken are allowed according to its bylaws. Otherwise, challenges — including lawsuits — may arise from auditors, vendors, or its own members.
In most cases, board members should receive proper notification of any proposed amendments, which will be subject to voting and ultimately passed if two-thirds of all members are in favor. Even an unincorporated association that utilizes voting powers might be required to approve bylaw amendments through a majority vote.
Does my tax-exempt organization need to submit changes in its bylaws to the IRS?
The Internal Revenue Code 501(c) (3) requires that any tax-exempt organization report changes in bylaws and other governing documents to the IRS every year using IRS Form 990. This is best used for minor changes. Any significant changes to the organization's methods of operation, purpose, or character must be reported as soon as possible, since these changes, if inconsistent with tax exemption requirements, could jeopardize the tax-exempt status.
You can also submit the new bylaws or a detailed letter stating the amendment changes to the IRS Exempt Organizations Determinations Office.
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