Developing Better Bylaws: Supporting Mission, Governance and Operations at Your Nonprofit

JASON Z. QU

MANAGING ATTORNEY

D.C. BAR PRO BONO CENTER

JULY 21, 2020

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Nonprofit Bylaws: Functions, Purposes and Goals

Nonprofit Governance 101 ➢ Most nonprofit organizations are corporations that are governed by a Board

of Directors – the Board, in turn, is structured, empowered, and regulated by the nonprofit’s Articles of Incorporation, its Bylaws, and relevant governmental legal authorities.

• The Articles are like the constitution – they set forth broad principles for the operation of the nonprofit (i.e., the corporation shall not be operated for the benefit or private individuals and its affairs shall be managed by a board of directors.)

• The Bylaws are like statutes – more specific rules that govern the general operations of the nonprofit and are consistent with the principles set forth in the articles of incorporation. (i.e., the Board shall consist of at least 3 and not more that 15 directors.)

How are Bylaws Created?➢ The bylaws are first adopted by the initial Board of Directors.

• They can be amended by subsequent Boards.

➢ Bylaws may contain any provision for managing the activities and regulating the affairs of the nonprofit that is not inconsistent with the Articles or existing laws

➢ The D.C. Nonprofit Code contains default provisions that apply in cases where the Bylaws are silent on key issues. (e.g., can the Board hold a meeting via conference call? D.C. Code says yes, unless the Bylaws say otherwise)• For clarity and consistency, best to include these Code-covered legal requirements

in your Bylaws • Nobody wants to memorize the Nonprofit Code!

Why Are Bylaws Important?➢ Authorizing Actions and Decisions: Bylaws define the “who, what, where, why, and how” re:

the nonprofit’s process for making major decisions• Decisionmakers get their legal authority to act via the Bylaws and must do so in accordance

with the bylaws for their actions to be bindings

➢ Establishing Governance Structure: Bylaws create or implement governance structures (e.g. board committees) that affect the organization’s day-to-day operations

➢ Individual Responsibilities: Bylaws frame the function, roles and responsibilities of the organization’s members (if any), directors, officers and key personnel

➢ Legally Enforceable: Bylaws are essentially a legal contract between the nonprofit corporation and its members (if any), directors, officers, and key personnel • A breach of the Bylaws can cause legal liability to the organization and to breaching

individuals for the damages or other harm caused by the breach

• Potential enforcement in court (e.g. non-breaching directors or officers file legal action) or by regulatory authorities (e.g. D.C. Officer of Attorney General)

Developing Better Bylaws: 6 Key Goals

1. Legal Compliance

2. Consistency

3. Clarity

4. Completeness

5. Flexibility

6. Culture & Values

Developing Better Bylaws: 6 Key Goals

1. Legal Compliance

• Bylaws are, themselves, required to apply for and obtain federal 501(c)(3) status

• Bylaws also codify structures, responsibilities, and practices that are needed to satisfy other relevant legal requirements. Legal requirements can stem from:

A. D.C. Nonprofit Code – specific requirements re: board composition, meetings, other corporate procedures, officers, members, indemnification, etc.

B. Federal IRS Rules – general rules re: nonprofit mission/purposes and ongoing compliance

C. Fiduciary Duties of Nonprofit Directors – directors have legally recognized duties of care, loyalty, obedience, and a duty to inform

◦ Bylaws create infrastructure for satisfying/exercising those duties

◦ Mutually reinforcing b/c “duty of obedience” requires adherence to nonprofit bylaws

Developing Better Bylaws: 6 Key Goals2. Consistency

• The Golden Rule: “Bylaws should say what you do, and you should do what the they say.”

• Bylaws should be consistent with the actual practices of your organization

o You call into question the legality of the organization’s actions if they are not properly authorized/executed in accordance with the bylaws

Tips & Next Steps: Review your bylaws for requirements that are out of step with your current practices. Then decide, for inconsistent provisions: (1) Revise the bylaws (if legally permissible)? Or (2) change the practice.

Developing Better Bylaws: 6 Key Goals2. Consistency

• Another layer of consistency = consistency between bylaws & other key organizational documents – specifically, your:

o Articles;

o Other organizational policies (e.g. Conflicts of Interest policy);

o Annual Form 990 filings

• Inconsistencies can be small/technical (e.g. do you consistently use “President” vs. “Chair” to describe the head of the board?) or major (do you articulate your mission/purposes differently across different documents?)

