Corporate Documents

To be legally authorized as nonprofit organizations, most ministries must create and utilize articles of incorporation and bylaws. Both should be prepared with the advice of legal counsel.

Articles of incorporation (or organization) signify the creation of a nonprofit organization and are filed with the Secretary of State (or similar office) of the state in which the nonprofit is formed. A nonprofit organization’s bylaws, on the other hand, contain its rules and procedures for internal governance.

An essential part of writing bylaws includes determining the style of the board of directors. Nonprofits may choose from two board styles when creating their organizational structure. 

  1. A membership board. A membership board is comprised of people elected by members of the nonprofit. Churches, associations, and K-12 schools are more likely than other nonprofits to utilize a membership board.

  2. A self-perpetuating board. A self-perpetuating board elects its own members. This board either re-elects itself or appoints new members to the board. This is the more common approach to board formation for most ministries.

Other required portions of corporate documents are purpose and dissolution clauses. Prohibited transaction clauses are favored by the Internal Revenue Service but are not required. 

Purpose Clause. Nonprofits are required to specify the religious and/or charitable purposes of the entity in their organizing instrument. If the organizing document is known as the Articles of Incorporation, and the purpose of the entity is included in the articles, repeating the purpose in the bylaws generally is not required. If the purpose statement is included in both the articles and bylaws, a change in the purpose would require amending both the articles and the bylaws as required by Internal Revenue Code Section 501(c)(3)-1(b)(ii).

An example of a purpose clause follows:

The corporation is formed exclusively for charitable purposes, including the making of distributions to organizations that qualify as exempt organizations under section 501(c)(3) of the Internal Revenue Code of 1986, or the corresponding provisions of any future tax code or laws.

Dissolution Clause. For an organization to qualify for tax-exempt status, its organizing instrument must contain a property dissolution clause, or state law must provide for distribution of assets for one or more section 501(c)(3) purposes upon dissolution. Most states also require a dissolution clause. The dissolution clause generally is included in the Articles of Incorporation. If the clause is included in the Articles of Incorporation, there generally is no need to include it in the bylaws as required by Internal Revenue Code Section 501(c)(3)-1(b)(4).

An example of a dissolution clause follows:

Upon the dissolution of the corporation, assets shall be distributed for one or more exempt purposes within the meaning of section 501(c)(3) of the Internal Revenue Code, or the corresponding section of any future Federal tax code. Any assets not so disposed shall be disposed of by a court of competent jurisdiction of the county in which the principal office of the corporation is located. Disposal shall be made exclusively for exempt or public purposes, or be made to such organization or organizations as the court shall determine to be organized exclusively for such purposes.

Operational Prohibitions. Tax-exempt organizations must not enter into a prohibited transaction for the purpose of diverting substantial corpus or income of the organization (Treas. Reg. § 601.201(n)(6)(vii)). Although the IRS does not generally require a clause in the articles or bylaws prohibiting these types of transactions, the IRS considers such a provision desirable. If the prohibition is included in the Articles of Incorporation, it is generally not needed in the bylaws.

The following is a sample operational prohibitions clause:

No part of the net earnings of the corporation shall inure to the benefit of, or be distributable to, its members, trustees, officers, or other private persons, except in the services rendered and to make payments and distributions in furtherance of the purposes set forth in these Articles of Incorporation. No substantial part of the activities shall influence legislation, and the corporation shall not participate in, or intervene in (including the publishing or distribution of statements), any political campaign on behalf of or in opposition to any candidate for public office.

Notwithstanding any other provision in these Articles of Incorporation, the corporation shall not engage in any activities prohibited (a) by a corporation recognized as exempt from federal income tax under section 501(c)(3) of the Internal Revenue Code, or the corresponding section of any future Federal tax code, or (b) by a corporation, contributions to which are deductible under section 170(c)(2) or the Internal Revenue Code, or the corresponding section of any future Federal tax code.


Visit the ECFA Business Directory if you are seeking legal or other professional advice to start a church or nonprofit or maintain its tax-exempt status. 

 

 


This text is provided with the understanding that ECFA is not rendering legal, accounting, or other professional advice or service. Professional advice on specific issues should be sought from an accountant, lawyer, or other professional.

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