by Jonathan Wilson | September 01, 2015

While tax-exempt associations can be organized in a variety of different ways, most are organized as nonprofit corporations. The nonprofit corporate format is favored because state laws (and corporations are creatures of state law) generally provide clear rules for the governance of nonprofits as well as judicial remedies for situations when things get out of hand. For nonprofit groups, the key governing document is its bylaws, usually adopted by the initial board of directors. Bylaws can be amended by the board (unless the bylaws or the state corporations code state otherwise).

Well-crafted bylaws will usually stipulate several specific things relating to the governance of the board. While these provisions might sound like boring pieces of legal busywork, they can have important and practical impact on problems, such as:

Director vacancies: Sometimes, nonprofit associations’ directors—or even their entire board—will resign before the end of their terms. Well-crafted bylaws will contain provisions for the organization to re-populate its board. An association without these kinds of provisions can find itself stranded in a legal no-man’s land, without any legal method to replace its directors.

Deadlocks: Boards can become deadlocked on key issues, and in worse-case scenarios, those deadlocks can threaten to destroy the enterprise. While some states have statutes that may allow a judge to intervene, well-crafted bylaws will contain a provision to resolve a deadlock.

Authorizing transactions: Bylaws should also contain clear rules regarding the authorization of transactions. Lacking such rules can put an association at risk if an individual officer or director signs a contract or takes other action in a way that binds the organization.

Indemnification: In the case of claims and lawsuits against an association’s directors, indemnification is the idea that the organization will pay for attorneys’ fees and amounts required to be paid in a settlement. These provisions are usually very important to the individuals who serve as directors, because attorneys’ fees required to fend off even a frivolous lawsuit can amount to hundreds of thousands of dollars. Well-crafted bylaws will contain appropriate indemnification provisions in favor of the officers and directors while carefully staying within the limits of the corporation’s indemnity power as provided by the state corporations code. When the organization’s grant of authority is clearly defined, the officers and directors can usually expect to be indemnified if they are sued for taking action consistent with their authority; however, if the authority of officers and directors is unclear, it can be difficult for them to establish that they were within their authority and entitled to indemnification. Lacking indemnification, officers and directors can become personally liable for actions they believed they took on behalf of their association.

If your nonprofit association hasn’t hired a lawyer to review its corporate governance, seriously consider it. To get started, even the most modest associations should take the following steps:

Collect corporate documents. Pull together your articles of incorporation, bylaws and any written minutes of your board meetings.

Collect tax documents. Locate and obtain copies of your association’s original Form 1024 (application for recognition of exemption under Section 501(a)), any IRS correspondence or filings and your association’s annual income tax filings (Form 990 or Form 990-EZ).

Collect policies and procedures. Locate copies of any policies, procedures or documents that the board may have adopted to manage the organization’s affairs. For associations, there is often a “conflicts of interest” policy and similar procedures that are intended to ensure the group’s ongoing compliance with its nonprofit purpose and reasons for Section 501(a) exemption.

With copies of these documents (or with confirmation that you have looked and the documents either don’t exist or have been lost), you should be ready to consult with an attorney about what to do next. The effort required to develop and adopt appropriate governance documents with legal counsel might seem time-consuming or expensive, but it is both easy and easily cost-justified in comparison to the extraordinary time and expense associated with even a single lawsuit when an association is unprepared.