Over the past few issues of the newsletter, we have provided excerpts from our upcoming book on managing the nonprofit organization. We are providing an advance look at the part of the book that addresses the first steps taken by the board of the organization. Ideally, the founder of the new charity gathers the potential board of directors together before any other steps are taken in the formal legal operations of the organization. In reality, this is rarely how it happens. Most typically, a lone founder has a great idea, and then comes to us to discuss how to make it happen. We are always ready to help our clients move forward from wherever they are in the process when we meet them.
However, ideally, the founder has already talked up the new idea with others who share the enthusiasm, and who have wisdom to add to the development of the organization. For those, we have put these steps together to guide the new committee that will soon be the corporate board.
We trust that this will stimulate thinking as you consider starting your new charity, or going back to steps that may have been missed along the way. And as always, if we can be of help to you in this process, be sure to let us know!
It is important for the members of the board to understand the founder’s vision from the beginning. Each board member needs to find a compromise between yielding to the founder’s vision, since that vision is the whole point of the organization operating, and using independent judgment as an excuse for trying to make the organization operate as if each director was creating the organization himself or herself. So, the founder needs to cast the vision right from the very first meeting.
The new directors should be brought into the vision right from the start. They will have had the business plan distributed to them in advance, and they should all be familiar with it. So, the founder can get the board functioning well from the beginning by making a very brief—no more than five minutes—summary of why the organization was founded, and what it will accomplish. Afterwards, the founder should introduce each member of the board to each other, explaining what skills that member brings to the board, followed by discussion from each director that lets all the others know their background, interests and experience in the work of the new charity. Getting the board members comfortable with each other is a critical part of building trust, which is vital to a good start.
Once introductions are done, the founder should give a longer discussion of the purpose of the organization. It is important not to just summarize the business plan. If the founder only summarizes the plan, it communicates to the board that they do not need to read the materials sent in advance. The initial summary should move the project forward. It is a time to explain matters that could not be fully fleshed out in the business plan, provide further illustrations of the needs, and point out clearly what the challenges will be.
This presentation should transition to interaction with the board. The members should be invited to raise questions about matters they do not fully understand, provide clarity to aspects that might be confusing, and to discuss how to smoothly make a successful transition from idea to action. If board members have reservations about aspects of the work, those should be addressed in a thorough, but positive, manner.
This task may take some time, even the first hour. But, it is one of the most important accomplishments for the new organization. Once you know that each board member understands and supports the vision (after addressing legitimate concerns), this task will be completed.
Task Two: Approve the Articles of Incorporation
The Articles of Incorporation are the birth certificate of the new organization. Once the Secretary of State stamps the word “Filed” on the Articles, the organization will know its birthday.
There was a time when the Articles of Incorporation were a big deal. Back in the early years of California’s history, it was not unusual to hire a calligrapher to prepare the Articles, affix a wax seal, and set out grand statements about the organization. In those days, the state government reviewed the articles closely to consider whether the corporation was worthy of approval.
Over the years, less ceremony surrounds the Articles. The Secretary of State now supplies an optional form with check boxes and very short lines for providing information. They can be completed quickly, using very few words. For most organizations, brevity is a good thing. In the line that requires a statement of the specific purpose of the organization, not many words need to be used to meet the needs of most organizations. For example, if the organization is going to be a church, the line only needs to read that “the specific purpose of the organization is to be a church.” If it is a charter school, the statement can read that the purpose is to be “a charter school.” If there is no reason to provide more information, then no more should be given.
The Articles are not a place to put a slogan, catch phrase, or inspiring vision. It is only to let the public (and the government) know what activities the organization will be pursuing. So, avoid statement of grand visions that include such ideas as “attaining excellence,” or “changing the world” or “being an inspiration to every person we encounter.” At its core, the purpose in the Articles shows the reader why the organization is a charity worthy of tax exemption. Attaining excellence may be charitable, but then again it may not be. More concrete language is useful here than abstract language.
There are occasions when an organization might want to provide more information. Articles are difficult to amend when compared with bylaws. So, if the founders do not want the purpose to be easily changed, some of the permanent restrictions can be put in the Articles. This will make it more difficult for the organization to drift from its purpose. It is not unusual for religious organizations to put their doctrinal statement in the Articles for this very reason. A school that wants to show a commitment to classical education may want to include that distinction in the statement.
Be cautious that too many qualifications can hurt the organization down the road. It cannot operate outside the scope of the purpose in the Articles. If the Articles state that the purpose is to train troubled teens in Tehama County, the organization cannot serve teens in Plumas County, or 20-year olds, or teens that aren’t troubled. This can create serious problems down the road. So, stick with a very simple, concrete description of what the organization does, in words that are broad enough to cover the scope planned in the business plan.
Articles can be amended, but it is not always easy to do so. Sticking with something simple and useable for years to come is the best choice.
Ultimately, the Articles will be signed by an individual designated as the incorporator. That sounds like an important role, but it really isn’t. By statute, the incorporator has four powers: filing the Articles, adopting initial bylaws, appointing the initial board, and doing all other things necessary to get the first three tasks done. With that, the incorporator’s work is done.
