Nonprofit vs Business

Unlike a conventional business, nonprofits are designed to positively impact a target community without yielding a profit. Nonetheless, nonprofits share much in common with for-profit organizations. This guide is designed to help anyone interested in establishing a nonprofit do so. We cover what distinguishes a nonprofit from a conventional business, the costs of getting one off the ground, and offer a step-by-step guide on how to create one of your own.

In general, nonprofits should be structured like a for-profit business. However, there are a number of important differences, including:

1. Ethically, nonprofits should minimize administrative costs and fundraising obligations.

2. For-profit organizations are funded through investors and revenue generated from customers who purchase goods and/or services. Nonprofits, on the other hand, are funded through donations (with no return on investments) and donate their services and/or goods for charitable purposes to those in need.

Startup costs

The startup costs of a nonprofit depend on a host of factors that vary by state. Other costs include:

1. Articles of incorporation: between $25-$195 (see more below)

2. Tax filing costs: the cost of filing for tax-exempt status depends on the size of your revenue and assets.

3. Additional costs: other costs vary by state, but may include fees for periodic reports or charity renewal.

   • Be sure to consult your state’s website

Do I need an attorney?

It’s best to hire an attorney with 501(c)(3) experience to help you start your nonprofit and file your tax exemption documents. Most attorneys lack experience working with nonprofits, so consider consulting the Better Business Bureau for recommendations for qualified firms.

Nonprofit Bylaws Definition 

Nonprofit bylaws are explanations of how your nonprofit operates. It is a legal document that is required by law. It is generally filed with the Secretary of State. The nonprofit also keeps a copy within the facility for physical inspection.

Why Does Your Nonprofit Need Bylaws?

Nonprofits seek to generate funds in a number of ways. According to GrantSpace, they are funded in a number of ways, including government grants and contributions from both individuals and corporations. However, those wishing to start a nonprofit must go through a special incorporation process that is specific to nonprofits. All organizations undergoing the incorporation process, regardless of whether they are for-profit or nonprofit, must create a set of bylaws. 

The most common provisions present inside of nonprofit bylaws are:

• The name of the nonprofit and the document. For example, Bylaws of Nonprofit Incorporated, a Nonprofit Registered in the State of _____________. 

• A summary of board member and officer elections, their roles, and the general abiding terms. Common officer elections include a president, a vice president, a secretary for the nonprofit, and a treasurer who oversees the funds of the nonprofit. The qualifications of all officers and members of the board should be listed, as well as information on how individuals are elected and how they may resign from their position in the future. This provision should also explain any term limits that may exist for officers or board of directors, including how long each term lasts and whether consecutive terms may be served; it should also explain if there are term limits and, if so, how many terms may be served. 

• An explanation of the membership categories and the responsibilities of each category. Generally, members attend certain meetings, have voting rights, and may have other responsibilities as well. Many nonprofits limit the membership of their nonprofit to their board members. This section should explain the membership categories and the responsibilities of each. For example, how often meetings occur and whether all members must attend. This section is also used to explain when the annual meeting takes place as well as how notice will be given for special meetings of the board of directors. 

• Guidelines for the member meetings. This provision may also be titled as “Frequency” or “Quorum.” A quorum is the minimum number of members who must be present in a meeting before an official decision can be made at the meeting. The number of members should be listed, but it is important to first check the laws in your state to find out whether the state in which the nonprofit is incorporated has a minimum quorum. If so, your nonprofit should follow or exceed that minimum.

• How the board for the nonprofit is structured. This provision explains the minimum and maximum number of directors or board members of the nonprofit. Before drafting this provision, check with the state where the nonprofit is incorporated. They may have either a specific minimum number of board members or a specific method you must use to calculate the minimum and maximum. You’ll also use this provision to explain the types of committees your nonprofit has. For example, a funding committee. 

• How board members are compensated as well as protected from personal liability. Indemnification is an important part of this provision because it explains whether or not (as well as how) board members are protected from personal liability. They aren’t always protected, neither are directors or officers for that matter. Compensation for officers, directors, and employees should also be explained in this provision. Compensation may be subject to approval. To learn more, consult IRS Form 1023, Application for the Recognition of Exemption Under Section 501(c)(3) of the Internal Revenue Code. 

• The day-to-day responsibilities of the Chief Executive Officer or Director. One responsibility of the board is to hire the Chief Executive Officer or Director. However, it is important to specify the day-to-day authority and responsibility this person holds. This provision should also specify that the board has the power to terminate the Chief Executive Officer or Director by a certain specified number of votes. 

• How conflicts of interest will be handled by the nonprofit. Nonprofit bylaws must include a provision that explains how the organization handles conflicts of interest. You should consult the laws in the state where your nonprofit is incorporated as well as review IRS Form 1023, Application for the Recognition of Exemption Under Section 501(c)(3) of the Internal Revenue Code. 

