SEE ALSO: Articles of Incorporation
Bylaws are your organization’s operating manual. Bylaws may contain any provision, not in conflict with law or the corporation's articles of incorporation, for the management of the activities and for the conduct of the affairs of the corporation. Bylaws should provide guidance to the corporation's board of directors and reassurance to government authorities, funders, and other interested stakeholders. In addition, they allow contractual parties to verify that corporate actions were properly taken.
- Size of the board and how it will function
- Roles and duties of directors and officers
- Rules and procedures for holding meetings, electing directors, and appointing officers
- Conflict of interest policies and procedures
- How grant monies will be distributed
- Other essential corporate governance matters
A nonprofit’s bylaws should include board liability and indemnification language that clearly define the circumstances under which the organization will indemnify its directors, officers, volunteers, and employees against claims arising from the performance of their duties.
Board Indemnification Language
SEE ALSO: LIABILITY INSURANCES
Most nonprofit bylaws include indemnification provisions — language that expresses the intent of the nonprofit to cover the expenses a board member might incur in defending an action and paying settlements or judgments related to his service on the board. There are circumstances, however, when indemnification is not available or becomes a hollow promise. These include:
- When the nonprofit does not have sufficient resources to pay the losses and expenses incurred by a director or officer;
- When state or federal law limits the protection that may be afforded through indemnification due to public policy considerations;
- When the board is unsympathetic to the plight of the director who has been sued and refuses to authorize the indemnification;
- When the organization decides that it is inappropriate to use the nonprofit's financial resources to indemnify a director.
Every state has a volunteer protection law and the federal Volunteer Protection Act (VPA) became the law of the land in September 1997. The Volunteer Protection Act provides that, if a volunteer meets certain criteria, he or she shall not be liable for simple negligence while acting on behalf of a nonprofit or governmental organization. The VPA also provides some limitations on the assessment of noneconomic losses and punitive damages against a volunteer. The Volunteer Protection Act does not, however, protect a volunteer from liability for harm "caused by willful or criminal misconduct, gross negligence, reckless misconduct, or a conscious, flagrant indifference to the rights or safety of the individual harmed by the volunteer action." The Act does not prohibit lawsuits against volunteers nor does it provide any protection for nonprofits.
The state volunteer liability laws vary significantly. Some states only protect directors and officers while other states extend the protection to all volunteers, however, every volunteer protection statute has exceptions. The most common exclusions are for claims based on a volunteer's willful or wanton misconduct, criminal acts, or self-dealing.
Resources & Sample Documents
NEO Law Group - Nonprofit Law Blog: Nonprofit Bylaws - Common Problems
Form1023.org: How To Draft 501(C)(3) Nonprofit Bylaws With Sample
The Foundation Group: Nonprofit Bylaws Dos and Don'ts
NOLO.com: Forming a Nonprofit Corporation in Iowa
BoardEffect: Sample Nonprofit Bylaws
IRS.gov: Exempt Organization Bylaws