Tips & Next Steps: Ensure that mission, description of key programs, basic governance structure, etc. are consistent across all organizational documents & filings; start by conforming with Articles (or amending Articles if necessary/appropriate)

Developing Better Bylaws: 6 Key Goals3. Clarity

• Language in bylaws should be clear and unambiguous; be concise and avoid unnecessary jargon

• Ambiguity in bylaws can lead to conflicts of interpretation and implementation amongst directors and other stakeholders

o Conversely, clear language can prevent or resolve conflicting understandings of how the nonprofit is operated and governed

Tips & Next Steps: Identify clauses or provisions in your bylaws that are open to multiple interpretations; discuss and revise using clearer, unambiguous language.

Developing Better Bylaws: 6 Key Goals4. Completeness

• Bylaws should address both regular/recurring situations (e.g. annual board elections) and rarer “what-if”/“worst case” scenarios (e.g. process for removing directors; process for dissolving the nonprofit)

• Important to address awkward/sensitive issues head-on – saves you conflict down the road (“Just going by the Bylaws…”)

• D.C. Nonprofit Code may have default provisions to fill in any “holes”, but don’t rely on the Code

Developing Better Bylaws: 6 Key Goals5. Flexibility

• Bylaws should give nonprofit leaders maximum flexibility to deal with changed circumstances and/or pressing needs

o E.g., allow the board to have telephonic meetings even if you prefer having in-person meetings

• Bylaws should create the floor, not the ideal/“best practice” version of your governance and operations

• Use ranges when appropriate (e.g. “the Board shall consist of between 7-15 directors”) and give the Board general authority to create non-essential officers & committees, rather than locking yourself into a rigid committee structure/officer mix

• Not everything needs to be in the bylaws; follow-on policies can create more detailed requirements and procedures, but can be amended more easily

Developing Better Bylaws: 6 Key Goals6. Culture and Values

• The contents of your bylaws will affect how your organization is run and overseen; this will, in turn, affect your organization’s culture and codify core values

• Aside from obvious provisions (e.g. Mission/Purpose statement), consider how bylaws provisions affect nonprofit’s posture towards:

o Collaboration/Participatory Decision-Making: What is the balance of power between the Board, key members/officers of the Board, and other organizational stakeholders?

▪ e.g. existence of Executive Committee; existence of standing non-Board committees; role of Executive Director; issue-specific supermajority requirements

o Board Culture: Term limits, attendance requirements, and removal requirements communicate expectations about board service & board culture

o Diversity, Equity, and Inclusion: Are there binding and/or aspirational commitments to advancing DEI in the Bylaws? What is the process for recruiting a (diverse, inclusive) Board?

Anatomy of Nonprofit Bylaws & Drafting Tips

1. Corporate Name

➢ Consistency is key – the Nonprofit’s name must be identical in its Articles of Incorporation and its Bylaws

• If they do not match, corrective amendments will be necessary

• All governmental filings and legal documents should use the correct, consistent name

2. Nonprofit Mission/Purposes

➢ Same idea – to ensure consistency, simply cross-reference Articles’ purpose statement instead of restating it in your Bylaws

• If you prefer to restate the Mission/Purpose in the Bylaws, ensure that it’s identical to the language in the Articles – otherwise, amend or the other to conform

• Check your 990s as well!

2. Nonprofit Mission/Purposes

Template Purpose Statement from Articles of Incorporation

➢ Keep your “specific” purpose statement as general as possible to accommodate a variety of activities & include “catch-all” provision – otherwise, you will have to amend your Articles and provide IRS notification (via Form 990) when your mission/key activities change

3. Corporate Offices & Registered Agent

➢ Offices: In D.C., nonprofits need a corporate office address to obtain a Basic Business License

➢ Registered Agent: Nonprofits are also required to designate a Registered Agent and to keep that information up-to-date with DCRA

➢ These bylaws provisions affirm these legal requirements, but also ensure maximum flexibility

4. Members vs. Non-Members

➢ Nonprofit corporations can take one of two forms – membership versus non-membership• In a membership organization, the members are like stockholders in a for-

profit corporation. They elect directors (and sometimes officers) and they approve major corporate transactions, such as corporate mergers

• In a non-membership organization, these decisions are made by the Board itself

4. Members vs. Non-Members➢ Members are optional – generally, running a membership nonprofit is more complex

and administratively demanding; non-member nonprofits are much more common today

➢ Your Articles will have the final say on whether you’re a membership or non-membership organization – check to make sure

➢ Depending on which form the organization takes, the provisions of the bylaws will vary significantly. For membership orgs, special considerations in the Bylaws include:• Determining Membership: setting membership criteria; process for admitting members (incl.

