How does a new nonprofit move forward after incorporation? The practical answer is through strong leadership and significant effort! The legal answer is through “First Minutes,” a written corporate resolution reflecting a nonprofit corporation’s key first steps. The First Minutes should address essential elements, particularly to avoid corporate governance pitfalls.
Pre-First Minutes: Initial Formation
A new nonprofit corporation is typically formed through articles of incorporation (or in some states, a certificate of formation), which is a document filed with a state Secretary of State’s office or other state agency. Upon incorporation, the new entity is officially “birthed” as a legal person.
The nonprofit’s articles of incorporation typically include the new entity’s name, corporate purpose (consistent with applicable tax-exemption requirements), registered agent, other IRS-related provisions, and the name of the incorporator. Additionally, many states (e.g., Illinois) require that the articles include an initial list of at least three directors.
Now for First Minutes – Meeting or Unanimous Consent?
The First Minutes document essentially functions as a “To Do” list, addressing important initial matters for the new nonprofit’s leaders. For this reason, the First Minutes may be quite formulaic – but also customized to some extent for each organization’s own first toddling steps.
The First Minutes should be styled in terms of either (A) an initial meeting of all directors, which may be in person, held via teleconference or videoconference, or some combination thereof, or (B) through a unanimous written consent of all the initial directors. Note that if the articles of incorporation contain only the incorporator’s name, then Option A is likely better – allowing the incorporator to name the initial directors, who then meet together. Additionally, under Option A, a quorum of directors as defined under applicable state law (typically a simple majority) must attend the meeting. Conversely, Option B can be quite a helpful tool, particularly if the leadership has already worked through initial matters as addressed further below. The initial directors can then approve the First Minutes through emails (e.g., “I approve”) or other written communications. Note too that “unanimous” means all directors. So, if a director has left since incorporation or a new director is to be added, Option B should not be used for the First Minutes.
Nonprofit boards act officially through their directors, voting in person or otherwise unanimously per above. Accordingly, the First Minutes should reflect that the initial directors address the following matters (“Resolved that . . . .”):
- Approval of transition from significant pre-incorporation history (e.g., if the organization existed previously as a different legal entity, or if it is being created as an affiliate or subsidiary of an existing organization);
- Official approval of filed articles of incorporation;
- Acknowledgment of federal employer identification number;
- Approval of any director additions or removals, as well as recognition of any director resignations;
- Approval of the nonprofit’s bylaws;
- Director terms – per the newly adopted bylaws;
- Officer designations and terms – also per the newly adopted bylaws;
- Approval of any initial employees (e.g., executive director) - and if such persons also serve as directors or officers, then the First Minutes should reflect their recusal from any deliberation or vote on their employment including compensation);
- Approval of initial corporate policies, such as the critically important conflict of interest policy;
- Recognition of completed annual conflict of interest disclosure statement by each director, officer, and key employee, as per the conflict of interest policy;
- Approval of banking institution and initial appointment of individual or joint signatories (e.g., President and Treasurer);
- Authorization to proceed with IRS tax-exemption application and other legal compliance matters;
- Post-incorporation approval of legal counsel; and
- Acknowledgment of pre-incorporation loans, financial transactions, or donations (possibly for tax-deductibility, if the nonprofit is a Section 501(c)(3) organization).
Special attention should be given to the new nonprofit’s bylaws. Before the new board’s approval of written bylaws, the organization will operate only under its state’s nonprofit laws. In Illinois and many other states, such laws provide for default mechanisms – e.g., simple majority for quorum of directors, requirement of at least three directors, meetings upon prescribed notice, and action via meetings or unanimous consent (as described above). But such laws typically do not specify director terms, what officers are required, or many other elements. Consequently, it is vital that the nonprofit board adopt the organization’s own bylaws at the earliest possible stage – typically via the First Minutes. Substantial effort often goes into the bylaws’ successful development before the First Minutes are adopted, particularly so that all the leaders are ready to adopt them once the first meeting is held (or unanimous consent is sought).
Additional attention is warranted for officer designations, banking decisions, and other items in this list. Through such conscientiousness, the nonprofit leadership can provide for smooth initial corporate development. The leaders can then quickly move on to operational matters like fundraising and getting programs underway.
What Could Go Wrong?
Occasionally, nonprofits get started without these crucial first corporate development steps. On the positive side, nonprofits often bring together like-minded individuals to work together for a greater cause, and they can strive together informally with implicit agreements about leadership, governing rules, banking, and other matters listed above. But anyone who has seen the Movie The Social Network knows that startups can go awry due to internal conflict. Nonprofits of all sizes may face board dissension, misunderstandings that lead to frustration, and factional divides that threaten the very existence of even the noblest endeavor.
A common error that some leaders make is confusing the pre-incorporation stage with the post-incorporation stage. The leaders at the pre-incorporation stage are just that: leaders of an organization yet to be official. Once incorporation occurs, the leaders should scrupulously attend to confirming such leadership consistent with the bylaws, including specified terms, the number range of permitted directors, and with any ex officio director (that is, by virtue of such person’s position – such as an identified executive director who therefore is also a voting director per the bylaws). On a related note, a nonprofit’s founder may be a strong leader to whom other leaders defer. But legally speaking, the founder does not have any greater rights than any other director on the board.
Another common error is to neglect corporate meeting minutes (or to not take them at all!). As with the First Minutes, the corporate minutes reflect official actions of the board – and therefore of the corporation. The corporate minutes should succinctly set forth key information such as that a quorum existed sufficient for board action, the directors present, any guests present too, a summary of each agenda item addressed, any key information related to such agenda items (e.g., that a compensated director recused himself or herself for discussion and vote thereon), whether any motions were made, whether such motions were approved as board resolutions, and who took the minutes (typically the corporate secretary).
Banking issues can become problematic too, such as if disagreement arises among the directors that evolves into questions of bank account control. It is not uncommon for banks to accept one director’s word about proper corporate authorization for bank signatories. When other directors disagree with that director about nonprofit governance matters, they may be quite unpleasantly surprised to find themselves unable to access the organization’s account. Even worse sometimes, some banks will freeze the organization’s accounts until the governance disputes are sorted out, which may involve significant delay, give rise to expensive litigation, and otherwise seriously threaten the nonprofit’s mission and viability.
How to Get Governance Right?
What if a nonprofit’s leaders realize they did not start out on the right foot, without taking some or all of the above-listed steps through First Minutes? An important remedial step is to review the available corporate meeting minutes and identify what did go right. The next key step is to do some homework, such as by developing bylaws, identifying banking issues, and confirming directors and officers. Then either call a meeting or prepare for unanimous consent of all directors (if they were previously approved correctly per applicable nonprofit law). The meeting minutes (or unanimous consent document) functions effectively as a catch-up corporate resolution, addressing all matters warranted attention as “Resolved” for board approval. Better late than never!
Positioned for Flourishing
Successful nonprofit leaders attend to both visionary goals and significant details. Quintessentially, First Minutes function deep within the details. They thus may seem relatively insignificant at the time, indeed even just more paperwork to be processed. But they are vital! As first initial post-incorporation steps, the nonprofit board’s careful attentiveness to developing and then officially approving First Minutes should lay strong groundwork for building the mission and averting governance-related conflicts.