Going Beyond Incorporation: Completing the Initial Corporate Documents for a New Nonprofit
As we launch Defending Equity Initiative, our new nonprofit for supporting progressive organizations that may be targeted by the current administration, it’s tempting to hit the accelerator and race through the formation process. But we also want to use this series to model how to set up a nonprofit, and it’s all too common to see people over some important steps in establishing a foundation for a nonprofit corporation that will hopefully last a long time.
So, we’re going to try to be patient and use this post to cover everything after the Articles of Incorporation; namely, the Bylaws, the appointment of directors and officers, a Conflict of Interest Policy, and a framework for the nonprofit’s functioning moving forward. As a reminder and a disclaimer, these documents are provided as useful samples, not as legal advice, and every nonprofit corporation is a bit different — so, get legal support if you can when setting up your nonprofit and always read anything carefully that you sign and make sure it makes sense.
Once this is done, we can (finally) get to the work at hand, and with a solid legal foundation.
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Action of Sole Incorporator
When we left off, all we had was some Articles of Incorporation, signed by me as “the incorporator” and filed with the Secretary of State to put our organization into existence.
Now what? Who is in charge? It will be the Board, but who puts them in place?
That’s what the incorporator for: to bridge the gap between forming the nonprofit by signing and filing the Articles (the incorporator) and putting the first Board in place (who takes over from there).
So we always need an Action of Sole Incorporator that will typically do at least two things:
Adopt the Initial Bylaws – the Board can later change it, but we need something to start with so we know what kind of Board to have in place.
Appoint the Initial Directors – this puts the initial Board in place, and once that happens, the incorporator’s power disappears. Going forward, the Board will be appointed in whatever manner the Bylaws say. We’re getting started with 5 directors – all MLC team members, and a majority of whom are attorneys. We wanted at least a few attorneys on the Board because this nonprofit will be a legal services provider, and we need to make sure that attorneys are in a position to make the calls that attorneys need to make under the ethics rules.
And we could stop there, and leave the first Board to take care of the rest at their first board meeting (or in their first unanimous written consent). But we’re running behind schedule and want to knock all of it at once. So, while I as the incorporator have all the power to ‘perfect’ the corporation until the Board takes on its role, we are going to pack as much into this document as we can.
So, as you’ll see here, our Action of Sole Incorporator does the above AND all of the following:
Appoint the Initial Officers – the Board will do this going forward, but let’s start off my naming those: we’ll name myself as President to get things started, my Attorney teammate Cate as Secretary, and our Managing Paralegal Michelle as Treasurer. I’m sure these roles will change over time and maybe will add more, but these are the three ‘minimum’ roles we need to get off the ground.
Authorize Establishment of Bank Accounts and Signatory Authority for Financial Transfers – one of the first things a new organization does is set up a bank account and the bank is going to ask us who is authorized. So let’s start by authorizing any offer to be a signatory – when Michelle or I go to the bank, the resolutions at 6-8 will allow us to sign whatever the bank asks us for. Sometimes organizations want only the President, or only the President or Treasurer, or perhaps they want dual signature requirements. We may get to that in time, but I’m not expecting a lot of cashflow early on, so we’ll keep it simple and flexible for now.
Authorize Signing of Contracts – again, favoring flexibility, we’re going to start with any officer of the corporation being authorized to sign a contract on behalf of the nonprofit. This is something the Board can revisit later if we want to narrow it to just the President, for example. An important nuance here: authorizing someone to sign a contract is not the same as giving the power to approve a transaction. The President can be the authorized contract signer, but that doesn’t mean the President can go sign a contract to buy a house in the name of the nonprofit without going back to the Board. In general, all of an organization’s authority starts with the Board and flows downward – through delegation of authority. If the contract is carrying out directives or a budget previously approved by the Board, the President may have presumptive authority. But if the contract is something the Board has never concerned or explicitly delegated to the President (e.g. my proposed house purchase), the President still needs to go back to the Board before signing the contract – even though they are generally a contract signer.
Adopt a Conflict of Interest Policy. More on this one below. Great to do from outset because (1) it’s really important, and (2) the Form 1023 asks if we have one in place or not.
There are other items you might do in an initial corporate action like an Action of Sole Incorporator. For examples, many formation services will include a Whistleblower Policy and a Document Retention Policy to start with because the Form 990 filed by public charities ask if you have one or not, and most. I’m reluctant to wedge them into the formation process, both here and with our clients, because I think these are policies best figured out once an organization is fully operating and knows what it can realistically follow.
Bylaws:
Perhaps we should save the ins and outs of nonprofit Bylaws for another post. In my experience, they are both easier and harder than organizations expect them to be. Easier because the majority of the content does not need to change a ton, and because a lot of the complexity that people try to shove into them (e.g. mission statements, complicated director qualification requirements, rules of order for meeting) is unnecessary and best left out. Harder because the stuff that does change matters a lot, and there is limited flexibility in terms of how to do it. Especially for California nonprofits, a major function of Bylaws is informing the Board of what rules apply to a nonprofit corporation, whether they like it or not.
