What are bylaws? Why are they so important? Many nonprofits ask, “Are we correctly following our Bylaws?” Or even, “Where are our bylaws?!”
All nonprofit organizations should use well developed and legally compliant bylaws. Many state nonprofit corporate statutes require them. Government agencies (like the IRS) and donors (like grant-making foundations) may ask for bylaws – and expect to see them, particularly as a reflection of sound governance. Nonprofit leaders should view bylaws as the nonprofit’s primary governance tool, reviewing them as needed and addressing them as part of board orientation and training.
How can nonprofit leaders best understand and use bylaws for optimal legal compliance, effective governance, and operational success? The following questions and answers address these areas based on our law firm’s extensive experience representing hundreds of nonprofit organizations of all shapes, sizes, missional focus, and tax-exempt status.
Q: What are bylaws?
Merriam-Webster’s Dictionary defines the word “bylaw” as a “rule adopted by an organization chiefly for the government of its members and the regulation of its affairs.” Another dictionary defines bylaws are “rules and regulations enacted by an association or a corporation to provide a framework for its operation and management.” In other words, bylaws are a set of rules identifying how an organizational body must operate – whether through governing leaders, members, or committee members.
Bylaws are not policies, which typically are more fluid and easier to change. Bylaws modifications often require specific types of notice, meeting quorums, sometimes a two-thirds or other super-majority board vote to change, and perhaps approval by a nonprofit’s membership too (if the organization has voting members). Bylaws should be drafted as a stable, durable document, but allowing for some internal flexibility (e.g., a range of directors or a potential variety of committees).
Policies, on the other hand, may be adopted by the Board, the members, a committee, or even an authorized executive on a more ad hoc basis – and particularly to address specific or emergent needs of an organization. Sometimes policies are proposed first by a committee, such as a Property Committee or an HR Committee. Policies may also be recommended by legal counsel for effective operations and legal compliance, such as conflict of interest, dispute resolution, gift acceptance, investment, other financial, child safety, record retention, and a myriad of other organization-specific policies.
Q: Why are bylaws so important?
Legally speaking, a nonprofit corporation is a “person.” A nonprofit’s bylaws are this legal person’s skeleton, directing how the organization is governed through its board of directors as the “muscles.” In other words, bylaws serve as the framework for corporate operations; their structure allows the corporation to function.
Bylaws should bring order and clarity to how a nonprofit should be run – not in terms of its day-to-day operations, but rather in its governance as carried through the people involved with it. Without such corporate skeletal and muscular structures, a nonprofit entity is powerless to move, operate, and accomplish its purposes. In short, bylaws are indispensable.
Q: What are the essential attributes of well-developed bylaws?
Four key pillars apply to effective nonprofit bylaws: (1) accurate fit; (2) internal consistency; (3) legal compliance; and (4) best practices.
First, bylaws should accurately reflect the organization. Does it have members? Then the bylaws should provide for members. How many directors does it have? The bylaws should provide a range of desired directors, with the actual number of directors within such prescribed range. What is the corporation’s stated purpose, as reflected in its website and articles of incorporation? Whatever the purpose, it should likewise be contained in the bylaws. Who are authorized organizational signatories? Its bylaws should contain financial policies providing default answers, absent an express board resolution.
Second, bylaws should be internally consistent. For example, if a nonprofit board changed the “President” officer position to “Chair,” then the bylaws should reflect the updated terminology throughout the bylaws. Likewise, if a nonprofit previously had several standing committees that are no longer used, its bylaws should be updated to delete committee provisions.
Third, bylaws should be legally compliant. For example, the number of prescribed directors under Illinois law must fall within a range of five directors (e.g., 3-8, 4-9, 5-10). On a related note, most state nonprofit laws require that an organization have at least three directors. Most state laws additionally impose minimum notice requirements, such as at least 20 days’ notice for a nonprofit merger in Illinois (accompanied by a proposed plan of merger or summary thereof).
Fourth, bylaws should reflect best practices for nonprofit organizations. Such provisions may address directors’ and officers’ fiduciary duties (including confidentiality),[1] conflict of interest issues[2], indemnification[3] for leaders, financial policies, meetings, and dispute resolution – all consistent with applicable state law, IRS guidelines, and other considerations for optimal nonprofit governance.