obtaining consent); process for terminating or suspending membership

• Annual Meetings & Special Meetings: process for holding the mandatory annual meeting; method for determining the “record date” (the cut-off date as of which the Board determines who is a member entitled to vote at the meeting); notice requirements and procedures; procedures for calling and holding special meetings

• Membership Voting: quorum, majority required, and proxy/ballot voting requirements

• Director and Officer Elections: details and procedures re: how the members elect org leaders

5. Board of Directors –Membership on the Board ➢ Nonprofits must have a board of directors. Bylaws should address:

• Number of Directors: DC law requires a minimum of 3 directors on the board

o Bylaws will typically express a higher acceptable range for the size of the board (i.e., between three to nine directors) – even if aspiration is higher, set a safe lower bound

• Qualifications: Only individuals can serve as a director; for example, cannot have an XYZ Org. seat (although you can give XYZ Org the right to appoint such individual)

o Directors do not have to be a resident of D.C. or the United States

• Ex Officio Members: You may choose to have ex officio directors. Ex officio directors are automatically members of the board because of their position – common ex officiomembers include immediate past president of the board or the CEO

o Ex officio does not mean non-voting; ex officio members almost always have the right to vote (it is not a good practice to have non-voting members of the Board – they have the potential legal liability of Board members without actual authority)

5. Board of Directors –Membership on the Board ➢ Nonprofits must have a board of directors. Bylaws should address:

• Term Lengths: The bylaws should specify a director’s term of office (DC Code default is one year, unless bylaws provide otherwise.)

• It is better to have multi-year terms that are staggered between “classes” of directors, so that a completely new Board is not elected each year

➢ Term Limits: The bylaws may contain term limits, which put a cap on the number of terms a director can serve (either permanently, or with “cooling off” period before they can be reelected). It is considered a best practice to ensure that board membership is refreshed vs. entrenched/stagnant. • If you have term limits, make sure to follow them! • Avoid disputes about the authority of directors who “overstay” their term

5. Board of Directors –Membership on the Board ➢ Nonprofits must have a board of directors. Bylaws should address:

• Director Removal & Resignation: In non-membership orgs, directors may remove a fellow director with or without cause, unless bylaws say otherwise. o “For cause” removal requirement is not advisable – can generate legal disputes and

delays about whether there was adequate “cause”. Consider amendingo Allow directors to resign “on demand”, without burdensome acceptance/notice reqs

• Attendance Requirement: Consider including a provision that if a director misses a particular number of meetings in a row or over the course of a year, the person is automatically off the Board. This mechanism saves directors from the awkwardness of removing non-attending directors & communicates attendance expectations up front

• Vacancies: Allow the remaining directors to fill a board vacancy by majority vote whenever one arises – also address situations where # of remaining directors is fewer than quorum, e.g. allowing vacancies to be filled by unanimous consent

5. Board of Directors –Meeting and Voting Procedures➢ Regular Meetings: The bylaws should provide for regular board meetings. The specific

dates can be in the bylaws (i.e., third Monday of every month) but better to have the Board adopt a resolution scheduling the meetings at the beginning of each year.• The nonprofit does not have to provide separate notice of a regularly scheduled board

meeting• Bylaws can also schedule an annual meeting to elect new directors & perform other

period tasks

➢ Special Meetings: The board can also call special meetings. The bylaws should specify who can call and how much notice is required.

• If the bylaws are silent, then the chair, the CEO or 20% of the Board can call a special meeting of the board on 2 days’ notice.

• Bylaws can specify the form that special meeting notices should take; make sure that your bylaws allow for email or other electronic forms of notice

5. Board of Directors –Meeting and Voting Procedures➢ Electronic Meetings: Electronic meetings (e.g. via telephone, web conference) where

everyone can hear, speak, and vote are allowed by default• Ensure that your bylaws do not contain language specifically barring electronic meetings.

