How to Incorporate a Nonprofit Organization

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					Should You Incorporate?                                    Forming a Nonprofit Organization                             The Bylaws
                                                                                                                        Your Primary Governing Document
Potential advantages:                                      Step 1 — Get organized!
■ Protection of limited liability. Incorporation           Obtain from the IRS a copy of Publication 557, Tax           Bylaws are your organization’s primary governing
  protects both board and staff from legal liabilities     Exempt Status for Your Organization, and Package             document. They establish the organizational “rules”
  incurred by the organization – the corporation holds     1023, Application for Recognition of Exemption.              by which the organization will conduct itself. It is
  the debts and liabilities, not the individuals and       Review the requirements and develop a plan.                  important these be documented, approved and
  officers who work for the organization.                                                                               followed by the organization. Amendments can be
■ Done thoughtfully, the process of incorporation can      Establish a board of directors (or trustees) with at least   made as the organization evolves.
  be strengthening for an organization. It requires        three members. Decide on the statement of purpose
                                                           (mission) of the organization. Develop and adopt             Good organization bylaws should have a lot in
  thinking through what you are about, and how you
                                                           Articles of Incorporation. Publication 557 includes          common with the Constitution of the United States.
  are going to do your work.
                                                           samples of recommended language for Articles.                The Constitution covers all the big questions, yet it is
■ It readies an organization for application of federal
                                                           Robert’s Rules of Order, Newly Revised has samples           a relatively brief document, unburdened with needless
  tax-exempt status. However, nonprofits choosing to
                                                           and provides additional information on procedures and        detail. It is clear about who is responsible for what,
  remain unincorporated may still file for tax-exempt
                                                           parliamentary rules for organizations. Other                 and who can get to be leaders, and how. It states
                                                           organizations may allow you to review their Articles         guiding principles.
■ It helps to formalize decision making and
  ownership among the principals involved.                 of Incorporation and Bylaws for examples.                    A cautionary note, many organizations have attorneys
■ It reinforces legitimacy of the organization.            This is a good time to establish some long range goals       develop their bylaws which often makes them more
                                                           for the organization and to do some detailed planning        wordy and harder to understand and use. It is
Potential disadvantages:                                                                                                recommended that you use examples from other
                                                           that includes a budget. The IRS requires budget
■ It takes time and money to accomplish.                   information, which is supporting documentation for           organizations and that they are developed by the
■ It entails playing by the state and federal              your goals and objectives.                                   directors. You may wish to have an attorney review
  government rules. You must be knowledgeable                                                                           the completed bylaws and give an opinion before they
  about the laws related to charitable organizations.      Step 2 — File with your State or Local                       are adopted.
■ There may be some risk of over-structuring or            Government                                                   Some general thoughts:
  under-structuring the organization.
■ There is some risk of people involved thinking           Laws and regulations vary in each state. Contact is          ■ Decisions to amend the bylaws should require
  incorporation will accomplish something magical.         generally made through the Secretary of State or               considerable effort and serious thought.
                                                           Attorney General. There is most often a fee for              ■ If you have provisions for getting people into office
                                                           incorporation and a requirement for copies of Articles         or membership, you should have provisions for
Faith-Based Organizations                                  of Incorporation and Bylaws.                                   getting them out.
A large number of churches are setting up nonprofit                                                                     ■ A brief description of the committees’
organizations in order to operate community                Step 3 — Apply to the IRS for recognition of                   responsibilities is sufficient.
assistance programs. A new guidebook from the              tax-exempt status.                                           ■ Policies, job descriptions for the board, committees
Alban Institute helps congregations answer some                                                                           and other necessary documents can be developed
                                                           Information on how to apply is found in Publication
important questions about establishing a nonprofit.                                                                       later in the life of the organization by the board.
                                                           557 and Package 1023. If you wish to be a status
“Starting a Nonprofit at Your Church” explains that        other than 501(c)(3), consult Publication 557 for the        Items commonly covered in bylaws:
the nonprofit structure allows for new funding sources     process and forms to use. Secure from the IRS a
                                                           Form SS-4, for an Employer Identification Number,            ■   The name of the organization.
and collaboration partners and volunteers. It also                                                                      ■   The mission or purpose of the organization.
explains some of the risks involved with a nonprofit.      and file it with your application. The IRS charges a
                                                           processing fee for tax-exempt applications. For              ■   The geographic area served by the organization.
