Lately, there’s been a flurry of sexual harassment scandals involving celebrities and powerful industry insiders such as Harvey Weinstein, James Toback, Kevin Spacey, and others. The public’s anger at these men has been swift, although in many cases their appalling behavior was an open secret for years or decades. They are now paying a price, as Harvey Weinstein has been fired from his company, and Netflix has cut ties with Kevin Spacey, to name just a couple of examples.
Among the many lessons society draws from these examples, nonprofits should take this as a reminder of the importance of a particular contract provision: the morality clause.
This clause is likely what allowed Netflix and The Weinstein Company to act so quickly, and it is an even more important consideration for nonprofits (for whom reputation is everything).
Whether your nonprofit has engaged a celebrity to receive an honor or attend a gala, contracted with a corporate sponsor led by a public (or not so public) figure, or partnered with a company or individual on a commercial co-venture, you want to be able to distance yourself as soon as possible from someone whose behavior could taint the organization’s reputation. And you don’t necessarily want to wait until the accusations are confirmed or the matter is decided in court (although circumstances vary on this point). Many times, the mere accusation of bad behavior can be enough to turn off your donors and grantors.
That is why I often recommend a morality clause, particularly in corporate sponsorship agreements and commercial co-venture agreements.
Ideally, a morality clause should:
An organization may not have the bargaining leverage to insist on a morality clause that is this robust. But if you ignore the issue altogether, your organization may find it difficult to distance itself from the next person who is shamed by the public for his or her bad behavior.Posted in Contracts | Comments Off on One Thing Nonprofits Should Learn From Recent Harassment Scandals December 4, 2015
This week, Facebook founder Mark Zuckerberg dropped a bombshell when he announced his plan to donate 99% of his Facebook stock (currently valued at $45 billion) to charitable causes. It was not long until critics started voicing their concerns. While some of the concerns were focused on the societal impact of such massive diversions of wealth to private charities rather than the government, most of the skeptics have taken issue with Zuckerberg’s unconventional choice of structure: a for-profit limited liability company.
The more conventional choice for a charitable endeavor of this scale would have been to form a 501(c)(3) private foundation, like the Bill & Melinda Gates Foundation. As a lawyer for nonprofits, I have an affinity for the 501(c)(3) sector, and believe that the rules governing private foundations serve an important public purpose. For example, the self-dealing rules ensure that private foundations are not pilfered by their founders or their family members. The Form 990-PF provides a much-needed layer of transparency. And the 5% payout rule provides an incentive to put foundation money to use in the charitable sector rather than let it accumulate indefinitely.
Yet, I am not troubled by Mark Zuckerberg’s choice of the LLC structure. This move gives no particular financial benefit to Zuckerberg (indeed, if Zuckerberg were looking for a quick tax break, he could have simply donated his Facebook stock directly to a 501(c)(3) public charity). Rather, he is giving himself flexibility to approach social issues in ways that may be restricted or limited for 501(c)(3) private foundations. The LLC structure lets Zuckerberg engage in political and lobbying activity, invest in socially conscious businesses without worrying about the program-related investment, jeopardizing investment, and excess business holdings rules, and establish joint ventures and partnerships of all kinds.
Zuckerberg’s choice highlights a key consideration that all would-be social entrepreneurs should take seriously: the need to experiment and evolve your approach to philanthropy. Zuckerberg is a 31-year old businessman, and it may take him years to figure out how he can have the most impact on the world given his unique perspective, talents, assets and connections. Zuckerberg should not necessarily be burdened by the private foundation rules at this stage when his vision is not fully formed.
Down the road, it might make sense for Zuckerberg to establish a 501(c)(3) private foundation like the Gates Foundation. But the freedom to experiment now will only strengthen his future efforts at philanthropy, and this could create the biggest benefit to the public in the long term.Posted in Private Foundations, social entrepreneurship | Tagged 501(c)(3), mark zuckerberg, nonprofit law, philanthropy, private foundations, social entrepreneurship | Comments Off on Mark Zuckerberg’s Unconventional Approach to Philanthropy November 18, 2015
A successful and well-run nonprofit depends on a strong Board of Directors, and the primary vehicle for Board involvement is the Board of Directors meeting. Yet many nonprofits give little thought to how their Board meetings are conducted and documented. This article reviews some best practices for properly running a nonprofit Board of Directors meetings.
The Directors on the Board must be given adequate notice of upcoming meetings. Procedures for giving notice are usually specified under state nonprofit corporation law and in the organization’s Articles of Incorporation and Bylaws. In addition, Directors should receive in advance of the meeting an agenda listing the items to be discussed, along with copies of any materials to be reviewed at the meeting, such as minutes from the prior meeting, amendments to governing documents, financial records, and proposed budgets.
Special care should be taken with respect to financial information presented to the Board. Whenever possible, an organization should consult an accounting firm with expertise in nonprofits to make sure its financial reports are accurate and reported in a way that is easily understood by Directors who may not have a background in finance.
Whether conducted by phone or in person, Board meetings should begin with the taking of attendance and a determination that a minimum “quorum” of Directors is present to allow the meeting to proceed. The precise quorum requirements are generally set forth under state nonprofit corporation law and in the organization’s Articles of Incorporation and Bylaws. Next, the Board generally addresses other official items such as the approval of minutes from the last meeting and voting on formal resolutions, before moving on to discuss strategic, fundraising, and other matters.
Try not to let the Board get swept up into lengthy discussions without clearly resolving formal decisions. When the momentum of group discussion takes over, it can be hard to tell what the Board has decided and what it hasn’t. Following simple parliamentary procedures is helpful, such as requiring that each decision to be made via a vote on a formal motion made by one Director and seconded by another. This ensures that everybody in the meeting knows exactly what the Board has decided.
