Key Legal Documents You Need to Set Up a Nonprofit

So, you’ve got a fantastic nonprofit idea. Now what? Setting up a nonprofit organization properly is key to ensuring that your mission thrives and avoids legal or compliance issues down the road. Preparing the correct legal documents is one of the most important aspects of launching a successful nonprofit. These documents will help you maintain transparency, attract donors, and qualify for tax exemption under the Internal Revenue Code. 

In this article, we’ll walk you through key documents you need to set up a nonprofit and why working with a nonprofit lawyer can help streamline the process and safeguard your charitable organization’s future.

Articles of Incorporation 

The articles of incorporation are one of the first legal documents you need to set up a nonprofit organization. These articles define your nonprofit’s purpose and mission statement, establish its corporate structure, and identify the governing body (your board of directors). When you file these documents with the state, you officially form your nonprofit as a legal entity.

The Importance of Articles of Incorporation 

Articles of incorporation serve as a legal foundation for your organization. They must include specific language required by state law, which varies from state to state. Missing or incorrect information can lead to issues down the road, so be sure to include the following: 

• The legal name and address of your nonprofit 
• The purpose of your organization 
• The names and addresses of your initial board of directors 
• Language indicating your nonprofit’s intent to apply for tax-exempt status under section 501(c)(3) of the IRS code 

In addition to establishing your organization legally and defining its structure, articles of incorporation are necessary for gaining tax-exempt status. They serve as a blueprint for how your nonprofit will operate and ensure that it meets the IRS’ organizational requirements for tax exemption. Specifically, the Internal Revenue Service (IRS) looks for certain language and elements, including: 

• Purpose Clause: The articles must include a clear statement of your nonprofit’s mission and purpose, demonstrating that it operates for charitable, educational, religious, or other qualified purposes under section 501(c)(3) of the IRS code. If the purpose does not align with these IRS-approved categories, your nonprofit may not qualify for tax exemption. 
• Dissolution Clause: The IRS requires that the articles include a provision specifying that, upon dissolution, the nonprofit’s assets will be distributed to another 501(c)(3) organization or for a public purpose. This clause ensures that no individual or private entity profits from the nonprofit’s dissolution, aligning with tax-exempt guidelines. 
• Governing Structure: The articles must detail the structure of your nonprofit’s governance, including the board of directors, which ensures your organization is properly managed in a way that adheres to its mission and tax-exempt requirements. 
• Tax-Exempt Language: Including specific tax-exempt language in the articles is mandatory. This language explicitly states that your organization will not engage in activities or earnings that benefit private interests, which is a key condition for the IRS to approve tax-exempt status.

Bylaws

Bylaws are the rules that govern the internal operations of nonprofit organizations. They outline your nonprofit’s corporate structure, define the roles and responsibilities of your board members, officers, and key staff such as the executive director, and detail how your organization will be run. Unlike articles of incorporation, which are filed with the state, bylaws are kept as an internal document and guide day-to-day governance.

One of the core functions of the bylaws is to clearly define the roles of board members and officers. This includes outlining specific duties, terms of service, and how vacancies will be filled. Bylaws should provide clear direction on who is responsible for what, helping to avoid confusion and potential conflicts within the organization. Common elements include: 

• Rules for how board meetings will be conducted, including the frequency of meetings, quorum requirements, and voting procedures 
• Details of how decisions are made, how votes are taken, and the requirements for passing resolutions 
• Clear procedures ensure that meetings run efficiently and decisions are made in a structured manner 
• The number of board members, term lengths, and how new members are appointed
• Guidelines for addressing potential conflicts to maintain ethical standards in decision-making 
• The process for amending the bylaws as needed 

By having a comprehensive set of bylaws, your nonprofit organization will remain well-structured and prepared to handle the administrative tasks required as your organization grows. This clarity helps to prevent internal disputes, maintains transparency, and promotes accountability, all of which are critical for achieving your nonprofit’s mission. 

A well-written set of bylaws also ensures your nonprofit organization complies with state and federal regulations and helps you avoid future legal issues. Clear bylaws are often required when applying for 501(c)(3) status.

Conflict of Interest Policy 

A conflict of interest policy is necessary to ensure transparency in your nonprofit’s operations. This policy establishes clear guidelines for board members and staff regarding conflicts between personal interests and the interests of the nonprofit corporation. 

Having such a policy protects your organization’s integrity and helps maintain the trust of donors and government agencies. The IRS recommends that all charitable organizations include a conflict of interest policy when applying for 501(c)(3) tax-exempt status. 

Key components of a conflict of interest policy should include: 

• Board Members’ Responsibilities: Board members must act in the best interest of the nonprofit. The policy outlines their duty to avoid actions that could result in personal gain or the appearance of favoritism. 
• Disclosure Requirements: Board members and staff are required to disclose any potential conflicts, such as personal relationships or financial interests, that may affect their ability to make impartial decisions.
• Recusal Procedures: Board members and staff are required to disclose any potential conflicts, such as personal relationships or financial interests, that may affect their ability to make impartial decisions. 