For clarity, consider adding language that specifically permits electronic meetings

➢ Actions of the Board (Voting): By default, the board should be able to approve actions by a vote of the majority of directors present at a meeting at which quorum is present • Quorum is typically a majority of the directors currently in office; you can make it as low as

1/3 of all directors, but this is not recommended

➢ Acting by Unanimous Written Consent: D.C. law also allows the board to act via unanimous written consent, unless the Bylaws say otherwise – useful for routine/non-controversial matters

➢ Robert’s Rules: No need to observe complex procedural reqs like Robert’s Rules

5. Board of Directors –Meeting and Voting Procedures➢ Acting by Unanimous Written Consent: D.C. law also allows the board to act via

unanimous written consent, unless the Bylaws say otherwise – useful for routine/non-controversial matters

• Unanimous means unanimous – e.g., an affirmative written consent from all 7/7 of the directors in office to a specific proposed action

➢ No Proxy or Ballot Voting: D.C. law does not allow for proxy or ballot voting• Proxies: asking another individual to vote on your behalf without being personally

present at a meeting

• Ballots: voting outside the confines of a meeting without a unanimous consent requirement

• Some bylaws (especially older ones) may allow for proxy or ballot voting, but 2010 Nonprofit Code amendments clarified that these practices are not permitted

o To act quickly, call a special (electronic) meeting or vote by unanimous consent

6. Officers➢ The Bylaws must provide for the selection of officers.

➢ DC law does not specify the number and title of officers, except that a nonprofit must have: (1) a chief management officer; (2) a chief financial officer; and (3) someone responsible for maintaining the books and records of the organization. These are functional titles, and do not have to be the literal title of the persons fulfilling each role. • Chief Management Officer: The most senior staff person (e.g. Executive Director; CEO) would

normally be the Chief Management Officer.o In all-volunteer organizations, the Board President/Board Chair generally also serves as

the Chief Management Officer.

• Chief Financial Officer: In smaller organizations, the Chief Financial Officer would be the Treasurer; in larger organizations, this is typically a staff position.

• Book and Records: This role is generally fulfilled by the board Secretary. Again, in large organizations, this function can be transferred to a staff person.

• To ensure compliance, your Bylaws should specify which of your officers are meant to fulfill each of these three DC Code-required positions

6. Board Officers➢ Most nonprofits have a core set of volunteer “Board Officers”. These positions are

typically Chair, Vice Chair, Treasurer, and Secretary• The Chair oversees the Board and presides over the meetings of the Board; the Vice

Chair performs these functions in the absence of the Chair. The Chair and Vice Chair are always directors.

• The Treasurer and Secretary have duties that are specific to the whole organization and not just the board – finance and corporate recordkeeping, respectively

o These positions can be filled by staff persons; however, the more common practice is to reserve these positions specifically for Board members to help with succession planning and to enable the Board to meet in Executive Session /w all officers present

➢ The Bylaws should outline the duties of each Board Officer and the process for electing them

• Require a majority vote of all directors for Officer appointments

6. Administrative Officers➢ Nonprofits can also have “Administrative Officers” who are generally executive-level (paid) staff

rather than directors on the Board; your bylaws should allow the Board to create Administrative Officers as needed (for maximum flexibility), but may also specify some standing AO positions

➢ The most common standing Administrative Officer is a CEO/ED (who typically serves the function of CMO); best practice is to have the Bylaws create a standing CEO/ED position, but only require the Board to fill it when it has the funds/the ability to hire a candidate• Your CEO/ED is always considered an officer under D.C. law and IRS rules, unless they do not exercise

the actual authority of a CEO/ED

➢ Other Administrative Officers can include “C-level” executives like a CFO/COO• However, not everyone with a title is automatically an officer. Someone can have a title – such as Vice

President of Programs or Director of Communications – and not be an officer. • An officer has the authority to perform certain activities on behalf of the nonprofit as a whole – such as

signing government filings, executing deeds, and opening bank accounts – that other employees do not have; officers also have enhanced fiduciary duties for serving in their capacity

• It is therefore important for the Board to clarify which executives are “officers” vs. other high-level staff

7. Board & Advisory Committees ➢ Under the DC Code, a Board may establish two types of committees – board committees

and advisory committees

➢ Board committees have the authority to make decisions on behalf of the Board. For example, if the Board appoints a Finance Committee, it can make binding changes to the budget in the same way the Board can.• Other common board committees include Executive, Audit, Compensation, Strategic

Planning, Development, Public Relations, and Governance/Nominations committees

➢ There are a few exceptions to the scope of a committee’s power. A board committee cannot:• Elect or replace directors;

• Amend the bylaws;

• Dispose of a substantial portion of the nonprofit’s assets; or

• In membership orgs, recommend that a matter be put before the members for a vote.