It includes step-by-step procedures for setting up a                                                                    ■   Membership
501(c)(3) organization, and offers plenty of examples      501(c)(3) organizations with anticipated annual
                                                           revenues of less than $10,000, the fee is $150. For               • Membership classes; qualifications for each
of churches that have already started programs. The                                                                            class; and the benefits, rights, and
guide is available at The Alban             larger revenue 501(c)(3)s and other types of tax-
                                                           exempt organizations, the fee is $500. These fees                   responsibilities of each class.
Institute is an ecumenical, interfaith organization that                                                                     • Dues (Should indicate clearly how and by whom
supports congregations through consulting services,        must accompany the application. The approval
                                                           process may take up to 120 days after the application               dues are established, and what period of time
research, book publishing and educational seminars.                                                                            they cover).
                                                           and all required forms are filed.
                                                                                                                  Forming a
     • Annual Meeting (i.e. “shall be held each year in      • Limitation or qualifications for custodians of
       October, or such other time as the board of             funds and books.
       directors may designate”).                         ■ Indemnification of officers and directors
     • Called or special meetings (by whom and            ■ Procedures for Amending the Bylaws
     • Quorum.
     • Voting procedures.
                                                             • Initiation of proposed amendments.
                                                             • Voting procedures, including notice
     • Notice requirements.
     • Provision for waiving notice requirements.
     • Provision for expulsion or suspension of
                                                             • Margin by which amendments must be
                                                             • Procedures for dissolution of corporation.
■   Board of Directors
     Directors                                            Additional Resources:
     • Number of directors. Length of terms.
       Staggering terms.                                  How to Form a Nonprofit Corporation, Fifth
     • Limitation of the number of terms to which a       Edition, by Anthony Mancuso. Published by Nolo
       director can be elected.                           Press, 950 Parker St, Berkeley, CA 94710. Visit
     • Qualifications.                          
     • Nominating and election procedure.
                                                          Legal Guide to Starting and Managing A Nonprofit
     • Conditions and procedures for removal of
                                                          Organization, by Bruce R. Hopkins
       directors from office.
                                                          Visit                                                                 ®
     • Procedures for filling vacancies.
     • Statement about compensation and                   Robert’s Rules of Order, Newly Revised, available at
       reimbursement of directors.                        most major book stores or visit
     • Description of each office and its duties.         Drucker Foundation Self-Assessment Tool Process                  NATIONAL
                                                          Guide, Contact: Jossey-Bass Publishers, 415-433-
     • Nominating and election procedure.
     • Conditions and procedures for removal from         1740 or visit                       COALITION
     • Procedures for filling vacancies.
                                                          Strategic Planning for Nonprofit Organizations,
                                                          Contact: National Trust for Historic Preservation,
■   Meetings
     • Frequency.
                                                          202-588-6296 or visit                              HOMELESS
     • Manner of calling a meeting, including notices.
     • Provision for waiving notice requirements.
                                                          How to Form a Nonprofit Corporation, by Mark
                                                          Warda. Visit                                      VETERANS
■   Committees
     • Description of each standing committee and its     Managing a Nonprofit Organization in the Twenty-
       duties.                                            First Century, by Thomas Wolf and Barbara Carter.
     • Limitations of committee actions and powers.       Visit
     • Provision for the creation of other committees,                                                                   333 ½ Pennsylvania Ave., SE
                                                          Strategic Planning for Public and Nonprofit
       including appointment procedures.
                                                          Organizations, Contact: Jossey-Bass Publishers,                   Washington, DC 20003
     • Quorum requirements.
                                                          415-433-1740 or visit                                   Phone: 202-546-1969/Fax: 202-546-2063
     • Requirements for committee composition.
                                                                          Toll Free: 800-VET-HELP/Fax: 888-233-8582
     • Reporting requirements.
■   Rules of Order                                        The Nonprofit Handbook by Gary M. Grobman.                        Email:
■   Fiscal Year of the Corporation                        Visit                                         Website:
■   Books and Depositories
     • Description of principles of financial record      Internal Revenue Service, visit, or call
       keeping and reporting.                             the IRS tax exemption information line at 1-877-829-
     • Procedure for designating institutions in which    5500.
       funds will be deposited.

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