The 15 Most Common Nonprofit Bylaw Pitfalls: How to Avoid the Traps
The bylaws are super important to your nonprofit. They form the backbone of a nonprofit’s governance. Without updated, relevant bylaws, directors are often at a loss for how to handle issues that may arise. When there’s a membership dispute, a concern about a director’s behavior, or a voting issue, the bylaws instruct the directors how to proceed. Are your nonprofit’s bylaws ready to handle an unexpected emergency?
1. Understand your state’s nonprofit corporation law.
A state’s nonprofit corporation statute overrules any provision of the organization’s bylaws. The nonprofit corporation act has the default rules for areas that the bylaws might not address, such as the minimum number needed for a quorum for a vote. It also contains prohibitions, like not allowing voting by proxy, among other provisions.
Organizations should review the default provisions in their state’s nonprofit corporation act to see if there are any defaults you should override in the bylaws. For example, the organization could establish a lower quorum for a membership vote than the default number in the nonprofit corporation act. Additionally, you should ensure that the bylaws don’t allow practices prohibited by the state law. If they do, those provisions will have no effect, and any actions under those provisions will be essentially null and void.
Nonprofit corporation statutes vary from state to state, so it’s important to review the relevant state requirements. Simply using another organization’s bylaws as a base, even if the organizations’ missions and operations are similar, could lead to trouble because the requirements, prohibitions, and default provisions of the relevant state nonprofit corporation acts may be – and often are – different.
2. Make sure your bylaws are consistent with other regulatory documents.
Be sure to double-check your bylaws for consistency, both internal and external. They should keep in line with the articles of incorporation, the state’s nonprofit corporation act, and any policy or governance manual. Other state laws provide even more mandatory bylaw provisions if your organization is governed or licensed by another state agency, such as a state department of education.
3. Be sure to address all foreseeable scenarios.
Sometimes, bylaws contain a provision about removing a board member but leave out any provision about how that position gets filled. Take the time to carefully walk through all of the “what-if” scenarios to avoid any holes that will make things difficult.
4. Populate your bylaw committee with an accurate cross-section of your organization.
A bylaw committee is one of the most common ways nonprofits go about the review and amendment process. But, if the committee is made up of people that don’t fully represent your organization’s constituency, they may run into difficulties with the membership or board of directors. By creating a bylaw committee that reflects your organization’s population, you are less likely to run into this problem, and you will have more success vetting potential issues early on in the process.
5. Coordinate the actions of your bylaw committee with legal advice.
When rewriting bylaws, almost inevitably, a legal adviser will spot some inconsistencies and potential problems. Coordinate with legal counsel from the beginning of your process, not after all of the committee’s work has been done. It’s better to start off strong, than waste time on starting over.
6. Create bylaws that reflect the appropriate political climate of your organization.
Bylaws should reflect the balance of power among the members, the board of directors, and the executive committee. Some newer nonprofit corporation acts allow for more flexible governance arrangements, like “designated bodies.” Designated bodies, which hold some, but not all, of the power of members or boards of directors, can be particularly helpful in more parliamentary-style organizations. Depending on the state of incorporation, there could be several options for the disbursement of governance responsibilities. Carefully weigh all available options.
7. Keep your bylaws current.
Often, organizations inherit bylaws that have been patch-worked together over time, leading to an out-of-date document that doesn’t fit the current nonprofit. Sometimes the best solution is to scrap it and start over from scratch, using a good, proven model provided by legal counsel or others as a starting point.
8. Keep your bylaws flexible.
How the organization functions today may not be exactly the same as it will in the future. Building flexibility into the bylaws can help the organization moving forward. This could include stating a range for the required number of board members or allowing the board to designate additional officers not named. Bylaws should provide an outline of governance structure that allow flexibility for future changes.
9. Reserve the details for policies, not bylaws.
Some details belong in board-approved policies rather than in the bylaws. These include items like membership criteria, membership dues, and the operation of committees. It’s helpful to place all of these board-approved policies into a single manual. Bylaws should be a relatively concise and easy-to-navigate document, leaving the details to policies. Policies can be more easily revised in the future so that the bylaws will not need regular amendment.
10. Ensure that your purposes clause reflects your organization today.
This is actually first and foremost a tax-exemption issue.
The IRS often refers to the purposes clause in the articles of incorporation to determine related and unrelated activity. Most nonprofits also have a purposes clause near the beginning of their bylaws, which oftentimes differs from the clause in the articles. The purposes clause in the articles of incorporation is controlling, leaving the one in the bylaws useless and confusing.
Because of this, the two clauses should be fully consistent. It is much simpler if the the bylaws, in lieu of a separate purposes clause, just refers to the purposes clause as written in the articles of incorporation. You should also review the clause in the articles of incorporation, to ensure that it actually reflects your current nonprofit.
11. Closely review the meeting and voting procedures for members and directors.
This is an area where I commonly see bylaw provisions that are inconsistent with the governing state law.
Review your state law to learn how voting members and directors are allowed to meet and vote. Many state nonprofit corporation acts do not allow directors to vote by proxy. To be counted as part of a quorum or vote, a director must attend the meeting in-person or via telephone. Although the trend is changing, some statutes still don’t allow members to vote outside a meeting unless by unanimous written consent. Even for the many statutes that allow voting by email, sometimes specific procedures or prerequisites must be followed.
12. Look at committee composition.
State nonprofit corporation acts can be very particular about committee members. For example, several states and D.C. require that only directors can serve on “committees of the board” . Those committee members are appointed by a majority of all directors (not a majority of a quorum). This requirement applies to committees exercising the power of the board, like an executive or audit committee. Others not exercising the power of the board, like fundraising committees, can have members who are not directors.
13. Pay attention to the approval process.
For organizations with voting members, amendments to the bylaws usually require member approval. (Check your applicable nonprofit corporate statute for the specific requirements.) In some cases, the board of directors must also give approval. Often, you also have to send out written notice of the proposed amendments a certain number of days in advance. It’s important to understand all the details of the approval process at the beginning. You don’t want to go through the entire review only to find out that it will be another year before the you’ll get member approval.
14. Do not make your bylaws too difficult to amend.
Some bylaws require amendments to be approved by a two-thirds vote of the membership or some other burdensome or super-majority requirement. Be sure the bylaw amendment provision and process is not overly difficult and fits with your organization.
15. Keep a pulse on the bylaws.
After amending the bylaws, make sure they don’t become dusty. Your nonprofit could create a standing bylaws committee that can speak up at meetings when bylaws issues are discussed. Other organizations place the bylaws as an agenda item at each annual meeting. Keep bylaws in mind as your nonprofit grows and evolves, amending when necessary. At the same time, though, well-drafted bylaws should be flexible enough to not need changes too often. Constant bylaws revision is unproductive and diverts attention from more pressing business.