Compliance and IRS Recommendations 

The IRS strongly recommends that tax-exempt organizations, including nonprofits seeking 501(c)(3) status, adopt a conflict of interest policy. While it’s not legally required for IRS approval, having this policy in place is viewed as a best practice and can be important for maintaining compliance with nonprofit governance standards. It shows that your organization is committed to transparency and ethical decision-making, which can be important when applying for tax-exempt status and securing public support. 

IRS Form 1023 or 1023-EZ 

To apply for federal tax-exempt status under the Internal Revenue Code, your charitable organization must file either IRS Form 1023 or the simpler Form 1023-EZ. The form you choose depends on the size of your nonprofit and its expected annual revenue. 

• Form 1023: This is the long form, typically used by larger organizations or those with more complex structures. It requires detailed information about your nonprofit’s activities, governance, and financials. If your organization anticipates having gross receipts over $50,000 annually or more complex assets and operational structures, Form 1023 is usually required. 

• Form 1023-EZ: Designed for smaller, simpler nonprofits, this streamlined form is much shorter and easier to complete. It’s available for organizations expecting less than $50,000 in annual revenue and less than $250,000 in total assets. The 1023-EZ is an online form with fewer documentation requirements, making it an ideal option for new or small nonprofits.

Information You’ll Need to Provide 

Regardless of whether you’re using Form 1023 or 1023-EZ, you’ll need to provide detailed information about your nonprofit, which may include: 

• Mission and Purpose: A clear description of your organization’s mission and how it furthers charitable, educational, religious, or other tax-exempt purposes. 
• Organizational Structure: Information about how many board members and officers you have, along with their roles and responsibilities. 
• Financial Data: Your nonprofit’s expected income and expenses for the next few years, as well as information about any prior financial history if applicable. 
• Operational Plans: A detailed outline of the activities your nonprofit will undertake to accomplish its mission.
• Supporting Documents: Copies of your Articles of Incorporation and Bylaws, along with other relevant documents like conflict of interest policies and a fiscal sponsor agreement, if applicable. A fiscal sponsor can be helpful if your organization is not yet ready to apply for its own 501(c)(3) status but still needs to access grants or receive tax-deductible donations through an established nonprofit. 

Filing for tax exemption is an important step to ensure that donors’ donations to your nonprofit are tax-deductible. Your organization will also qualify for additional benefits, such as access to specific government grants and financial resources from private foundations. It also establishes your nonprofit as a legitimate and trusted organization. 

Employer Identification Number (EIN) 

Every nonprofit, whether or not it has employees, must obtain an Employer Identification Number (EIN) as part of the setup process. Think of it like a social security number for your nonprofit organization. It’s a unique nine-digit number assigned by the IRS as your org’s official identifier for all tax-related matters. You’ll use it to file federal tax returns, manage payroll (if you have employees), and apply for tax-exempt status with the IRS. You’ll also need it to open a bank account and file state tax forms. 

Obtaining one is simple and can be completed on the IRS website. Once you have your organization’s EIN, you’ll be set to hire employees, apply for business licenses, and build credibility with donors and grantmakers.

Initial Board Resolutions 

Board resolutions are the formal documentation of board members’ decisions, which are pivotal in defining your nonprofit’s structure and authority. They keep everything official and ensure your organization runs smoothly. These resolutions typically cover decisions like adopting the bylaws,  appointing officers, and authorizing the filing of tax-exempt status applications. Examples include: 

• Adoption of Bylaws: One of the first resolutions should confirm the board’s approval of the nonprofit’s bylaws, establishing the internal rules for governance and operations.
• Appointment of Officers: The board must pass a resolution appointing the organization’s key officers, such as the president, treasurer, and secretary, who will manage the nonprofit’s activities. 
• Authorization to File for Tax-Exempt Status: The board should also pass a resolution authorizing the filing of Form 1023 or 1023-EZ to apply for 501(c)(3) tax-exempt status with the IRS. This confirms that the board supports the nonprofit’s pursuit of tax exemption and recognizes the steps needed to complete the process.

Documenting these decisions early ensures that your nonprofit complies with state and federal law and that its actions are consistent with its mission. Well-organized resolutions will also provide clarity for future board meetings and strategic planning.

How Working with a Nonprofit Lawyer Can Help 

Setting up a nonprofit involves navigating complex legal requirements, and working with a nonprofit lawyer can simplify the process and help you avoid costly mistakes. A nonprofit lawyer can assist with drafting articles of incorporation and bylaws, ensuring that your nonprofit organization meets state-specific and federal tax requirements, including the complex language needed for tax-exempt status. They can also guide you through filing Form 1023 and help ensure your application is correct the first time. 

By working with a nonprofit lawyer, like the team at Chisholm Law, you can be confident that your new nonprofit complies with all regulatory requirements, saving you time and reducing the risk of future legal issues. Additionally, having legal support can help you navigate the complexities of board meetings and ensure that your board members understand their roles and responsibilities.

Get Started with Chisholm Law 

The proper legal documents are a requirement for launching a successful nonprofit. From filing the Articles of Incorporation to preparing your conflict of interest policy, each document sets your nonprofit up for long-term success. 

Chisholm Law can help streamline the process so that your nonprofit is compliant. We offer tailored legal services for nonprofits, including assisting with tax exemption filing, developing bylaws, and establishing a solid governance structure. Contact us today to set up a free consultation and begin building your nonprofit correctly.

*Past results do not determine future outcomes