LET’SGOLEGAL:TheRightRoadtoCompliance&Protection
1:GOVERNANCE–STATELAW
KNOW
TherearefivekeyareasofStateLawfornonprofitstobeawareof:
1. ArticlesofIncorporation:ArticlesofIncorporationarethe
documentthatcreatesthecorporation.Itneedstomeetbothstate
requirementsforanonprofitcorporationaswellasfederaltaxlaw
requirementstoqualifyasa501(c)(3)organization.
2. Bylaws:“Bylaws”referstothedocumentthatsetsouttherulesof
operationforyourorganization.
3. FiduciaryDuties:Boardmembershaveasetoflegalobligations
towardsthenonprofitcorporation,calledfiduciaryduties.
4. Recordkeeping:Anonprofitboardkeepsrecordssothatitcan
reporttofundersorgovernmentagenciesorthecommunityabout
decisionsandactionsmade.
5. StateTaxes:Whileatax-exemptorganizationdoesnotpayfederal
taxes,itisresponsibleforapplicablestatetaxes.
KNOWMORE
1.ArticlesofIncorporation
SinceArticlesaretheoriginaldocumentthatcreatesanorganization,a
nonprofitshouldkeepacopyofthefiledArticles.Ifitdoesn’thaveone,it
canorderthemfromtheSecretaryofState.TheArticlessettheparametersofthe
organization’scharitablepurposesandmaydescribewhetherornotithasmembers.
A. Statelawrequirements
q RegisteredAgent:Anonprofitmusthavearegisteredagentandaregistered
office.Thisisthewaythatthestatecontactsthecorporation.Theregistered
agentneedstobeadependableperson,andtheaddressneedstobeastable
StateLaw
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LET’SGOLEGAL:TheRightRoadtoCompliance&Protection
streetaddressinWashingtonState.TheRegisteredAgentmustsignaconsentto
serveinthatrolewhichisfiledwiththeArticles.
q Name:Anonprofitmusthaveanameforthecorporationthatcannotbethe
sameasorverysimilartothenameofanyothercorporationorlegalentityin
WashingtonandcannothavewordslikeInc.,Co.,Company,Ltd.init.
q InitialDirectors:Anonprofitmustgivethenameandaddressofatleastone
individualwhowillserveontheBoard.
q Incorporator:Anonprofitmustgivethenameandaddressofatleastoneperson
whowillserveastheincorporator.Theincorporatoristhepersonwhosignsthe
Articles.
B. Federaltaxlawrequirements
Whilewegointomoredetailonfederallawinthenextsection,let’sreviewtheelements
oftheArticlesofIncorporationthatrelatetofederalrequirements.
q Purpose:Anonprofitmustlistpurposesfortheorganizationthatmeetthe
definitionofcharitablepurposesunderfederaltaxlaw.SeetheSampleArticles
ofIncorporationinourKeyDocuments,forspecificlanguage.
q Dissolution:Anonprofitmustprovideforthedistributionofanyremaining
assetsintheeventthatthecorporationiscloseddown.Theassetsmustbe
distributedtoanother501(c)(3)organizationortothefederalorstate
governmentforapublicpurpose.
q Limitationofliability(recommended):Thisprovisionchangesthestandardfor
determiningliabilityofdirectorsto“grossnegligence,”makingithardertoprove
liability.
q Indemnification(recommended):Thisprovisionauthorizesthecorporationto
paycostsofdefendingofficersanddirectorswhoaresuedandinsomecases,
anydamagesrequiredtobepaidbyanofficerordirector.
C. RequirementsafterIncorporation
q AnnualReport:AnonprofitneedstofileanannualreportwiththeSecretaryof
Statetomaintain“ActiveStatus.”Itisduetobefiledeveryyearonthebirthdate
ofyourcorporation.Ifthenonprofitdoesn’tfileit,itwillbeadministratively
dissolved.
q InitialMeetingoftheBoardofDirectors:TheindividualslistedintheArticlesas
theinitialdirectorsmeettotakeactionsnecessarytostartupthecorporation.
ThisincludesadoptingtheBylaws,electingofficersandauthorizingopeninga
bankaccount.
D. ChangestotheArticles
TheArticlescanbechangeduponapprovaloftheBoardofDirectorsbyadocument
called“ArticlesofAmendment.”ThemostcommonamendmentstoArticlesareto
changethecorporation’snameortoaddnewpurpose.
