Kara Sears
Non-profit corporations are a common vehicle for groups promoting arts, music, education, health, conservation, and community services. They are often a prerequisite for obtaining funds from government agencies and private foundations. Non-profit corporations are required to have officers, who are usually appointed by the board of directors. The bylaws of a non-profit corporation should deal with the highest level of governing issues, including officer position descriptions and responsibilities. While there are usually no limits on related board members holding officer titles, the total number of board seats occupied by related individuals is restricted. Non-profit corporations must observe most of the same formalities as regular corporations, but there are some differences. For example, a non-profit corporation cannot distribute profits to its members or engage in lobbying activities.
Characteristics of Non-Profit By-Laws
| Characteristics | Values |
|---|---|
| Definition | A "nonprofit corporation" is a corporation where no part of the income is distributed to members, directors, or officers. |
| Formation | A nonprofit corporation is created by filing a certificate of formation with the secretary of state. |
| Purpose | A nonprofit corporation may be created for any lawful purpose, which must be stated in its certificate of formation. |
| Tax Exemption | To become exempt from federal and state taxes, the organization must meet certain requirements and apply with the IRS and relevant state authorities. |
| Members | Members of a nonprofit corporation are similar to shareholders of a for-profit corporation in terms of rights. However, members typically do not own the nonprofit and do not receive stock. |
| Directors | Directors are members of the board of directors and have voting rights. They can be elected by voting members, appointed by the board, or designated by a designator in the governing documents. |
| Officers | Officers are usually appointed by the board of directors and can be board members or non-board members involved in day-to-day management. Examples include President, Vice-President, Treasurer, and Secretary. |
| Governance | Nonprofit corporations must follow formalities, such as maintaining records and refraining from distributing profits. They are governed by bylaws that cover purpose, structure, roles, and other key issues. |
| Liability | Nonprofit corporations provide limited liability protection, shielding directors, officers, and members from personal liability for the organization's debts. |
| Amendments | Bylaws can be amended by a majority vote of the Board of Directors, provided that the vote is documented in the Meeting Minutes. |
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What You'll Learn
- Non-profit bylaws must include officer position descriptions and responsibilities
- Non-profit corporations must observe most of the same formalities as regular corporations
- Non-profit corporations are protected from personal liability for the corporation's debts
- Non-profit corporations can't distribute profits to members or contribute to political campaigns
- Non-profit corporations can be created for any lawful purpose
Non-profit bylaws must include officer position descriptions and responsibilities
Non-profit bylaws are the main governing document for a non-profit organisation. They are the main official documents of an organisation, whether it is a non-profit or a for-profit entity. While the IRS does not require specific language in the bylaws of exempt organisations, many state laws dictate that tax-exempt organisations must have a clear operating procedure, which is often outlined in the bylaws. The bylaws are created by the board when the organisation is established. They supplement the rules already defined by the state corporations code and guide how the non-profit is run.
It is important to note that directors and officers are not the same. When an individual holds both the position of director (i.e. board member) and an officer position (e.g. chair of the board), they are often elected only for the officer position. It is then assumed that this person automatically becomes a director, but this is only the case if the governing documents of the non-profit provide that the officer is an ex officio director. An ex officio director has full voting and other rights of a director.
The bylaws should be reviewed approximately every two years. This is because board officer terms can make it hard for the board to keep track of bylaw revisions. The bylaws should accurately reflect how the organisation works and remain relevant. If there are major structural or authority changes, these need to be reported in the next Form 990.
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Non-profit corporations must observe most of the same formalities as regular corporations
Non-profit corporations are structurally similar to regular corporations in many ways. For instance, both types of corporations are required to file articles of incorporation with the relevant state government office. However, non-profit corporations must also complete federal and state applications for tax exemptions. This is because non-profit corporations are not automatically exempt from federal or state taxes. To become exempt, the organisation must meet certain requirements and apply to the IRS and relevant state departments.
Non-profit corporations are also required to create bylaws, which outline the operating rules for the organisation. These bylaws can include alternative provisions, which differ from those of a for-profit corporation. For example, non-profit corporations cannot distribute profits to members, directors, or officers, nor can they contribute money to political campaigns or engage in lobbying activities. They also cannot be owned by anyone and therefore cannot be sold.
In terms of leadership, non-profit corporations are managed by a Board of Directors, also known as a Board of Trustees. This Board can elect its own successors or be elected by members, depending on the structure outlined in the corporate bylaws. There can be different classes of members, including voting and non-voting, and the qualifications for membership are defined in the corporation's bylaws. Members and directors are not considered owners and are not issued stock.
Finally, non-profit corporations are required to file an informational report upon request by the secretary of state, which must include information about the corporation's registered agent and office, as well as the names and addresses of its current officers and directors. This report is required regardless of the corporation's tax status.