Who should be the incorporator? Anyone who can get the job done. It is not really a great honor. It just needs to get finished. In our office, we serve as incorporators for most of our clients because we can do it quickly. Of course, if you really want to see your name on the bottom of the Articles, go ahead and sign them. Your name will pop up anytime someone searches for the Articles.
The role of the board in this task is to review the proposed Articles, and authorize the incorporator to sign and file them. This can go very quickly. The board very likely will not have a lot to say about who the agent for service of process is, or even the name of the organization. They should make sure the purpose statement is accurate and appropriate, and that may take a few minutes. But this is generally an easy task. Of course, if there is a lot of additional information added to the Articles, it may take a long time to work through the details.
Once the Articles have been finalized, the board considers a motion to approve the Articles and have them filed. We recommend that the final product be reviewed by an attorney who works with nonprofit organizations. Very often we see Articles that have problems which need to be corrected. This ends up costing more in time and money than getting it right the first time.
Task Three: Review and Approve the Bylaws
Bylaws are often misunderstood, and far too often neglected by nonprofit organizations. Although California law requires bylaws, there is only one provision that must be contained in the bylaws—the number of directors on the board. Even this could be avoided if that number is placed in the Articles of Incorporation instead.
Since the Corporations Code requires that there be a bylaw or article provision addressing the number of directors, we will point out one of the most frequent violations of this provision. Sometimes, it is easier on a nonprofit organization if it contains a range for the number of directors, rather than just a single number. That way, if there is a loss of directors who are difficult to replace, or if there are several candidates to be added, this can be done without amending the bylaws. For example, suppose the bylaws require nine directors. Two resign suddenly, and it is difficult for the organization to find two replacements. No matter how difficult it is, the organization needs to make it a priority to add two directors, since the bylaws require that there be exactly nine.
In contrast, if the bylaws require that there be between five and nine directors, then the number of actual directors can vary without the bylaws being violated. There is a catch though. Even though the bylaws may provide a range of directors, the board must determine an exact number of directors within that range. Many organizations fail to do this. But somewhere in the recent minutes, there must be a resolution by the board setting the exact number of directors.
Here is how this would play out. The bylaws require a range of five to nine directors. The board passed a resolution requiring eight directors, and there are in fact eight directors. Two resign, and the board does not believe it can replace the two of them in the next few months. The remaining directors need to pass a resolution reducing the number of authorized directors to six, and maintains this until it is ready to add more directors. When that time comes, the board must pass a resolution increasing the size of the board, and then electing the new directors. The board cannot simply take a position that the number of authorized directors is equal to whatever number of directors happen to be present.
Bylaws are intended to allow an organization to determine how it is going to be organized. Without bylaws, California’s Corporations Code determines how the organization must be governed. Some of the provisions in the Corporations Code are fine, but they can be changed by bylaws. There is a great deal of flexibility in how these can be adapted to meet the needs of the organization.
Not every nonprofit organization is a membership organization, and nonmember organizations generally have bylaws that are more brief than those of membership organizations. For those with members, the bylaws should set forth all the requirements of members, including how to become a member, the standards for maintaining membership, the rights and duties of members, and how to lose one’s membership.
Many organizations have bylaws that have a lot more information than there needs to be. We recommend having bylaws that are as simple as they can be, but are as complete as needed. There is no need to give the purpose, or the requirements for tax exemption, or the address, or the names of the board members. What is needed is the information that give guidance on how the organization is supposed to operate.
We recommend that bylaws state how long the directors’ terms are, how the directors are elected, how often the board meets, how notice is given for meetings, what officers the organization has, how they are chosen, and what their duties are, and they should also address insurance and indemnification. Finally, the bylaws should state how they can be amended.
We also strongly recommend that the bylaws be reviewed, and even better, drafted, by an attorney. If the organization is a membership organization, then the need for attorney drafting is even stronger. It is very difficult to get the membership clauses right, and they are best done by people who do this frequently.
Once the people who will make up the board are satisfied with what they would like to see in the bylaws, there is a chance for the incorporator to complete his or her responsibilities. Since there technically isn’t really a board until there are provisions on how the board can function, the incorporator should approve the initial bylaws. So, to carry this out, the board-to-be should inform the incorporator about having completed and approved the bylaws they want, along with a list of those they want to be a part of the initial board. With that information, the incorporator will be directed to prepare a written “Action of Incorporator,” which are like the first minutes for the corporation. In the Action, the incorporator approves the bylaws, attaches a copy to the action, and elects the first directors. Then the role of the incorporator comes to an end.
There are variations on how this last function can be carried out, but the approach in this Task may be the simplest way to accomplish this important function.
At the end of this task, the board (technically just an organizing committee at this point) will have an opportunity to make one of its second decisions. When the bylaws are agreed upon, it votes to have the incorporator prepare the Action of Incorporator. The board then makes a note for the agenda for the next meeting, at which it will get a report back on the incorporator’s action, as well as a report on the successful filing of the Articles of Incorporation with the Secretary of State.