Legal compliance for nonprofit corporations is arguably the least exciting duty of a nonprofit board. It has none of the heart-warming satisfaction associated with feeding the hungry, housing the homeless, educating children or bringing art to the community. Indeed, for many nonprofit boards, legal compliance is a distraction that takes valuable resources and time away from the corporation’s true purpose. For volunteer directors who join the board with lofty visions of doing good, legal compliance is simply not what they signed up to do.
Yet this tedious task is a necessity that should not be overlooked or postponed. Failure to fulfill legal requirements may jeopardize the corporation’s tax-exempt status and existence as well as burden the officers and directors with personal liabilities. While there are numerous topics to cover in the area of legal compliance, the purpose of this article is to exhort nonprofit directors to review the corporation’s bylaws for deficiencies and take steps to bring them into compliance with California law and federal tax law.
Review your nonprofit corporation bylaws
- 1. Begin your review of your nonprofit corporation bylaws by first assembling your corporation’s records including your articles, bylaws, amendments to bylaws, IRS exemption letter, Franchise Tax Board exemption letter, California Attorney General registration, policies and minutes.
- 2. Review the corporate records for consistency between the documents as well as with your current practices. Make a note of any discrepancies.
- 3. Carefully review the corporate purpose. You may discover that the corporate purpose stated in the articles is different from the corporate purpose stated in the bylaws or that the practical objectives of the organization have strayed from the original purpose. Corporation assets may only be used for the specific charitable purposes set forth in the articles of incorporation, and a corporation may not engage in broader purposes than are stated in the articles of incorporation. If you find that the written purpose is outdated, it may be time to amend the articles of incorporation and the bylaws.
- 4. Check if your bylaws provide for non-voting directors. California nonprofit corporations are not permitted to have non-voting directors. Any person named “director,” “ex officio director,” or “honorary director” will have the same rights and obligations, including voting rights, as directors.
- 5. Do the bylaws specify qualifications for committee members? Be sure that committees exercising board power consist only of directors. Non-directors may serve on committees but may not exercise the powers of the board.
- 6. Review the voting procedures outlined in the bylaws to see if they specify voting by proxy. Directors may not vote by proxy.
- 7. Each director has only one vote. If the bylaws state otherwise, you will need to revise them.
- 8. The term “chairman of the board” may now be changed to “chairwoman of the board,” “chairperson of the board,” or other gender-neutral term. This is not a mandatory revision, but you now have the option of doing so.
- 9. Review the officer requirements and qualifications. The corporation must have (a) a president, (b) a treasurer or CFO, and (c) a secretary. The secretary and treasurer may be the same person, but neither can be the president or chairman of the board.
- 10. Consider the size of the board. Your corporation may have as few as one director, but a larger number is generally better. On the other hand, your board should not be so large that it is unwieldy. The exact number of directors recommended will vary depending on the needs of the corporation. It is not uncommon for the number of directors to be between 9 and 15.
- 11. Review the qualifications for becoming a director. Are they too stringent, too lax, or impractical?
- 12. Review all financial arrangements that the directors may have with the corporation. Are they receiving payment for their services, or do they provide goods or services to the corporation for a fee? If the directors have a financial interest in the corporation, they are “interested directors”. No more than 49% of the board of a public benefit corporation may be interested directors.
- 13. How do the bylaws address resignation? Public benefit corporations and religious corporations do not permit resignation of a director if the corporation would be left without a duly elected director or directors in charge of its affairs.
While this is not an exhaustive list of changes to be considered, these items will provide you some sense of whether or not your bylaws are compliant. Contact us in order to have your bylaws thoroughly reviewed and amended so that they are suitable for your organization. Keep in mind that changes to the bylaws must be reported to the IRS annually on the organization’s Form 990. If the changes are substantial, they should be reported immediately. Changes that are inconsistent with the organization’s tax exempt purpose could impact the organization’s tax exempt status.
THE INFORMATION PROVIDED IN THIS UPDATE IS NOT A SUBSTITUTE FOR LEGAL ADVICE. READERS SHOULD BE ADVISED THAT IF THEY HAVE QUESTIONS ABOUT THIS OR ANY OTHER AREA OF LAW, THEY SHOULD SEEK THE ADVICE OF COMPETENT COUNSEL SPECIALIZING IN THIS AREA.
- 1. California Corporations Code Section 5047
- 2. California Corporations Code Section 5047
- 3. California Corporations Code Sections 5212(b), 7212(b), and 9212(b)
- 4. California Corporations Code Sections 5211(c), 7211(c), and 9211(c)
- 5. California Corporations Code Sections 5211(c), 7211(c), and 9211(c)
- 6. California Corporations Code Sections 5213(a) 7213(a), and 9213(a)
- 7. California Corporations Code Sections 5213(a) 7213(a), and 9213(a)
- 8. California Corporations Code Section 5227
- 9. California Corporations Code Sections 5226 and 9226