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Non-profit corporations are protected from personal liability for the corporation's debts
Non-profit corporations are a popular business structure as they offer protection from personal liability for the corporation's debts. This means that the personal assets of staff, board members, and officers are protected. For example, if a nonprofit symphony is sued by an audience member who fell due to a poorly maintained staircase railing, and the court rules in favour of the audience member, the nonprofit's directors, officers, and members are not personally responsible for paying that debt.
In the case of for-profit corporations, the corporate entity is separate from its owners, and so the corporation can be held liable without impacting the personal assets of its owners. This is known as limited liability protection. This protection also extends to non-profit corporations, which do not have shareholders but do have staff, board members, and officers who are protected from personal liability.
However, there are some exceptions to this protection. Directors or officers of nonprofit corporations can be held personally liable if they fail to ensure that the nonprofit deposits taxes or files necessary tax returns, or if they engage in intentional fraud, illegality, or wrongdoing that causes harm. For example, under New York law, a corporate officer may be held individually liable for their personal participation in the corporation's affirmative commission of a tortious act, such as misrepresentation or fraud.
Additionally, in some cases, a plaintiff may persuade a court to "pierce the corporate veil" and impose personal liability on a shareholder for the corporation's debts if they can show that the shareholder exercised complete domination over the corporation and used it to commit fraud or another wrong against the plaintiff. Therefore, it is essential for those involved in non-profit corporations to understand the extent of their protection and the circumstances under which they may be held personally liable.
In terms of adding other officers to non-profit by-laws, there do not appear to be any limits on the number of related board members holding officer titles. The limits usually pertain to the overall number of board seats occupied by related individuals. It is important to note that the specific rules and regulations may vary depending on the state and the type of non-profit organization.
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Non-profit corporations can't distribute profits to members or contribute to political campaigns
Non-profit corporations are subject to specific rules and regulations that set them apart from for-profit corporations. One of the defining features of a non-profit corporation is that no part of its income is allowed to be distributed to members, directors, or officers. This is in contrast to for-profit corporations, where shareholders may receive profits in the form of dividends. In a non-profit corporation, members are not typically owners and are not issued stock.
Non-profit corporations are also prohibited from contributing to political campaigns or intervening in any political campaign on behalf of or in opposition to any candidate for elective public office. This restriction applies to all candidates for federal, state, and local elections. It includes contributions to political campaign funds and public statements of position made on behalf of the organization in support of or against any candidate for public office. Violating this prohibition may result in the denial or revocation of tax-exempt status and the imposition of excise taxes.
While non-profit corporations cannot contribute directly to political campaigns, they can engage in certain non-partisan activities, such as voter education initiatives, without violating the prohibition on political campaign activity. Additionally, non-profit corporations are required to file an informational report, known as a periodic report, every four years upon request by the secretary of state. This report provides information about the corporation's registered agent and office, as well as the names and addresses of its current officers and directors, regardless of the corporation's tax status.
It is important to note that the rules and regulations for non-profit corporations may vary slightly from state to state. For example, in Texas, a non-profit corporation is required to file a certificate of formation with the secretary of state and is not automatically exempt from federal or state taxes. To become exempt, the organization must meet certain requirements and apply for tax-exempt status with the IRS and the Texas Comptroller of Public Accounts.
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Non-profit corporations can be created for any lawful purpose
Non-profit corporations are formed for a variety of purposes, and in most cases, there are no restrictions on the number of related board members holding officer titles. However, the total number of board seats occupied by related individuals may be limited. Non-profit corporations are typically created by filing a certificate of formation with the secretary of state, and they are not automatically exempt from federal or state taxes.
In the context of non-profit corporations, a "member" is defined as an individual with membership rights, similar to a shareholder in a for-profit corporation. However, members of non-profits are usually not owners and do not receive stock. When establishing a non-profit corporation, it is essential to determine whether it will have members and who will govern it—the members, a board of directors, or both.
The laws governing non-profit corporations vary across different states in the US. For instance, in Texas, a non-profit corporation must file an informational report every four years, providing details about its registered agent, registered office, and the names and addresses of its current officers and directors. Additionally, Texas non-profit organizations can seek free legal assistance through Texas C-BAR: Community Building with Attorney Resources.
To ensure compliance with state and federal regulations, it is advisable to consult relevant state laws and guidelines, such as the Texas Business Organizations Code, and seek legal advice when forming or operating a non-profit corporation.
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Frequently asked questions
No, a non-profit corporation must have at least three directors. While there are usually no limits on related board members holding officer titles, the majority of the governing board should be unrelated by blood, marriage, or outside business ownership.
Officers are usually appointed by the board of directors. The board of directors can be elected by the corporation's voting members, or the directors may be designated or appointed by a designator identified in the corporation's governing documents.
Non-profit corporations must observe most of the same formalities as regular corporations. Officers might serve on the board of directors or be non-board members who play an active role in the day-to-day management of the non-profit. Non-profit corporations must have bylaws that deal with the highest level of governing issues, including officer position descriptions and responsibilities.
