Should our bylaws include an indemnification clause?

I’m reading your amazing ebook The IRS and Your Homeschool Organization, and I noted a difference in the bylaws example in your ebook vs your website.

There is an Article 7 Indemnification on the website sample bylaws.

Is an Indemnification section necessary to have in our bylaws?

Thank you,
Nicole

 

Nicole,

I’m glad the book is helpful!

You asked, “Is an Indemnification section necessary?”

 

What:

Let’s start by explaining what indemnification is. It means ‘to indemnify’:

indemnify

to compensate for damage, loss sustained, expense incurred, etc.
to guard, secure against anticipated loss; give security against (future damage or liability).

 

How does it work?
A nonprofit organization might include in their bylaws a clause such as this:

Indemnification
“The Organization agrees to indemnify, defend and hold harmless the board members, its officers, directors and employees, from and against all liability, loss, cost or expense (including attorney’s fees) by reason of liability imposed upon the Organization, arising out of or related to organization’s activities, whether caused by or contributed to by the members or any other party indemnified herein, unless caused by the sole negligence of the member or any other party indemnified herein. Organization may maintain insurance, at its expense, to protect itself and any such person against any such liability, cost or expense.”

Why have an indemnity clause:
It assures nonprofit board members that the nonprofit organization will pay any legal fees related to the organization’s activities or their board service (unless caused by the sole negligence of the board member). Typically, the nonprofit purchases Directors and Officer (D&O) insurance to pay for the legal bills when and if they arise.

Some people will not serve on a nonprofit board without an indemnity clause and without Directors and Officer insurance. So having this clause in the bylaws and a D&O policy helps attract and retain board members.

 

Why not have an indemnity clause:
Some nonprofits are small and they do not have the financial means to pay legal bills of board members or purchase Directors and Officer insurance.

True Story: I am on the board of a local charity (not a homeschool group) and we were reading over the bylaws word-by-word and updating them (a great idea to do that every few years!). The bylaws had an indemnification clause much like the one above. We were all a bit confused by the language and unclear what it meant.
One of the long-time, experienced board members said that the last sentence was the most important. It said: “The organization may purchase insurance for such indemnification as determined by the board.” This is a tiny charity, all volunteer, and we do not carry insurance to cover Directors and Officers. We decided to delete the indemnification clause since we had no resources to pay for attorney fees or D&O insurance. The indemnification clause was a promise we could not keep.

 

What should we do?

It’s best to research indemnification and talk it over with your board. Your board can decide to include it in your bylaws or not.

This is not legal advice. I recommend you contact an attorney if you need additional assistance.

 

Carol Topp, CPA

Helping Homeschool Leaders

Tiny Homeschool Groups: Do We Need to File Anything?

Tiny Homeschool Groups: Do We Need to File Anything?

Tiny homeschool groups have different challenges than large programs. They are limited on resources, volunteers, and activities. But they still have questions about legal status, money and taxes that the large homeschool organizations have.

In this 4-part podcast series, Carol Topp, CPA answers the common questions that tiny homeschool groups face. All podcasts are available at HomeschoolCPA.com/Podcast

  • Episode #175 Are We a Nonprofit?
  • Episode #176 Do We Need to File Anything?
  • Episode #177 Do We Need to Pay Taxes?
  • Episode #178 Do We Need a Bank Account?

In this episode of the HomeschoolCPA podcast, Carol Topp discusses:

  • Bylaws do not typically need to be filed anywhere. They are an internal document. Sample bylaws for a homeschool group
  • Articles of Association (if you remain an unincorporated association) or Articles of Incorporation (if you formed a nonprofit corporation in your state). Samples available here
  • Charitable solicitation registration if you solicit donations or hold fund raisers in your state. Get information on your state’s filing requirements from https://www.harborcompliance.com/information/nonprofit-compliance-guide
  • Business licenses for nonprofits (only 6 states require a business license)
  • Employer Identification Number. Helpful tips.

 

Join the Facebook group for homeschool leaders: I am a Homeschool Group Leader. 600+ homeschool leaders offer ideas, encouragement and respectful exchange of ideas. https://www.facebook.com/groups/72534255742/

 

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Adding religious purpose to bylaws and Articles

man_with_bylaws

Dear Carol

Our homeschool group is currently a 501(c)(3) association that was organized in 1986. Our articles of association were recently found and we find out that we are NOT a Christian group, even though many of us are Christian and we are recognized by the community as a Christian group.
Will switching from a secular to a Christian homeschool cause us to lose our funds in the back account or to cause any fee to be incurred by the IRS?

Becky W

Becky,
It is hard for me to advise you without seeing the Articles of Association or your 501(c)(3) application. If you have electronic copies and can sent them to me, it would be helpful.Your Articles of Association (or Articles of Incorporation) and your 501(c)(3) application define your group’s purpose.

Your bylaws and policy manual are where you you explain how you fulfill that purpose. For example, you might include a Statement of Faith in your bylaws, or a membership requirement that members need to be Christians, etc. It’s very simple to change bylaws. You simply get the board to vote  a change. Follow whatever your bylaws  say is needed to change the bylaws.