So don’t take this as a definitive statement on how to draft your own Bylaws, and don’t go using the sample and assume everything works for your new organization without needing to read it, but hopefully this gives you a sense of what Bylaws should address and some common ways to approach it.
Some high level thoughts on these Bylaws:
Appointment of the Board. For California nonprofits, the Board always has ultimate management authority. There are ways to put certain decisions to the vote of others (e.g. members or a designator) and officers will have day-to-day authority in terms of implementing the mission and plan set by the Board, but when it comes to management of the corporation all power ultimately flows down from the Board. As a result, the most important function of Bylaws is to set how the Board is going to be appointed. Most nonprofits are ‘self-elected’ Boards, where the Board elects and removes directors. Some nonprofits choose to be member-elected Boards, which are miniature constitutional democracies where the membership is the electorate. Our structure is a designator structure because we want to have our existing nonprofit (MLC Collective Fund) appoint and remove members of the Board to maintain alignment between our nonprofit entities and our law firm. If you’re interested in this sort of thing, you can check out this resource we created on nonprofit corporate structures. This could evolve over time, but for these initial Bylaws we’re going to start with the power, so we can choose to give it away later. So Article II covers the identity of the Designator and Article III has the Designator set the number and appoint the members of the Board.
Board Meetings. This is one area where the law isn’t all that flexible, with a few exceptions, but understanding the provisions is critical. Boards can act in two ways: (1) unanimous written consent or (2) a majority (or higher if set by the Bylaws) vote at a properly noticed meeting at which a quorum is present. The Bylaws can define those terms within limits imposed by California law. But for a new director reviewing their organization’s Bylaws, reading these provisions (Article III, Sections 7-12) is an important place to start. (And no, you can’t change it to majority written consent, and you can’t vote by email – email only works if properly documented and it is a unanimous written consent).
Committees. Committees are an option for your organization whether your Bylaws talk about them or not. And the standards are roughly what you see here in Article IV – in terms of how committees can be created, what types can be given Board authority, and what authority needs to be kept by the Board. The one truly custom provision in this Section is Section 3, where we establish a Legal Committee to oversee the legal services provided by this nonprofit from a professional responsibility standpoint. Not something I’ve seen in other Bylaws, but seemed appropriate here.
Officers. While officers can be the same persons as the directors (and they are here), they do not need to be. What matters is that the officers are people with individual authority to act on behalf of the nonprofit. The minimum set of officers are the President, Secretary, and Treasurer, which is all we are starting with here.
California Law Requirements. Articles VI (insider transactions), VII (California Nonprofit Integrity Act and its requirements re audited financials and executive compensation), IX (Indemnification and Insurance), and X, Sections 3 (annual reports to Board) and 4 (electronic transmissions) are all here just to inform Boards about certain rules that apply to them whether they like it or not.
Amendment. How the Bylaws are amended is in some ways the most important provision. Because power allocated under the Bylaws is only power if it can’t be taken away by the Board. For that reason, we have the Board with the power to amend the Bylaws, but it’s subject to the Designator’s consent – that way the affiliate’s power will remain in place as long as the affiliated entity wants it there. This is how nonprofits can be connected to each other to promote mission alignment, while still treating the two organizations as separate entities.
Conflict of Interest Policy: Another document that could be a post unto itself, but we’ll briefly summarize here. The main thing to understand about a conflict of interest policy is that it’s not just here because you’re “supposed to” have one or because the Form 990 or 1023 ask about it. A nonprofit needs a Conflict of Interest Policy because one of the greatest risks faced by nonprofits, both under the law and in the eyes of the public, is that of self-interest eclipsing the mission. California state corporate law has procedures to follow when the conflict of interest involves a director’s financial interests, and federal tax law (IRC 4958) imposes excise taxes if an insider (or family member of an insider) is overpaid or otherwise gets the better of the nonprofit, and provides procedures to follow to claim the benefit of the doubt. All of those procedures are folded as succinctly as we could (i.e. not that succinctly) into our Conflict of Interest Policy here.
Consent to Electronic Transmissions: The least interesting document, it’s still necessary under California law because everyone wants to do all of their notices and consents by email, but California Corporations Coe Section 20 says it’s only effective if that person receiving notice has consented to the method of electronic transmission used. So we will be circulating this internally and making sure we have it on record so we can handle our meeting notice by email.
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Now that these steps are done, the corporation exists, it has a Board and officers, and it can start doing things. Like raising money, starting programs, and securing tax-exempt status. All of that is coming up soon, with a lot more information to come on how to actually operationalize this Defending Equity Initiative, which still feels very timely as nonprofits continue to be on the receiving end of a lot of authoritarian bluster.
