How a 501(c)(3) Board of Directors Is Formed

Nicholas J Price

Usually, about two or three people come together with a great idea for forming a nonprofit, or 501(c)(3) organization, and become the founders. The founding board members become the cornerstone for the future work of the nonprofit. Their motivation and enthusiasm spark passion in others, who may become prime candidates to serve on the board of directors. The initial board of directors accepts many important duties at first. As the organization grows, the founding members take on additional responsibility for building a high-performing board that fully understands their duties, responsibilities and expectations. A well-composed board helps a new nonprofit organization place their best foot forward.

Initial Tasks for a 501(c)(3) Board of Directors

State laws govern nonprofit organizations. Most states require founding boards to have at least three members and some require them to have at least five members. Having odd numbers of board directors eliminates problems with potential tie votes. The IRS also cautions new nonprofits about having too many people on the board who are related, or who have close personal or business relationships, in order to prevent potential misuse of funds.

Boards then need to fill out IRS Form 990 and file it with the state, along with copies of their bylaws and articles of incorporation. Then, they’re ready to schedule their first board meeting. The founding board will already have determined how many board directors they need and what terms they will serve according to the bylaws.

At this point, the founding board can begin the process of deciding what skills, talents and abilities their board needs and start recruiting additional board directors.

What Qualities and Characteristics Should Boards Seek in Its First Board of Directors?

It goes without saying that prospective board members should have a passion for the cause. However, effective boards will need more than that. In rounding out the full board, founding members should make sure that board candidates have good business and financial skills. Board candidates should be willing to give of their time, money and other resources to help the nonprofit advance.

Character counts in choosing board directors. Board directors should be known for their honesty, integrity and ethical dealings, and should value those qualities in others. Board directors also need to be committed to transparency and accountability.

One or more board directors may be acquainted with a philanthropist or celebrity who has expressed some interest in the cause. Asking such a person to join your board can give your nonprofit easy publicity. In considering this, it’s important to have a discussion with the famous person about whether they desire to be just a figurehead, or whether they’re willing to be an active participant on the board. If they’re not willing to lend much more than their name or funds, it might be best to pass on them in favor of a more dedicated board director.

Educating New Board Directors About Their Legal Responsibilities

Unless new board directors have had previous nonprofit board director experience, new directors will need to learn about the legal responsibilities involved with serving as board directors.

Boards will need to meet at least annually, and more often as needed, or as indicated by the bylaws. It’s helpful for new nonprofit boards to have at least one financial person on the board. Nonprofit boards have a fiduciary responsibility to pass an annual budget. Nonprofit board directors are responsible for the strategic oversight of the organization, ratifying bylaws and overseeing management of the budget.

Nonprofit boards are responsible for maintaining public trust, which is why they are sometimes called trustees. Nonprofit organizations must adhere to their mission and work toward sustainability. This is how they earn and keep their tax-free status.

In addition, nonprofit boards have many other responsibilities. They must define the nonprofit’s mission, set priorities, develop long- and short-term goals, and oversee all plans and programs. Board directors may put in many volunteer hours, especially in the beginning, when they don’t have money to hire staff.

Board Composition for Initial Boards

Establishing a nonprofit board is an exciting venture. It’s one that you’ll want to be sure to share with your closest family and friends. However, be aware that the IRS requires nonprofit boards to not have a majority of board directors who are family members or personal or business associates. Boards that have the finances to hire an executive director may offer that person a spot on the board as well. This arrangement is acceptable as long as the executive director keeps their management duties separate from their board duties and responsibilities.

When considering board composition, boards should consider the range of skills across the whole board, including business, fundraising, governance and finance experience. Fundraising is the primary activity for nonprofit boards, so boards should inform directors that they expect them to use their connections to get new donors, to spread the word about the good work of the organization and to participate actively in fundraising campaigns.

In the beginning, boards will need to spend time creating new policies and getting the work of the organization going as soon as possible. Boards should also begin to spend as much time as possible in their strategic planning period. They can accomplish this by setting both short- and long-term goals.

Where to Look for New Nonprofit Board Directors

Boards will find candidates for new board directors all around them. Professional associations, local businesses, churches, chambers of commerce and other nonprofits are good places to find nonprofit board member candidates. Remember, you can also find a limited number of potential board candidates within your circle of family, friends, neighbors and business contacts.

Establishing Term Limits for Nonprofit Board Directors

While state governments control the minimum number of board members for a nonprofit board, they don’t specify board terms. That is left to the nonprofit to decide. Boards may establish terms of from one to five years, but typically nonprofit board terms are for two or three years. Also, most boards stagger their terms so that no more than one-third of the board turns over at a time.

It’s easier to begin with good habits than to break old habits later on. Get started on the right track by practicing good governance principles, even if you’re only starting with a few board directors. Develop clear agendas and send them out at least a week before the meeting date. Stick to the agenda during the meeting. Those who wish to stay after the meeting and chat can do so after the meeting adjourns. Start and stop on time, so board members know that if they’re late, they’ll be missing something. It’s never too soon to invest in a board management software system to help get a start-up moving in the right direction.

Overall, good board directors who have good policies and procedures at their disposal are the best combination to help get a new nonprofit up and running.

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Nicholas J. Price
Nicholas J. Price is a former Manager at Diligent. He has worked extensively in the governance space, particularly on the key governance technologies that can support leadership with the visibility, data and operating capabilities for more effective decision-making.