Your Client’s Nonprofit Corporation Wants to Change Its Bylaws. What Now?

Your Client’s Nonprofit Corporation Wants to Change Its Bylaws. What Now?

Estimated reading time: 7 minutes

It’s probably not your favorite procedural chore, but it’s among the most mission-critical for California business lawyers. The process of amending a nonprofit corporation’s bylaws is commonplace but complex, fraught with potential pitfalls and intricacies. And because the California Corporations Code is deliberately flexible – allowing organizations to change and customize various rules – it’s crucial that business attorneys understand the nuances and implications of every decision. 

Not only must any amendments comply with legal and regulatory requirements, they should also align with the organization’s mission, goals and governance structure. Here are several important considerations for advising California nonprofit organizations on amending their bylaws.

The Purpose of Nonprofit Corporation Bylaws

Like any corporation, a nonprofit operates under an internal set of blueprints. Bylaws are essentially the rulebook for how your client’s nonprofit operates, laying out everything from who’s in charge to how decisions are made. 

Bylaws serve three purposes:

Filling in the gaps: California law doesn’t cover every little detail about how a nonprofit corporation should operate – and that’s by design. Bylaws step in to provide rules for those situations. 

Changing default rules: Nonprofit companies must follow some basic rules by law if they don’t have their own rules in place. Bylaws can change these default rules to better fit the corporation’s needs. 

Providing a reference: Bylaws are handy reference guides for lawyers, directors and officers to know what rules they need to follow.

Bylaws should include information such as the number of directors (unless already stated in the articles of incorporation or founding document) and other important housekeeping details such as the time, place and method of meetings, the duties and powers of directors, how elections are conducted, the qualification of directors and the length of terms.

What Nonprofit Corporation Default Provisions Apply and Can Be Altered?

When your client’s nonprofit corporation was formed, it adopted certain default rules under the California Corporations Code. These provisions aren’t absolute requirements; they simply apply unless your client’s articles of incorporation or bylaws say otherwise. They’re the baseline; bylaws exist to adjust the autopilot gear when a different course is needed. This gives nonprofitss the flexibility to adapt operations to better suit their needs and circumstances. So, if a nonprofit corporation wants to run itself differently from the default rules set by the California Corporations Code, it should state those changes in its bylaws or articles of incorporation. 

The provisions that can be altered with bylaws and articles of incorporation will vary, depending on whether you’re dealing with a public benefit corporation, a mutual benefit corporation or a religious corporation. Some provisions are limited in how they can be customized.

Prohibited Amendments to Nonprofit Corporation Bylaws

There are some things you can’t change in a nonprofit corporation’s bylaws. Often referred to as prohibited amendments, certain statutory provisions are designed to protect board members and the public interest. It’s critical to recognize those as sacrosanct clauses. 

You also can’t change a bylaw if it conflicts with the law or articles of incorporation. For example, suppose a religious corporation tries to change its bylaws to allow someone to vote on the owner’s behalf regardless of their future consent; that change won’t be allowed because the law bars the use of irrevocable proxies.

Additionally, some things can only be dealt with in the articles of incorporation, not the bylaws. So, if you want to change those things in the bylaws, you must also change them in the articles. (Note that if amendments to the bylaws contradict what’s written in the articles of incorporation, those changes might not count unless the articles are also updated.)

Approvals Required to Amend Nonprofit Corporation Bylaws

In addition to legal knowledge, amending bylaws involves corporate politics, board interplay and stakeholder consensus. Depending on the issue, there can be various approvals to obtain. 

The board of directors 

In most cases, the board can change or remove bylaws without permission from the corporation’s members, but there are different rules for public benefit and mutual benefit corporations. 

For public benefit corporations, which exist to benefit the public or a specific cause, the board can make changes on its own – unless it affects the voting or transfer of the members. For mutual benefit corporations, which exist to benefit members, the board can make some changes, but not big decisions that directly affect members’ rights, voting, the number of members, or the dissolution of the corporation.

Board decisions normally need a majority vote at a meeting where enough directors are present (a quorum). However, the articles or bylaws of a particular corporation can set different voting requirements or limit the board’s power to change the bylaws. Making changes usually requires approval from a large proportion of the board unless the bylaws say otherwise.

Members

Some changes to the bylaws need agreement from the members, usually the nonprofit corporation’s owners. Generally, more than half of the members must agree to approve a change.

Changes to bylaws that require membership approval include:

Number of directors.

Membership approval requirements.

Increase in directors’ terms.

Selection of designated directors.

Replacement of removed directors.

Members’ voting rights.

Termination of all memberships (for public benefit corporations).

Other amendments that require membership approval under the corporation’s articles or bylaws.

Class members

In some cases, specific groups of members in public benefit and mutual benefit corporations might also need to agree to changes, especially if they uniquely affect their voting or transfer rights. For example, if a proposed amendment would allow senior members to elect a greater number of directors but wouldn’t give the same power to associate members, then this would require the associate members’ approval.  

For mutual benefit corporations, class approval is needed if the proposed change would:

Significantly and adversely affect the voting, dissolution, redemption or transfer rights of the class by changing the rights, privileges, preferences, restrictions or conditions of another class. 

Change the number of memberships authorized for the class.

Increase the number of memberships for another class.

Exchange, reclassify or cancel any class memberships. 

Authorize a new class of memberships.

Other approvals

Someone else named in the bylaws might also need to approve changes. However, if that person has died or no longer holds the position, then that approval isn’t necessary.  

Keep Records of Nonprofit Corporation Bylaws and Amendments

Every California nonprofit corporation must keep records of bylaws and amendments. This means having up-to-date copies at their main office and keeping detailed records of every change. And if the changes are significant, the bylaws should be restated altogether. 

Nonprofits should also report amendments to the IRS, the Franchise Tax Board and the California Registry of Charitable Trusts, which will need to see the updated documents attached to the nonprofit’s annual information returns, such as IRS Form 990 and FTB Form 199. The nonprofit might also need to ask the IRS for an official decision about how significant changes will affect its tax-exempt status using IRS Form 8940.

CEB Resources for a Seamless Nonprofit Bylaw Change Process

California business law attorneys play a pivotal role in ensuring nonprofit organizations remain compliant, efficient and aligned with their objectives when they amend their bylaws. The above guide is a snapshot of the precision and nuance required to navigate the process. CEB’s business law resources can help attorneys gain a deeper understanding and continue monitoring key sections that ensure proper governance and transparency. 

Here are some key insights and tools from chapter 7 of the Advising California Nonprofits book, which covers corporate bylaws. 

1. Default provisions in the Corporations Code that can be altered in bylaws or articles of incorporation.

2. Matters that can only be dealt with in the articles of incorporation.

3. Downloadable forms and templates for public benefit, mutual benefit and religious corporations’ bylaws.

4. Downloadable forms and templates for amendments to bylaws.

Contact information for submitting documents to the IRS, the Franchise Tax Board and the Registry of Charitable Trusts.

Want to see all of the California business law resources available through CEB? Reach out and schedule a free demo.