This section explains the process of incorporating a nonprofit organization under North Carolina law. It will discuss the required governance documents, their required contents, where they must be filed, and the process that must be followed to ratify the documents.
3.1 – File Articles of Incorporation
Once the organization has considered all preliminary matters and identified the state in which it will incorporate, the organization must file articles of incorporation with the Secretary of State to commence the legal existence of the nonprofit corporation. Founders should use the Secretary of State’s form, available on the Secretary of State’s website. Though the form is straightforward, there are a few issues to consider:
- For small community groups, the same individual often acts as the initial registered agent and the incorporator.
Practice Tip. Nonprofit corporations are permitted to have multiple incorporators, but should choose only one incorporator for administrative efficiency.
- That individual’s home address is often used as the address of the office of the registered agent, the address of the incorporator, and the address of the new corporation’s principal office.
- Nonprofit organizations should not form as membership corporations without an important reason for doing so. Membership can be administratively burdensome to keep track of. Also, membership corporations are more prone than non-membership corporations to leadership struggles that can lead to deadlock. The few instances in which a nonprofit organization may want to form as a membership corporation include:
- strong desire for community buy-in;
- to establish a subsidiary relationship with another corporation;
- to have more flexibility if the organization intends to engage in advocacy.
- Question 7 on the Secretary of State’s form asks the organization to attach “provisions regarding the distribution of the corporation’s assets upon its dissolution.” Question 8 asks for “any other provisions.” If an organization plans to apply for 501(c)(3) status, it should respond to these questions by attaching to the articles of incorporation the language found on the Secretary of State’s form called Tax Exempt Status Information. This form contains all language necessary to meet the IRS “organizational test” required for 501(c)(3) status.
- The organization must enclose a sixty dollar ($60) check with the Secretary of State’s form to pay the filing fee for filing the articles of incorporation. Typically, the articles of incorporation are processed within a few weeks. For an additional fee, the organization can expedite this process.
3.2 – Draft Appropriate Bylaws
The bylaws are operating instructions for the corporation. For example, they discuss how many meetings the board of directors will conduct each year and provide procedures for those meetings and for voting. They also specify the size of the board of directors and create officer positions for the corporation. Below are some guidelines for drafting bylaws for a nonprofit corporation:
- Keep bylaws simple. An organization’s bylaws should be kept as simple as possible because they are intended as a functional guide for the organization’s directors and officers. Small, community-based organizations do not need complicated committee structures, nor do they need layers of officers (e.g., assistant secretary, assistant treasurer, etc.). For simplicity, consider combining the positions of President and Chair.
- Organizations have a lot of flexibility when drafting bylaws. The North Carolina Nonprofit Corporation Act provides few requirements and allows for great procedural and organizational flexibility. For example, an organization can require that corporate decisions can only be made if the directors unanimously assent. More whimsically, if a nonprofit corporation wishes to require directors to wear funny hats to board meetings, all they have to do is write that requirement into their bylaws.
- Rely on models. Rather than drafting bylaws by hand, ask similar nonprofits for their bylaws. Additionally, check the usual sources for North Carolina-specific corporate forms. Finally, consult intermediary organizations such as the North Carolina Center for Nonprofits or Independent Sector. After identifying an appropriate model, walk the client through the language, pausing to discuss important decisions (e.g., how many directors; how many meetings; what to do if directors do not attend meetings?).
Practice Tip. Beware of these three common mistakes when drafting bylaws:
- Directors cannot vote by email if they do not attend the meeting where business is discussed. Similarly, they may not vote by proxy if they do not attend the meeting.
- Absent a meeting, the only way to undertake a corporate action is by unanimous written consent.
- Do not require that meetings be conducted under Robert’s Rules of Order if no one within the organization knows them.
3.3 – Draft Other Important Corporate Policies
In addition to the articles of incorporation and bylaws, nonprofit corporations should draft and adopt three other documents during the formation process:
- Conflict of Interest Policy and Annual Conflict of Interest Statement
- Document Retention and Destruction Policy
- Whistleblower Protection Policy
Of the three, the Conflict of Interest Policy is the most essential. It should provide a process for the board of directors to examine and approve or disapprove potential conflict of interest transactions. A quick Google search will find the IRS’s preferred Conflict of Interest Policy, which is brief and comprehensive.
3.4 – Hold an Organization Meeting
The best way to hold an organizational meeting is to schedule an in-person gathering attended by all of the soon-to-be directors. During the meeting:
- The incorporator appoints the initial board of directors and then formally hands power over to them;
- Once empowered, the new board of directors adopts a series of resolutions that will bring the new nonprofit corporation fully to life. Among other things, these resolutions:
- elect the initial officers;
- adopt bylaws and other corporate policies;
- authorize an officer to apply for a federal Employer Identification Number (EIN);
- empower the treasurer to open a bank account; and
- adopt the corporate seal.
Prior to the organizational meeting, the organization’s principals should prepare draft “minutes.” The draft minutes act as an agenda for the organizational meeting and, once amended and signed, become the official minutes for the organizational meeting.
Although a face-to-face organizational meeting is best, there are other ways to complete the organization of the new corporation. For example, North Carolina law permits the incorporator to complete the organizational tasks on his or her own and, in essence, hand the fully organized corporation over to the new board of directors. Alternatively, the incorporator may use the procedures of unanimous written consent. If all of the newly appointed directors eligible to vote receive copies of the resolutions and the various corporate policies, and if all directors approve them, the process can be accomplished without a meeting.
3.5 – Apply for an Employee Identification Number
An Employer Identification Number (an “EIN”) is essentially a social security number for an organization. A new organization cannot apply for tax-exempt status or even open a bank account until it has obtained and EIN, so it will want to do so immediately after the organizational meeting. The IRS issues EINs through a quick and simple online application. To apply for an EIN, visit https://irs-ein-tax.com.
3.6 – Responsibilities of the Board of Directors after Incorporation
After the organizational meeting, the nonprofit corporation is validly formed and ready to begin working towards accomplishing its mission. The newly appointed board of directors should be made aware of their powers and responsibilities under North Carolina law. For instance:
- The board of directors has authority to make decisions on behalf of the nonprofit corporation. Among other things, it has the power to enter into contracts on behalf of the organization.
- Generally, the board of directors should serve a supervisory function. Once the organization hires an executive director (i.e., the organization’s chief employee), the board should provide high level guidance and leave the day-to-day running of the organization to the employees.
- Directors owe fiduciary duties of obedience, care, and loyalty to the organization they serve. For further discussion of fiduciary duties, see Section 6.