Preparing Articles For Business

Preparing Articles of Incorporation
Leah Ryals Jacobs

Do you feel like you have a fantastic idea for a nonprofit, but have no idea where to start? We’ve compiled a few tips for the preparation of your Articles of Incorporation, Bylaws and Policies. Take a look at the suggestions provided to avoid some of the mistakes made by many nonprofit organizations.

Incorporation Process, Procedures

It is important to note that the incorporation process for nonprofit organizations is state specific. While there are many similarities, you should always review state requirements for incorporation of a nonprofit organization. Incorporation provides several benefits. Among these are reservation of the entity name, limitation of liability for the director and members, and it allows the entity to file for 501(c)(3) status (and obtain the benefits that come along with that status). Regardless of the state you are in, however, you will need to prepare articles of incorporation, bylaws, and key policies for your nonprofit entity. Furthermore, you will need to develop a full mission statement.

Articles of Incorporation: Key Provisions

When drafting the Articles of Incorporation, there are some key provisions you will want to include. First, you will want to ensure the document limits the organization’s purpose to those exempt purposes allowed in section 501(c)(3) of the Internal Revenue Code. They must not be given the power to engage in activities that do not further the allowed purposes (unless the activities are a minor part of the organization’s activities). This includes limiting lobbying or political activities. The simple way to meet this requirement is to state in the purpose section that the organization is limited by the purposes allowed in IRC section 501(c)(3). However, you are also able to incorporate a more detailed clause stating the entity is not for profit, will not engage in prohibited political and legislative activity, and will distribute its assets according to the constraints of 501(c)(3).

It is wise to note, however, this clause may not protect the individuals in every situation

Furthermore, the organization must be willing to dedicate its assets to the purpose of the nonprofit or an exempt purpose. This requires creating a dissolution clause that directs all assets to be distributed for exempt purposes upon dissolution of the entity. The alternative is the assets may be distributed to the federal, state, or local government to be used for public purposes.

Ideally, one would also include an indemnification clause for all who serve the entity. This will provide an extra layer of protection for those who work for the nonprofit or volunteer their time. It is wise to note, however, this clause may not protect the individuals in every situation, such as when there are actions that affect public interest or an individual does not act in good faith or acts willfully.

Bylaws: Key Provisions

Bylaws are necessary for an entity seeking 501(c)(3) status. These bylaws will be the rules by which the entity operates. There are numerous provisions that should be in the document, including notice requirements for annual and special meetings, how membership is defined, when the annual meeting will occur, how many members constitute a quorum for conducting business, tenure of members, election procedures, how to remove or fill vacancies of directors and board members, the officer roles and what their responsibilities entail, committee guidelines, and amendment processes. There are a few provisions, however, that I would like to bring to the forefront.

In the bylaws, membership should be defined. This tells who is allowed to be a member, what their voting rights are, and so on. It is possible to have members without voting rights, but this needs to be clearly stated in the bylaws.

A minimum and maximum number of board members should be stated clearly in the bylaws. I usually recommend that boards have an odd number of members, to avoid any need for tie-breaker votes. Also, be sure to check your state statutes on this to verify they do not require a certain minimum/maximum.

Similarly, it needs to be clearly defined how many will constitute a quorum in order to conduct business. Keep in mind that too many required may prevent business from being taken care of. However, you do want a good representation of those on the board present in order to conduct business. You may also want to clarify certain actions can only be taken with a certain number of board members present, thereby differentiating from the typical quorum requirements.

Conflict of interest policies should be regularly reviewed

Terms and term limits are an often overlooked part of the bylaws. This is crucial, because in nonprofit organizations especially, board members and directors can get burned out. Service to a nonprofit sometimes far exceeds what would be required of a board member of a for profit organization. Some boards choose to have two to three year terms, with an ability to serve one term after the other, then require a certain time of rest from the board. I have seen entities where this works well. The board member may then return for additional terms after their break.

Some entities choose to put their conflict of interest policy in their bylaws. I typically advise this be a separate document, but may be referenced in the bylaws. Conflict of interest policies should be regularly reviewed, and it may be easier to make amendments if the document is outside of the bylaws.

