Understanding Your Organization’s Governing Documents

Much like the United States government traces its authority back to the U.S. Constitution and subsequent statutes, non-profit organizations trace their authority from their primary governing documents: Formation document (Articles or Certificate of Incorporation) and Bylaws.  The formation document acts like a an organization’s constitution, and the bylaws act like the organization’s statutes.

 These governing documents are the place to look anytime a question arises as to whether an organization has authority to take an action, and if so, how do go about the action:

 Can we purchase a piece of real estate? If so, who must sign the documents?

Can we protect our board from liability through insurance?

How do we hire (or terminate) the chief executive?

Can we take out a loan? Can we make a loan?

 These are all questions of authority which can be traced to powers given in the governing documents.

 Keep in mind that the formation document is filed with the appropriate state agency, depending on each state’s law. Because it is filed with a government entity, it is the highest document in authority. Its provisions will trump any provisions of the bylaws if they are in conflict with each other. Any amendments to the formation document must be done in accordance with the provisions of state law, and must be filed with the appropriate agency to make the change effective.

 Bylaws are lower in authority than the formation document. They are an “in-house” governing document that need not be filed with any government agency, but should be formally approved by the organization’s board. Any amendments should be approved exactly as provided in the bylaws and documented in writing.

 The formation document should be general so that it does not need to be modified often. However, it must contain the minimum provisions required by state law, and must contain appropriate language for any organization wishing to have recognition of 501(c)(3) tax-exempt status from the federal government.

 Bylaws should be specific, and written in such a way as to leave no “dead ends” on any issues. Bylaws are easier to amend, and therefore should contain the kinds of provisions that may need to be updated from time to time.

 Non-profits may want to include the following often-overlooked provisions in their bylaws:

·       Indemnification Clause (allowing the organization to protect its directors and officers form liability),

·       Conflict of Interest Clause (addressing how conflicts will be addressed).

Churches may also want to include:

·       Clergy Ordination Clause (especially if the church is an independent congregation), and

·       Prohibited Activities Clause (prohibiting the church from conducting activities in its facilities that violate any officially adopted statement of doctrine).

 Finally, organizations should not be reluctant to modify their bylaws when they need to do so. Although the most altruistic approach may be to ensure that the organization’s activities are always consistent with what is already written in its bylaws, the more practical approach may be to modify the bylaws to be more consistent with how things actually work in a particular organization.