Why you should consider a legal review of your nonprofit’s corporate documents
Your nonprofit’s corporate documents may be like many people’s engines (or mine)—extremely important, often taken for granted, and no one looks at them until something goes wrong. Just like the engines in our cars, nonprofit corporate documents need to be reviewed from time to time to ensure they are not failing their essential purpose (keeping the organization running smoothly and its people safe!). These documents serve as the foundation for your nonprofit, and govern its purpose, mission, and many important details about how it functions. A good rule of thumb is that they should be reviewed by an attorney at least every five years, and certainly before major decisions are made that change the structure, purpose, or activities of the organization. But what exactly are corporate documents and why do they need to be reviewed?
1. Certificate of Formation (Articles of Incorporation)
Whether your nonprofit was formed fifty years ago or yesterday, it was created by filing a document with the local probate court or the Secretary of State known as a certificate of formation (or Articles of Incorporation, depending on the year). This is the overarching governing document for the corporation, and contains basic information required by the Code of Alabama. However, one major piece of information contained within the document is the statement of the corporation’s purpose. The statement of purpose is not only important for obtaining and keeping tax-exempt status with the IRS, but it must also be in line with the actual activities and work of the nonprofit (see Five things to consider before starting a nonprofit in Alabama). If there is a discrepancy between the purpose statement and the nonprofit’s activities, that could open the door to litigation, loss of tax-exempt status, and a host of other issues. Therefore, it is important to ensure the purpose statement is reviewed and updated as a nonprofit grows and pivots over time.
Another issue that directors and executors of nonprofits often overlook regarding the certificate of formation are its provisions governing the number of directors that the nonprofit must maintain (or is allowed to maintain), and a procedure for their removal. Failure to consult these provisions before taking certain actions could have negative consequences, such as having major decisions of the organization rendered null and void, or even litigation.
A legal review of an organization’s certificate of formation, particularly within the context of the organization’s activities, practices, and procedures, can ensure that your nonprofit is operating consistent with Alabama law, its tax-exempt status, and with its own policies and governing documents. Additionally, religious nonprofit organizations should ensure they choose an attorney who is knowledgeable and experienced with religious liberty issues to ensure the organization is well-positioned to take advantage of its constitutional rights, as well as those provided through federal and state law, when it comes to operating according to its sincerely held religious beliefs.
2. Bylaws
While a nonprofit corporation’s certificate of formation is its chief governing document, its bylaws provide a much more detailed framework for its internal operations and governance. The bylaws are a legal document that help ensure the nonprofit complies with state and federal laws, defines the organization’s structure, outlines the organization’s leadership and the duties and responsibilities of its directors and officers, provides procedures for decision making and conflict resolution, and much more. A periodic legal review of the bylaws is important to ensure the organization’s practices are in line with applicable laws, performed according to internal governance provisions, to prevent directors and officers from breaching legal duties that could expose them and the organization to liability, and to expose any inefficient or unhealthy practices.
For religious organizations and ministries, it is important that their bylaws contain specific provisions that help the organization ensure that it can avail itself of all applicable religious liberty protections in the performance of their purpose and mission. From day-to-day operations, to hiring decisions, to resolving disputes according to their sincerely held religious beliefs, religious nonprofits have unique needs and should have their bylaws and practices reviewed by an attorney knowledgeable not only about nonprofits, but also religious liberties and employment law.
Regardless of the purpose or mission of the nonprofit, a periodic legal review of its bylaws can help ensure a stable and transparent environment for achieving its mission and goals.
3. Corporate Minutes
All too often nonprofit organizations fail to take minutes of meetings of their board of directors (or to hold board meetings altogether). Meeting minutes are not only important to keep track of past board decisions, they serve the very important purpose of memorializing the discussions behind board decisions and showing that such decisions were made by the board as a whole, using due diligence and reasonable judgment, rather than flippantly (or even illegally) by some individual. To that point, minutes also help protect individuals from accusations of self-dealing, acting unilaterally or beyond the scope of their authority, or shouldering all the blame for decisions that do not go as planned. Meeting minutes can also serve as a reference point should anyone ever contest whether or how a particular decision was made, and diligent recordkeeping can also have the indirect effect of helping board members genuinely consider important matters before decisions are made. A legal review of a nonprofit’s process and procedure for taking and maintaining board minutes, as well as holding regular board meetings, can help ensure the organization is functioning properly and prepared for any challenges to its decision making.
If you believe your nonprofit organization’s corporate documents are in need of a checkup, or if you would like legal assistance with your nonprofit’s governance, policies, or procedures, please contact our firm at 205-874-0339. You can also find more resources at https://alabamanonprofitlaw.com/.