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LET’SGOLEGAL:TheRightRoadtoCompliance&Protection
2.Bylaws
TheBylawsaretherulesofoperationforthecorporationandarerequiredby
StateLaw.Bylawsarenotfiledwiththestate.Thenonprofitshouldkeepa
fileoftheBylawsintheoffice,withanyamendments.Eachboardmembershouldkeep
uptodateBylaws.TheyarefiledwiththeIRSwhenyouapplyfortaxexemption.
q Members:Washingtonnonprofitcorporationlawpermitsnonprofitcorporations
tohavemembersasvotingornonvotingmembers.Ifyouhavemembers,itis
importanttobeclearwhyyouhavemembersandwhattheirrightsare.Ifyou
givememberstherighttovote,youneedtoclearlystatewhatthosevoting
rightsareandprovideappropriateprovisionsforholdingmeetings.
q BoardofDirectors:Understatelaw,onlyonedirectorisneeded;however,you
willneedatleastthreedirectorsifyouareseekingtax-exemptstatus.Usually
thenumberofdirectorsisdescribedasarange,withaminimumnumberand
maximumnumberofdirectorsgiven.TheBylawsalsoprovideforhowthe
directorsareelected,lengthofterm,theirqualifications,resignation,and
removal.Itisimportanttohaveremovalprovision.
q Meetings:TheBylawsprovideforhowtheBoardmeets,howitgivesnoticeof
meetings,howitholdsspecialmeetings,whataquorumis,andthevoteneeded
fortheBoardtoact.UnderWashingtonlaw,aBoardcanmeetin-person,orby
telephoneorsomeotherformofelectroniccommunication,aslongaseveryone
canheareveryoneelsespeak.Chatroomsonlinearenotpermitted.Youalso
canmeetintheformofwriting,calleda“consentresolution.”Directorsgive
theirconsentinwritingorbyemail.Suchaconsentmustbeunanimous;thatis,
everydirectorneedstovote,andeveryonemustvoteinfavoroftheresolution
proposed.
q Committees:Bylawsoftencovertherolesofcommittees.Therearetwokindsof
committees:(1)boardcommittees,composedonlyofdirectorsthatcanactfor
theBoard(non-boardmemberscanattendcommitteemeetingsandgiveinput,
butcannotvote),and(2)advisorycommitteesthatgiveadviceand
recommendationstotheBoard.
q Officers:Theirdutiesaredescribedinthebylaws.
q Amendments:There’saprovisionthatdescribeshowthebylawsareamended.
UsuallyamendmentstothebylawsrequireasupermajorityvoteoftheBoard
andsometimesspecialnotice.Ifthecorporationhasvotingmembers,this
provisionmayrequirememberapprovalaswell.
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LET’SGOLEGAL:TheRightRoadtoCompliance&Protection
3.FiduciaryDuties
TheWashingtonNonprofitCorporationActsetsoutthedutiesand
protectionsofthedirectors.
A.ThreeDuties
DirectorsmustfulfilldutiesdescribedastheDutyofCare,DutyofLoyalty,andDutyof
Obedience:
q DutyofCare:Adirectorisexpectedtohavealevelofcompetencedescribedas
exercisingthe“careofanordinarilyprudentpersoninlikeposition”under
similarcircumstances.Thatmeansadirectorhastoexercisereasonablecare
whenmakingadecisionasaboardmember,usingdiligenceandindependent
judgment.
q DutyofLoyalty:Adirectorshouldactinthebestinterestoftheorganization,
puttingtheorganizationbeforeself-interest.Thisisparticularlyimportantwhere
thereisthepotentialforpersonalgainandoftenariseswhenthereisaconflict
ofinterest.It’sabestpracticeforstaffandboardtosignaConflictofInterest
policy.
q DutyofObedience:Adirectormustmakesurethattheorganizationisin
compliancewithlocal,state,andfederallawsandisstayingtruetoitsmission.
B.Protections
WashingtonStatelawprovidesprotectionstomakesurethedirectorsareprotectedin
theeventthedirectorsarethreatenedwithlegalaction.Inbothcases,provisionsshould
bewrittenintotheorganization’sArticlesofIncorporation.
q LimitationofLiability:Theseprovisionseliminateorlimitthepersonalliabilityof
adirectorincaseswherethedirectordidnotactwithintentionalmisconductor
receiveinappropriatepersonalbenefit.
q Indemnification:Theseprovisionspermitadirectorwhoisapartofalegal
proceedingrelatedtothecorporationtoapplyforindemnification,inother
words,tobecompensatedforlossordamage,bythenonprofit.Thiswould
coverreasonableexpensesincurredbythedirectorinconnectionwithalegal
casebeforeacourt.Thisprotectioncanextendtoofficers,employeesoragents
oftheorganization.
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LET’SGOLEGAL:TheRightRoadtoCompliance&Protection
4.Recordkeeping
Anonprofitmustkeepclearandcompleterecordstoensurethatitcomplies
withtaxrules.Goodrecordkeepingsystemsalloworganizationstobetter
evaluateitsprograms,monitoritsbudget,andpreparefinancialstatementsandreturns.
