September 25, 2016

Nonprofit Series, Part III: Do I Really Need Nonprofit Bylaws?

All Corporations should have bylaws.  The emphasis is on “should” because state and federal laws do not mandate much of anything when it comes to bylaws.

The bylaws are important as a nonprofit because they are going to contain all of the essential information which the IRS requires to know about regarding how your corporation is to be governed and operated. As you will learn, the bylaws are a necessary part of your business as they provide you and your organization with the procedures you should follow during operations.

In other words, writing your bylaws will make you think through many likely scenarios you would not have otherwise, allowing you to come up with solutions for future problems.

The following information, which will be required for your Form 1023 (Request for Tax Exemption), should also be a part of your bylaws:

  • Information on the compensation and other financial arrangements with your officers, directors, trustees, employees, and independent contractors
  • Your conflict of interest and compensation approval policies (see the example in the Sample Bylaws in Appendix B of my book, Nonprofit Bylaws: A Writer’s Guide).
  • Information on your members along with information about other organizations and individuals who receive benefits from you
  • Your specific activities
  • Information outlining your internal controls

Think of the bylaws for your corporation like the Constitution of the United States and your directors like the members of Congress. Your bylaws will govern the corporate law that dictates how your corporation will run. If there is a new treasurer in the company, he is not a director, and he violates the conflict of interest policy, the board of directors will leverage the bylaws to punish him appropriately.

The articles of the bylaws state specific rules by which the corporation operates. In the conflict of interest issue with the new treasurer, a specific article outlines the conflict of interest policy. The policy acts like written law and the boardroom like a court.

The reason that the bylaws should be completed before the Form 1023 is submitted to the IRS is because it contains the internal controls and segregation of duties, which the IRS will want to see before they are comfortable with granting you tax-exempt status.

If you don’t have a conflict of interest policy and a policy for approval of compensation, for example, then the IRS would be running the risk of you paying yourself too much money and ripping off your own non-profit company by using it as a front for personal profit. While this is an extreme example, it is a perfect depiction of why it may be easy to incorporate, but not so easy to get tax-exempt status from the IRS. The IRS certainly does its due diligence to ensure that 501(c)(3) organizations are not defrauding the government to profit personally.

Other articles in this series:

Part I: Nonprofit Organizations 101

Part II: 501(c)(3) Tax Exemption 101

Pat Caffrey is the founder of a nonprofit called Brain Scans for Warriors Inc., an organization dedicated to healing the brains of our Veterans.  He served as a Marine Corps Captain and currently resides in Scottsdale, AZ.  To learn more about Pat or to buy his book, Guide to Nonprofit Incorporation and Tax Exemption, visit NonProfitFounders.com.