Nonprofit corporations that wish to add a religious purpose to their Articles of Incorporation, do that by amending the Articles of Incorporation with their secretary of state. These groups need a vote by the board (as outlined in their bylaws) to make changes to the Articles.

(In Becky’s case, her organization is an unincorporated association and is not required to file any Articles of Association or changes to the AoA with the state).

You asked: “Will switching from a secular to a Christian homeschool cause us to lose our funds in the back account or to cause any fee to be incurred by the IRS?You should not lose your funds, but your board needs to approve all changes to the bylaws and Articles of Association.

You could perhaps contact the IRS (via a letter) if you wish to add to the scope of your 501c3 tax exempt application (i.e add that you have a religious purpose).

If you can dig out your 501c3 application (Form 1023) and read what you originally told the IRS, it would be helpful. The religious purpose may already be  mentioned.

I hope that helps.

 Carol Topp, CPA

Common mistakes in homeschool group bylaws

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Nonprofit attorneys at Veneable LLP posted 15 Most Common Nonprofit Bylaw Pitfalls: How to Avoid the Traps

I adapted their suggestions (all excellent if you want to read their entire list) for homeschool organizations and added some of my own tips as well.

Common Nonprofit Bylaw Pitfalls

1. Understand your state’s nonprofit corporation law.

Veneable LLP advises, “Nonprofits need to be sure that their bylaws do not permit practices that are prohibited by the state nonprofit corporation act.”  It’s not a lot of fun reading state corporation laws (I’m read several of them!), so this is where a pro bono lawyer would come in handy. Ask  your members if anyone has a lawyer in the family who would be willing to check your bylaws against state nonprofit corporation laws.

2. Make sure your bylaws are consistent with other regulatory documents.

If your homeschool group is an educational organization (and most are!), make sure your bylaws do not contradict IRS requirements for 501(c)(3) tax exempt organizations. There are certain things the IRS prohibits 501 (c)(3) organizations from doing such as distributing its assets to members. Read the IRS prohibitions .

3. Be sure to address all foreseeable scenarios.

What if you need to remove a board member? Do the bylaws address that? How will the board member be replaced? Try to think of how things could go wrong or how a  group of disgruntled members could take over your organization. Veneable LLP is correct is stating, “It is important to take the time to carefully walk through all of the “what-if” scenarios to avoid holes in the bylaws.”

4. Keep your bylaws flexible.

From the attorneys at Veneable LLP, “Building flexibility into the bylaws including a range for the exact number of board members and allowing the board to designate additional officers not named in the bylaws, can help the organization moving forward. Bylaws should provide an outline of the governance structure but also should allow some flexibility if and when changes are needed in the future. ”

5. Reserve the details for policies, not bylaws.

“Bylaws generally should be a relatively concise and easy-to-navigate document, leaving the details to policies, which can be more easily revised in the future. This way, bylaws will not need regular amendment.” advise Veneable LLP. Frequently homeschool organizations have policies on sick children, membership requirements, dress codes, late payments, student conduct, etc. These do not belong in the bylaws, but in separate policies.

6. Keep your bylaws current.

One homeschool group used bylaws that mentioned notice of meetings could be delivered by telegraph! Time to update those bylaws! 🙂

7. Ensure that your purposes clause reflects your organization today.

Veneable LLP advises, “Most nonprofits also have a purposes clause contained near the beginning of their bylaws, and many times that purposes clause will differ from the purposes clause in the articles of incorporation. The two clauses should be fully consistent and, therefore, an organization might want to include a clause in the bylaws which simply refers to the purposes clause as written in the articles of incorporation. In addition, the purposes clause in the articles of incorporation should be reviewed, keeping in mind that a clause drafted 30 or more years ago may not accurately or fully reflect your organization today.”

An example would be for faith-based homeschool organizations to be very clear that they have a religious purpose, so that their religious freedoms are protected. If your religious purpose is not clear in your Articles of Incorporation, then it’s time to amend your Articles. This is usually done through your Secretary of State’s office.

8. Closely review the meeting and voting procedures for members and directors.

Review how members (if there are voting members) and directors are permitted to meet and vote. Many homeschool organizations do not have voting members; the board makes all the decisions. In this situation, it’s important to be very clear in the bylaws how the board is chosen.

9. Do not make your bylaws too difficult to amend.

Occasionally your bylaws may need an update. Usually bylaws require a super majority of 2/3 or 3/4 of the board to change the bylaws. One homeschool group found that their bylaws required a meeting of members with two week notice before they could change their bylaws. This was quite difficult to accomplish in the summer and slowed down their ability to make necessary changes.

I hope you find these tips on bylaws helpful. Take time for your board to review your bylaws (hopefully you can find them!) and update them as needed. If you don’t have bylaws, you can start with my sample bylaws  or do an internet search on “homeschool bylaws.”

Carol Topp, CPA