ItisabestpracticetohaveaDocumentRetentionPolicythatdescribeswhatrecords
shouldbekeptonfileandforhowlong.
A.FinancialRecords
Thelawdoesnotrequireacertainkindofrecordsystembecauseitwillvaryby
organizationalsize.Thesystem,however,shouldincludetheseitems:
q Receipts:Amountreceivedfromallsources
q Purchases:Itemsbought,includinganyitemsresoldtocustomers
q Expenses:Othercoststorunprograms
q Employmenttaxes(forstaffedorganizations)
q Assets:Propertythatanorganizationownsandusesinitsactivities
B.BoardMinutes
Boardminutesarethewrittenrecordoftheactionsanddecisionstakenataboard
meeting.Oncewrittenandapprovedbytheboard,theyareacceptedasatrue
representationofthemeetingtheyrecordandcanbeusedaslegalevidence.
UsuallytheSecretaryisinchargeofminutes.Anonprofitkeepsthemelectronicallyorin
abinder.Theyshouldbekeptforever.
C.Otherrecords
Otherkeydocumentsrelatedtotheorganizationshouldbekeptforatleast7years.A
DocumentationandRetentionpolicyisconsideredbestpractice.
5.StateTaxes
TherearethreestatetaxesthatimpactWashingtonnonprofits:
a. Business&OccupationTax:AnonprofitmustfileaMasterBusinessLicensewith
theDepartmentofRevenueifitwillhaveemployeesorarevenuesourceon
whichitmustpayStateBusinessandOccupationTax(B&OTax)orSalesTax.
TheB&OTaxtaxesthegrossincomethatyourorganizationbringsin.Donations,
grantsandproceedsfromfundraisingeventsareexempt.
b. SalesTax:Organizationsthatsellproductsmustpaysalestax.
c. PropertyTax:Unlessexempt,nonprofitsmustpaypropertytaxesonany
propertythatitowns.
StateLaw
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LET’SGOLEGAL:TheRightRoadtoCompliance&Protection
KEYDOCUMENTS
•
•
•
•
•
•
ArticlesofIncorporation
Bylaws
ConflictofInterestPolicy
DocumentRetentionPolicy
GiftAcceptancePolicy
Minutes
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LET’SGOLEGAL:TheRightRoadtoCompliance&Protection
ACTION
IfYes,Datesent
orreviewed
No
StateLawLegalChecklist
OurboardofdirectorsreviewstheArticlesofIncorporationatleastonceayear
tomakesurethatactualpracticeisconsistentwiththesedocuments.
OurOrganization’sregisteredagentisstillattheaddressonfilewiththe
SecretaryofState.
TheregisteredagenthassignedaconsentformthatisonfilewiththeSecretary
ofState
Wecanrelyonourregisteredagenttogiveusmailthatcomestothe
corporation
OurboardofdirectorsreviewstheBylawsatleastonceayeartomakesure
thatactualpracticeisconsistentwiththesedocuments.
OurOrganizationpreparesandmaintainsfinancialstatementsandstatements
ofaccountonaregularbasis.
Ourboardhasreviewed,andifnecessarysecuredexpertadviceabout,our
financialcontrols,andregularlyrevisitsthistopictoassureadequatescopeand
compliance.
OurOrganizationhasadequateseparationoffinancialduties.Inparticular,the
personwritingandsigningchecksisdifferentthanthepersonreviewingand
reconcilingbankstatements.
MorethanonepersonisanauthorizedsigneronourOrganization’sbank
accounts,andthesesignatoriesareup-to-date.
OurOrganizationdoesnotmakeloanstoanyofitsofficersordirectors.
OurOrganizationunderstandsandcarefullyobservesanyuseorspending
restrictionsongrantsandothercontributedfunds.
OurOrganizationhasOfficerandDirectorinsurance,andtheboardmembers
havereviewedthepolicyandunderstandwhatitcoversandwhatitdoesnot
cover.
OurOrganizationfilesanannualreportwiththeWashingtonSecretaryofState.
(YoumayalsoneedtoregisterasaCharitableOrganization;see“Fundraising”
formore.)
OurOrganizationhasfiledaMasterBusinessApplicationwiththeStateof
Washington.
OurOrganizationunderstandsitsobligationtopayanystatesalesorbusiness
andoccupationtaxes.
Ourorganizationunderstandswhetheritisentitledtoanyexemptionsfrom
thesetaxes
LOCAL
StateLaw
OurOrganizationhasacurrentlicensetodobusinessfromthecity/county
whereitislocated.
OurOrganizationunderstandsitsobligationtopayanylocalbusinessand
occupationorpropertytaxes.
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LET’SGOLEGAL:TheRightRoadtoCompliance&Protection
StateLaw
©2016WashingtonNonprofits.Allrightsreserved.
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