Charters Vs. Bylaws for Nonprofits
When starting a nonprofit, the question of charters versus bylaws is more about which one to do first rather than whether both are needed. Each document serves a different purpose and each is used to accomplish different administrative tasks. All states require a nonprofit corporation to have bylaws. Most states require a charter for the founding document, although in some states providing a short document called the articles of incorporation is acceptable.
The process for gaining tax exempt status from the federal and state government requires a nonprofit association to incorporate. The incorporation process includes writing a charter for the organization. An nonprofit corporation's charter is often likened to its constitution. It sets up the structure of the organization, outlining the processes by which rules are made and enforced. An organization's charter must be written in accordance with state requirements, so different states have different processes for chartering a nonprofit. In most cases, the charter is handled and written by the association's attorney.
If an organization's charter is like its constitution, its bylaws are like its regulatory system, akin to an ordinance. Bylaws take into account the rules for operating the organization. They may be very detailed or general, depending upon the corporation size and scope. For most small 501(c)3 nonprofits, the bylaws tell which officers are required, how they are elected and what their responsibilities are. Larger organizations often have detailed rules covering member behavior and responsibilities. Bylaws often are written by the board of directors.
Bylaws must be written with the charter in mind, but the reverse isn't true. The charter is general, while the bylaws are more specific. Some states favor articles of incorporation, a simpler format that makes a charter unnecessary. Because of this difference, the Internal Revenue Service accepts whichever the state prefers. However, the IRS and all states require bylaws as part of the incorporation process. The board of directors can change bylaws at will as long as they conform to the charter. Charter changes, however, must be approved by the state and are more difficult to alter.
Even if an organization has an attorney sitting on its board of directors, the charter is usually prepared by the organization's attorney, who is a different person. Because a charter is the linchpin upon which the organization's tax exempt status relies, it must avoid any perception of conflict of interest. If a nonprofit makes changes to its bylaws and those changes are challenged, a court's decision will rest primarily on an interpretation of the charter. A weak charter could put the organization at risk.