Q: What is the most important provision in the bylaws?
Though many provisions in the bylaws are necessary and powerful governance tools, the heart of bylaws lies in the following essential provision: “The affairs, business, and all legal matters of the Corporation shall be managed by its Board of Directors.” In other words, the corporation acts through the Board – as its deliberative and decision-making body. Stated more colloquially, “the buck stops with the Board.”
Q: Which provisions are the most customized?
Typically, the most client-specific bylaw provisions address directors and officers. Director provisions may address the number of directors, their terms, whether any term limits are imposed, and whether any directors serve in an ex officio capacity (see the next question). Officer provisions usually identify specific officer positions, including listed responsibilities, term of office, and whether the officers must also be directors or not. It is common and expected that the President and Vice President are also directors, and often optional for the Secretary and Treasurer to be directors too. Notably, Illinois law prohibits the President and Secretary offices to be filled by the same person, which is otherwise a great best practice since the Secretary is expected to sign corporate minutes and resolutions that may authorize the President in certain ways (e.g., to sign other corporate documents).
Additionally, membership organizations such as churches, other houses of worship, social clubs, and trade associations often have highly customized membership bylaw provisions. Such bylaws should provide for membership qualification, admission, voting rights, discipline, removal, and meetings. Sometimes membership is conferred only as an honorary matter, to communicate a sense of belonging and involvement but not to impart any membership voting rights. Bylaws should clearly state that the “members” are not members for legal purposes. The distinction may be vitally important, not only to clarify voting rights but also in light of some state laws (including Illinois) that provide members with rights of access to organizational minutes and financial records.
Q: What does the term ex officio mean, and where does it belong in the bylaws?
The Latin term ex officio is often used in corporate appellative systems and means “by virtue of one’s job.” An executive director for whom the bylaws designate as a director of the board is automatically a director, because of the person’s executive director position in the corporation. Note that such ex officio role does not therefore mean that the executive director is a voting director of the board. The bylaws should therefore specify whether such ex officio director is voting or non-voting. In many states either option is legally permissible.[4]
A director without any board voting rights, however, ends up in the unfortunate position of having fiduciary responsibilities without any legal power. On the other hand, organizations avoid certain conflicts of interest employing executive directors without voting rights. Many nonprofits prefer to separate Board functions (vision focused) and executive functions (operational focused), and may prefer not to convey voting rights to an executive director for this reason.
Here are a few more examples. First, a church’s senior pastor may be designated in the bylaws as an ex officio director and chairperson of the Board, in order to reflect desired leadership. Second, the president of one organization could be identified in another organization’s bylaws as an ex officio director of the other organization’s board, to promote the two organizations’ close relationship (but with due regard for potential conflicts of interest arising from such dual role). Third, occasionally a nonprofit’s governing board shall be made up of elected officers, perhaps with one or more additional “at large” directors.
Q: What happens when a director’s or officer’s term expires under the bylaws?
If a director’s or officer’s term expires under the bylaws, the termination of the leader’s tenure is not self-executing. Rather, state nonprofit laws uniformly provide that both directors and officers will continue in the expired position notwithstanding such term expiration. Generally, however, the Board is under a duty to fill the expiring term “as soon as is practicable.” It is often helpful for the bylaws to state such information expressly, to avoid confusion about what happens upon a director’s or officer’s term end. Additionally, responsible board leaders should carefully track leaders’ terms, as well as attend to new elections and other means for developing new directors and officers. The nonprofit’s annual meeting (as may be specified in the bylaws) is an excellent time for term renewals and election of new leaders.
Q: How authoritative are bylaws?
Bylaws are THE rules for a nonprofit organization, subject only to possible conflicted provisions in the articles of incorporation or any overriding provisions of a state nonprofit law. Nonprofit leaders thus should work with legal counsel to ensure that bylaw provisions harmonize with the articles of incorporation. Additionally, keep in mind that while bylaws provide a private set of governing rules, they remain subject to state nonprofit statutes. Typically, state laws provide default provisions and some legal boundary lines such as identified above regarding legal compliance. It is therefore advantageous for nonprofits to both (a) be incorporated under nonprofit corporation laws, and (b) to have their own bylaws that amplify nonprofit law and address related governance aspects as may be desired.