7. Board & Advisory Committees ➢ Because board committees have broad powers and final authority within their area of

expertise, only directors can serve on a board committee under D.C. law • Also, the creation of the committee and the appointment of committee members must

be approved by a majority of all directors serving on the Board, not just a majority of directors present at a particular meeting

➢ No committees are required under the D.C. code, and bylaws can simply empower the Board to create committees as needed; specifics can be laid out in a charter for each committee• One common exception is an Executive Committee, which typically has general authority

over all Board matters rather than a specific issue area – typically used to facilitate decision-making between board meetings or in crisis situations where a meeting of the full Board would be impractical

• Because Executive Committees can seriously affect the balance of power and decision-making process of full Board, bylaws are often specific about whether they are allowed or disallowed within an organization

7. Board & Advisory Committees ➢ The bylaws can also authorize the Board to create advisory committees –

these are committees that can make recommendations to the board, but not final decisions. • E.g. Fundraising Committee; PR/Communications; Junior Boards

➢ Advisory committees can also make staff-level decisions that do not require direct Board approval or oversight • E.g. Events Committee that plans and executives the annual fundraiser

➢ Non-board members can serve on advisory committees – a great opportunity to engage non-directors in governance/leadership

➢ Bylaws should allow for the creation of Advisory Committees as needed

8. Indemnification Procedures➢ Under D.C. law, if an officer/director is sued with respect to any conduct which they

reasonably believed to have been in the best interests of the organization and they prevail in the suit (on the merits or otherwise), the director is legally entitled to indemnification by the nonprofits (e.g. coverage of legal fees & other costs related to the proceedings)

➢ In order to recruit and retain officers/directors, nonprofits are allowed (and often choose to) offer expanded indemnification for their officers/directors; e.g. covering costs from the beginning of litigation, instead of waiting to see if the officer/director prevails • Nonprofits purchase Directors & Officers (D&O) Liability Insurance to fund these

indemnification obligations

➢ Articles should specify whether/when the organization will offer expanded indemnification; Bylaws should have section describing the process that the Board will use (generally requiring an analysis/vote) to approve expanded indemnification on a case-by-case basis, with special attention to ensuring that the process is free from conflicts of interest

9. 501(c)(3) Compliance

➢ Articles should have language requiring the nonprofit to act only in accordance with IRS rules governing 501(c)(3) nonprofits; Bylaws can include a similar section, but not mandatory

10. Fiscal Year

➢ Bylaws should contain a provision establishing your nonprofit’s fiscal year – can be on a calendar year basis or a different cycle (depending on revenue, grant, program, and audit-related considerations)

➢ Note: changes to your fiscal year require IRS notification (either by filing a form 990 for the “short year” following the change or, if a change was already made within the last 10 years, IRS Form 1128, Application to Adopt, Change, or Retain a Tax Year)

11. Execution of Documents / Check Signing Requirements / Loans

➢ Execution of Documents – This provision ensures that officers only sign/execute documents once, even if they hold multiple offices/titles

➢ Check Signers – Specifies who is authorized to sign checks; best practice is to have multiple authorized signers; as an internal financial control, consider requiring 2 signatures on some (i.e. large)/all checks

➢ Loans – DC law prohibits making loans to officers/directors; consider codifying req in your bylaws

12. Amending the Bylaws

➢ Include a specific provision allowing for amendments to the Bylaws as needed; typically subject to supermajority and extended notice requirements

➢ In membership orgs, amendments may require member approval in certain circumstances (generally when they affect the status and rights of the members)

“Living” and Reviewing Your Bylaws

➢ Review your bylaws on a periodic basis to ensure that they are consistent with real-world practice and supportive of changing organizational needs • Can be a project of the full Board at a designated time; alternatively, Governance

Committee or ad hoc Bylaws Committee can be delegated primary responsibility of conducting the review and recommending amendments

• Best practice is to perform a full review at least every 2-3 years; but also in response to organizational changes or changes to the law affecting nonprofits

➢ Include a review of the bylaws as part of orientation/on-boarding process for directors and staff

Beyond Bylaws➢ Nonprofit bylaws should not be your

only “day-to-day” governance document – nonprofits should adopt policies and procedures relevant to their operations and business, as needed

➢ The IRS (via the “Governance” section of Form 990) recommends that nonprofits have the following policies:• Conflict of Interest (+ annual COI

disclosure forms)

• Whistleblower

• Record Retention

Beyond these IRS-recommended policies, other common policies include:• Code of Ethics

• Board Guidelines/Manual

• Compensation

• Child Safety/Risk Management

• Anti-Harassment/Retaliation

• Diversity, Equity & Inclusion / Non-Discrimination

• Gift policy/Investment policy

• Social Media

Questions?

Jason QuD.C. Bar Pro Bono Center901 4th Street NWWashington, DC 20001jqu@dcbar.org

Resources:• Nonprofit resource library – http://www.probono.center/nonprofits• Template bylaws – https://probono.center/templatebylaws