• How amendments to the nonprofit bylaws may be made. This provision is optional, but it plays an important role because it gives you a way to provide a simplified explanation of what must be done for the nonprofit to amend its bylaws. Without this provision, there could be a lot of hoops your nonprofit must jump through in order to amend the bylaws. A simple method that may be elected in this provision is by an amendment receiving a majority vote at a regularly scheduled board meeting. 

• How the nonprofit may be dissolved. Most of the time, nonprofit bylaws must include a dissolution clause. Check with the state where your nonprofit is incorporated to know whether this clause is legally required. However, even if it isn’t a legal requirement, the clause can save you a lot of trouble in the event that the nonprofit must be dissolved. When this clause is required by law, it must usually include that the assets of the nonprofit will be distributed upon dissolution for tax exemption. 

How to write your Nonprofit Bylaws:

A nonprofit bylaws template is most often organized as follows:

• Article I. This is the name of the nonprofit. 

• Article II. This article explains the purpose of your nonprofit. You should also list a few specific activities that your nonprofit engages in, as well as the focused scope of what your nonprofit does. 

• Article III. This article addresses membership in many aspects. It includes eligibility, if annual dues are required as well as the amount, membership rights, resignation and termination of membership, and whether non-voting categories of membership exist or how they may be established. 

• Article IV. This article addresses meetings of the members. It includes the number of regular meetings that will be held and how often they will be held (such as quarterly; again, it is important to review the laws in the state where your nonprofit is incorporated to determine if there is a mandatory minimum), when annual meetings will be held as well as the purpose of them, how special meetings will be called as well as how notices for these special meetings shall be given, how notices for all meetings will be given as well as when they will be given, the quorum, and voting. 

• Article V. This article covers the board of directors, the authority of the board, and the board's responsibilities. It generally covers the general powers of the board, the number of board members, information about the length of the terms as well as year term limits, requirements to be a member of the board, when regular and annual meetings take place, how special meetings may be called by the board, how notices of all meetings must be given as well as when notices must be sent out, quorum, forfeiture of board membership, how vacancies on the board will be filled, whether or not board members will be compensated for their services, informal actions that may be taken by directors, a confidentiality clause that states board members may not discuss or disclose information about the nonprofit or its activities (however, this is not legally required in every state. Check the state laws in the state where the nonprofit is incorporated), whether there is an advisory council for the board as well as the council’s powers, parliamentary procedures, and how board members or advisory council members may be removed.

• Article VI. This article covers officers and their responsibilities and authority. It must include all officers. Additionally, all nonprofit officers must be active board members. It must also address how officers are elected, how officers may be removed, and how officer vacancies shall be made. 

• Article VII. This article addresses the various committees of the nonprofit. It includes how committees are formed, how the executive committee functions as well as its powers and responsibilities, how the finance committee functions as well as its powers and responsibilities, and so on for every committee within the nonprofit. 

• Article VIII. This article addresses the responsibilities and powers of the Chief Executive as well as any other corporate staff. Even if the nonprofit doesn’t currently have corporate staff, including this article can be helpful for future governance. 

• Article IX. This article covers how conflicts of interest are handled by the nonprofit as well as compensation matters. It is very important to review if not even use IRS Form 1023 language to explain how conflicts of interest will be managed. For compensation matters, address the purpose of the compensation, definitions related to those who may receive compensation (as well as a definition of the word “compensation”), the procedures by which eligible individuals of entities will be compensated, how those proceedings will be recorded, who is eligible for compensation (including voting members), and periodic reviews. 

• Article X. This article relates to indemnification. As you’ll recall, indemnification relates to the personal liability of board members, officers, corporate employees, or agents of the nonprofit. This article includes sections related to general indemnification, expenses related to indemnification (including the payment or reimbursement of attorney’s fees or court expenses), and insurance that may be available. 

• Article XI. This article relates to the books and corporate records of the nonprofit. Specifically, it addresses how the nonprofit will keep books and records related to the proceedings of the Board. 

• Article XII. This article explains how amendments to the nonprofit bylaws will be made and passed. While this is an optional clause, it is a helpful clause because it simplifies how amendments to nonprofit bylaws can be amended and adopted if necessary. Without this clause, the nonprofit could be subject to a lot of potential problems. 

• Language that positively identifies that the bylaws are adopted by the nonprofit. This ending clause is instrumental to the effective creation of nonprofit bylaws. The date the bylaws are passed or amended is listed. It is also signed by the president and the secretary of the nonprofit. Some nonprofits also require all of their board members to also sign off on the bylaws.

How to Notify the IRS of Bylaws updates

Under federal law, changes made to nonprofit bylaws must be reported to the IRS. This is done using IRS Form 990, Return of Organization Exempt From Income Tax.