The bylaws of a non-profit organization guide its directors, officers, and employees on how to conduct themselves and the business of the organization. If the non-profit wants to maintain its tax-exempt standing, these bylaws must be drafted subject to standards established by the tax code and applicable state law. Although bylaws may be amended, it is important that the rules are drafted well to ensure that the non-profit runs smoothly.
Non-profits are a class of organizations that have a special legal designation exempting them from taxation. These organizations are organized around a principle such as assisting others, promoting a cause, or supporting a professional class. All funds that these organizations raise are used to further their causes. Examples of nonprofits include churches, Harvard University, and the National Football League.
The bylaws define how a non-profit works toward its goals. Bylaws are drafted and adopted when the organization is created and can be amended as needed. Although the organizations are free to conduct their business as they see fit, the bylaws must conform to the regulations of the state in which the organizations are located. The bylaws discuss issues such as the duties of directors and officers; the procedures for board meetings; the process of electing directors and choosing officers; and establishing how the organization’s funds will be used.
Tax Code Limits
The bylaws must conform to the restrictions placed on non-profits as defined by the tax code. All non-profits are prohibited from transferring any benefit to any individual or organization that helped create or currently manages the nonprofit. This means that board members or people who have a vote on how the non-profit conducts itself cannot receive distributed profits or services from the organization for which they did not pay market rates. Specific classes of non-profits have additional limitations. For example, 501(c)(3) organizations are prohibited from influencing legislation or supporting any campaign for or against any political candidates; 501(c)(3)s are required to only be organized for a specific charitable purpose, as defined by the tax code and the IRS.
When drafting your organization’s bylaws, ask others for advice and get insight from individuals who are going to be a part of the non-profit. Consider reviewing comparable organizations’ bylaws. Bylaws are private documents and do not need to be disclosed to the public. However, given the public standing of these organizations and the fact that they often receive public donations, making the bylaws available would increase transparency and could increase an organization’s reputation.
John Cromwell specializes in financial, legal and small business issues. Cromwell holds a bachelor's and master's degree in accounting, as well as a Juris Doctor. He is currently a co-founder of two businesses.