Key Takeaways

  • Bylaws Are Legally Binding: They govern the internal operations of organizations and must comply with state and federal laws.
  • Importance of Incorporation: Incorporating a nonprofit offers liability protection and tax-exempt status benefits.
  • Essential Bylaw Components: Governance structures, board responsibilities, voting procedures, and conflict resolution should be detailed.
  • Amendments and Compliance: Nonprofits can amend bylaws as needed but must follow the procedure outlined within them.
  • IRS Reporting: Significant changes in a tax-exempt organization's bylaws must be reported to the IRS.
  • Difference Between Bylaws and Articles of Incorporation: Articles establish the organization legally, while bylaws guide its governance.
  • Bylaws for LLCs: Though not legally required, bylaws can help define operational rules and prevent disputes.
  • Corporate vs. Nonprofit Bylaws: The structure of bylaws varies, but all organizations benefit from well-drafted governance rules.
  • Legal Assistance: Consulting an attorney can ensure bylaws are enforceable and aligned with legal obligations.

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.

How Do Bylaws Differ From Articles of Incorporation?

Bylaws and Articles of Incorporation serve different purposes in forming an organization. Articles of Incorporation legally establish the entity with the state, outlining essential information such as the organization’s name, purpose, and registered agent. Bylaws, on the other hand, serve as the internal governance rules that dictate how the organization operates.

Key differences include:

  • Legal Requirement: Articles of Incorporation are mandatory for incorporation; bylaws are generally required but not always filed with the state.
  • Purpose: Articles define the legal existence; bylaws establish operational procedures.
  • Flexibility: Bylaws can be amended more easily than Articles of Incorporation, which typically require state approval for changes.

Both documents should align to ensure compliance and clarity in governance.

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.

Do LLCs Need Bylaws?

Limited Liability Companies (LLCs) are not typically required to have bylaws, but they can benefit from internal governance documents similar to corporate bylaws. Instead of bylaws, LLCs use an Operating Agreement, which outlines:

  • Ownership structure and member roles.
  • Decision-making procedures.
  • Profit and loss distributions.
  • Dispute resolution protocols.

While not mandatory in all states, an Operating Agreement can prevent conflicts and clarify management responsibilities.

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.

Corporate Bylaws vs. Nonprofit Bylaws

While corporate and nonprofit bylaws share similarities, they serve different organizational needs.

  • Corporate Bylaws:
    • Define shareholder rights and obligations.
    • Establish executive roles and voting rights.
    • Outline financial management procedures.
  • Nonprofit Bylaws:
    • Focus on the board of directors' duties and nonprofit mission.
    • Detail fundraising and donation policies.
    • Establish tax compliance and nonprofit dissolution procedures.

Both types of bylaws must align with state and federal regulations, ensuring legal and operational compliance.

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.

How Can an Attorney Help With Bylaws?

A well-drafted set of bylaws ensures smooth governance and legal compliance. An attorney can assist in:

  • Drafting Legally Sound Bylaws: Ensuring the bylaws comply with federal and state regulations.
  • Interpreting Legal Obligations: Advising on how bylaws affect decision-making and dispute resolution.
  • Amending Bylaws: Helping organizations update their bylaws in line with growth and regulatory changes.

Frequently Asked Questions

  1. Are bylaws legally binding?
    Yes, bylaws are legally binding as they define how an organization operates and must comply with state laws.
  2. Can bylaws override state laws?
    No, bylaws cannot override state or federal laws. They must align with legal requirements.
  3. Do LLCs need bylaws?
    No, but they should have an Operating Agreement, which serves a similar purpose in defining governance.
  4. What happens if a nonprofit violates its bylaws?
    Violating bylaws can lead to legal disputes, IRS penalties, or even loss of tax-exempt status.
  5. How often should bylaws be updated?
    Organizations should review their bylaws periodically and update them as needed to reflect changes in structure or laws.

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