Courts will address disputes between governing leaders, among members, and involving other governance problems by focusing on the nonprofit’s bylaws. For example, what are the membership’s voting rights regarding a contested director election? Another example: was sufficient notice given of a board meeting? The answers depend on a trifecta of what the bylaws say, what the state nonprofit law may say if the bylaws are silent, and what the state nonprofit law otherwise directs if it supersedes any contrary bylaw provision.
Q: What if an organization has no bylaws, or have bylaws that are quite outdated?
This is an inherently misleading question. An organization may not have written bylaws, or it may operate in ways that are different than an outdated written version. In that case, state law generally provides for “tradition and custom” to operate as de facto bylaws – i.e., unwritten rules for governance, subject only to any default governance rules under applicable state nonprofit law. In the event of a governance dispute, a court thus would evaluate the way governance matters have been handled over time in order to resolve disputes.
But as should be evident, operating under only “tradition and custom” can be fraught with peril. Whose tradition and custom is followed? For what time period? And how clear is such tradition and custom? Such troublesome questions can lead to enormous conflict, division, and even corporate divorce – often at an extremely high cost to all. The better answer is to have written bylaws, updated as appropriate, to promote clarity of understanding all around and to avoid expensive and destructive litigation.
Q: How should a nonprofit utilize its bylaws?
Admittedly, bylaws are not a short story, novel, or even a poem. They are a reference tool, much like a car manual, designed to instruct the nonprofit’s leaders on how to carry out the corporation’s activities. Bylaws should be easily accessible by all leaders and frequently referenced (e.g., for membership voting, board meetings, financial policies). Bylaws can provide a wonderful training and onboarding tool too for new leaders, particularly with respect to best practices provisions. For example, conflict of interest bylaw provisions can be used to train leaders on their fiduciary duty of loyalty. Additionally, committee bylaw provisions can be used to orient board members about committee service and their expected contributions. Bylaw indemnification provisions can also provide a springboard for addressing potential personal liability for directors and officers.
Q: How often should nonprofits review and possibly update their bylaws?
Nonprofit leaders should consider potential bylaw changes every few years, to ensure that they continue to satisfy the four pillars above. Here are some key questions for organizational leaders to consider, and there are plenty more!
- Does the board need to grow? Perhaps the prescribed range of directors warrants modification.
- Do ex officio positions need to be removed now (or added), in light of organizational leadership changes? The answer to that question often becomes vitally important when an organization shifts from founder-led operations to a new hired executive director (or comparable religious leader).
- Should the board (or membership) quorum requirement be adjusted? A common quorum for board is a simple majority, while membership quorum requirements often are lower (e.g., 20%).
- Has the nonprofit added an Executive Committee or changed its standing committees’ scope of activities or composition? It may be beneficial to modify bylaws’ committee language or to add new provisions.
- Do any legal changes affect the bylaws, or do updated best practices call for adjustments? Such questions may be best answered with advice of legal counsel.
- Are there any bylaw provisions that have proved confusing or otherwise unclear, as the board has exercised governance?
- Finally, and perhaps most importantly, has the nonprofit’s mission changed (or should it?) – with a corresponding need to modify the bylaws’ corporate purpose language?
In sum, bylaws empower a nonprofit board to function well – flourishing in leadership with clarity and focused purpose, and promoting trust and success among employees, volunteers, and donors too. What fantastic reasons to go find one’s bylaws, read them, and use them!
This blog was originally published on May 26, 2021 and updated on May 28, 2021.
[1] For more guidance on directors’ and officers’ fiduciary duties, see our blog articles on Directors’ and Officers’ Duty of Care – Pay Attention and Take Responsibility!, Wearing the Right “Hat”: the Duty of Loyalty, and Staying True to Your Mission: The Duty of Obedience.
[2] For examples of conflict of interest issues and related legal and practical considerations, see our blog article here.
[3] For more information about indemnification, see our blog article here.
[4] In some jurisdictions, such as California, only individuals having voting rights on a nonprofit’s governing board may be properly regarded as directors. Many thanks to Daryl J. Reese, an attorney with the law firm of Johnston Thomas for this clarification. Please see Mr. Reese’s bio here, and a helpful article on California law in this area from Johnson Thomas here.
