Many nonprofits pursue 501(c)(3) tax-exempt status, which allows organizations to avoid certain corporate, sales, and property taxes. Tax-exempt status is granted by the IRS, which does not directly require nonprofits to include specific provisions in their bylaws. However, when you apply for tax exemption, the IRS will look at your bylaws to determine if your nonprofit meets the legal requirements for exemption. By addressing the following provisions in your bylaws, you will increase your organization's likelihood of gaining 501(c)(3) status:
- The nonprofit's purpose: Here you can show that your organization's purpose meets the requirements for 501(c)(3) status. Your organization's purpose must be charitable, religious, educational, scientific, literary, for public safety testing, related to amateur sports competitions, or for the prevention of cruelty to children or animals.
- Conflict of interest policy: An exempt organization cannot provide a private benefit to an individual, including business dealings with board members. Your bylaws should have a policy that addresses potential conflicts, by requiring directors to disclose interests and abstain from voting on matters they could personally benefit from.
- Compensation policy for board members: Exempt nonprofits cannot pay directors more than a reasonable amount for their time and efforts, and many nonprofits have a policy stating directors will serve without compensation.
- Documents retention and destruction policy: Exempt nonprofits must maintain corporate records and meeting minutes, and after a specified period of time (which differs depending on the document), the directors should destroy the records. Your bylaws should set out your procedures for retention and destruction.
- Public disclosure of exemption application and annual tax returns: An exempt organization's tax filings, including the exempt application and annual returns, must be available for public inspection and copying.
- Limitations on activities: Exempt nonprofits cannot engage in political activity or substantial lobbying (read more about the restrictions here), and you can include this limitation in your bylaws.