Officer titles, term limits, and procedures for electing should also be considered in the bylaws. This provides a clear cut method for installing officers and details what their responsibilities and term limits will be. Details as to how officers, board members, and directors are removed and for what reasons are important to include in the document as well. It is also wise to include what committees are allowed and what powers they may hold, in addition to how the committee may be dissolved. Use of flexible wording here may prevent the need for frequent changes to the bylaws.

In recent years, it has been interesting to see how use of electronic devices has changed the ways board members and directors interact. This is something that should be addressed in the bylaws. The board and director need to determine if they will allow telephonic or electronic communication, whether meetings can be held telephonically, if board members may be considered present if only telephonically available, whether votes may be held via electronic means, and there are most likely many other considerations here. If you are assisting an entity that has been in existence for some time, it may be helpful to review their bylaws to ensure this type of provision has been added. A provision of this nature can streamline communication between the governing parties in an organization, and can assist in more effective operations.

Last, but certainly not least, all bylaws should contain a clause stating how the bylaws may be changed. If anything is certain, it is that there will be needed changes somewhere along the way. Therefore, consideration of this topic from the beginning will ensure smooth operations in the organization’s future.

Key Policies and Procedures

Quite honestly, I could go on forever about the types of policies and procedures a nonprofit may want to consider. Additionally, each policy may look different depending on the type of organization you are dealing with. It is very important for those creating a nonprofit organization to look closely at the goals of the organization, the mission statement, and consider the belief system (if any) behind the organization. This will greatly affect the policies needing consideration. There are some policies, however, that should be considered by all nonprofit organizations.

This has been mentioned many times, but I am going to mention it again. A conflict of interest policy is necessary for any nonprofit organization. The policy may be part of the bylaws, part of a policy manual, or it can be a standalone policy. It is, however, imperative that it exists. It should be thorough and address any potential or actual conflicts that may arise.

Nonprofit organizations should consider a social media, media, and public relations policy. Due to the constraints placed on nonprofits in regards to lobbying, politics, and other such issues, it is important to inform board members, employees and others working in some capacity with the nonprofit they cannot speak for the nonprofit. If they post on social media, speak to the media, or deal in public relations, they should make it clear they are not speaking on behalf of the organization (unless they have approval of the organization to speak on its behalf).

Compensation policies seem to be somewhat matter of course, but these should be thorough and cover many topics. Comp time and vacation should be outlined. I have had dealings with boards who did not offer paid vacation due to budget constraints. This was clearly outlined in their compensation policy and was explained to employees before their employment began. This policy should also explain any benefits offered, such as health care premiums, etc. The expected work schedule should be clearly defined. Leave policies and travel compensation should also be considered.

There should be a clear policy regarding discipline and grievances. Nonprofit organizations should lay out the policy for dispute resolution. Employees need to be aware of termination procedures and if there is severance pay available. The more clearly this information is given, the less likely there will be struggles in the future. Board members should also be aware of the process should someone approach them with a grievance or other dispute. When board members are unclear as to the correct process, it can create communication problems and a lack of clarity in the situation.

With the relaxing of laws toward certain substances, there is more of a need to define what the organization deems appropriate use and what they will consider abuse.

In recent years, I’ve spent more time in drafting detailed electronic device and phone usage policies. With the advent of personal cell phones and an easily accessible internet, it has become much easier for employees to spend significant amounts of work time handling personal matters. Regardless of how strictly the organization wants to limit the above, the rules for usage of phone, internet and other electronics should be well defined in this policy.

Of particular interest to some entities is a conduct and dress policy. I have seen this particularly in religious organizations, where they have a specific moral code they insist their employees and members follow. This can be well defined in a policy that is made part of the policies and procedures of the organization.

Substance abuse policies have become a much needed clause in recent years. With the relaxing of laws toward certain substances, there is more of a need to define what the organization deems appropriate use and what they will consider abuse. I’ve dealt with many religious organizations where those affiliated with the organization are prohibited from alcohol, drugs and other such substances use.

Finally, it can be very helpful to address nepotism and fraternization. I find nepotism seems to happen more frequently in the nonprofit sector. This is not necessarily a bad thing, but it should be addressed in a fully explained policy. Fraternization is similar. Those affiliated with the organization should have clear cut guidelines on what will be acceptable versus what is not allowed. A clear cut policy will also help board members hold directors and other leaders accountable.

If you follow the above guidelines, you will be well on your way to a well-run nonprofit organization. And if in doubt, give us a call at 501-819-2553!