“Executive Session,” in which one or more Board members discuss a matter in private without a written record, should be used sparingly, and for purposes of discussion only. All formal Board decisions should be documented under regular meeting procedures rather than made during private conversations.
The final steps of any Board meeting are to draft and adopt the meeting minutes. This is a crucial, and often misunderstood process. In the event of an Internal Revenue Service audit or any legal controversy, the minutes will be scrutinized to determine the facts of the situation.
Organizations must be wary of including too few details or too many details in the minutes. The minutes need not (and should not) be a transcript of every statement made during the meeting. The key is to strike the right balance.
At a minimum, the minutes should include essential details like the date, time, and location of the meeting, a list of the individuals present, each decision or motion approved by the Board (including copies of any documents adopted or approved at the meeting), and the votes for and against each decision or motion. The minutes should also summarize the general gist of the matters discussed by the Board. Sometimes it is advisable to include a more detailed record of the Board discussions, but this should be done strategically, when necessary to demonstrate that the Board has complied with the law and satisfied its fiduciary duties. Some situations that usually warrant extra detail in the minutes include the setting of officer compensation, the consideration of conflict of interest transactions, the authorization of committees, and the exercise of due diligence for major business transactions.
Once drafted, the minutes should be circulated to the Board and formally approved (usually at the next Board meeting). The official approved draft of the minutes should be signed by the organization’s secretary and kept in the corporate record book.Posted in Uncategorized | Comments Off on How to Conduct a Nonprofit Board of Directors Meeting September 7, 2015
One of the most common issues that comes up in my practice involves the formation of nonprofit subsidiaries. In other words, the creation of independent entities that are controlled (to some degree) by a parent nonprofit, tax-exempt organization.
Why would a nonprofit organization would consider creating a subsidiary rather than simply pursuing the activities on its own? The answer is usually one of the following:
Tax-Exempt Status: Sometimes creation of a subsidiary is necessary to protect the tax-exempt status of the parent organization. For example, a 501(c)(3) parent organization may wish to engage in business activities, lobbying, or political activities that are prohibited or limited for 501(c)(3) organizations. Other times, a for-profit company, 501(c)(6) trade association, or another type of nonprofit may wish to create a 501(c)(3) subsidiary to pursue grant funding or tax-deductible contributions for educational or other proper 501(c)(3) activities.
Liability: An organization may also wish set up a subsidiary to engage in high-risk activities for which the parent organization does want to be liable in the event of a lawsuit. While much of this risk can be managed or eliminated by purchasing insurance, forming a subsidiary corporation can provide additional protection.
Independence: A third common reason for forming a subsidiary is to ensure that a new project will be governed independently, without too much involvement or interference from the parent organization. This is often necessary when an organization pursues a new project in collaboration with other organizations or companies. With a subsidiary, the collaborating organizations can be given a seat on the Board of Directors, and any funds transferred to the project will remain under the subsidiary’s control (rather than used by the parent to offset its other budget priorities).
Once the decision has been made to form a subsidiary, the question is how the new entity will be structured in relation to the parent. The key challenge is to find the right balance between providing the desired level of the control to the parent, while maintaining enough independence so that the separateness of the entities will be respected for tax and liability purposes. Generally, the two organizations will be treated as separate so long as different individuals run the day-to-day management of the subsidiary.
With this principle in mind, the most common structure is to have a majority or more of the same individuals who serve on the Board of Directors of the parent organization also serve on the Board of Directors of the subsidiary, but with a different President/CEO/Executive Director running the subsidiary’s day-to-day operations. In some cases, the inverse design can also work — a majority of different individuals on the Board, but with the same President/CEO/Executive Director. In either case, the parent organization may retain control by having the right to appoint and remove directors on the Board.
Regardless of the Board of Directors structure, the subsidiary must be treated as a separate organization for financial and accounting purposes. Any dealings between the two organizations (such as employee or office sharing arrangements) should be carried out pursuant to arm’s length agreements for fair market value. And, most importantly, all staff, directors, and officers must clearly understand the different roles, missions, and activities of the two organizations.Posted in Uncategorized | Comments Off on Why and How Should a Nonprofit Create a Subsidiary? August 6, 2015
If you work for a nonprofit that aspires to have a nationwide or worldwide reach, it is likely you’ve spent some time thinking about the topic of local chapters. The chapter model (sometimes called the federation or affiliate model) is common among nonprofits of all types, and is often viewed as a fast and effective way to grow a nonprofit from small to large.
However, the chapter model is not without risk. Local chapters that are improperly organized or poorly managed can quickly destroy the parent organization’s reputation, drain the time and energy of its staff, and potentially leave the organization liable for the chapter’s activities. Minimizing these risks and building a chapter structure that lasts requires preparation, communication, and a well-drafted chapter affiliation agreement (sometimes called a chapter charter agreement).
The chapter affiliation agreement establishes the right of the chapter to use the parent organization’s name and receive specified assistance in exchange for agreeing to certain standards of conduct, oversight, and formal requirements. It is, in effect, the nonprofit version of the “franchise agreements” found in the business world. When properly drafted, the chapter affiliation agreement is an essential tool to communicate expectations and protect the reputation of the parent organization. A well-drafted chapter affiliation agreement must, at a minimum, include these eight essential provisions:
1. License of the Parent Organization’s Trademarks to the Chapter
This is the essence of the chapter affiliation agreement. The chapter is given a limited right to use the parent organization’s name, logo, and other trademarks and call itself a “chapter” of the parent, subject to various terms and conditions set forth in the agreement. To ensure uniformity in branding and messaging, the parent organization should be prepared to specify in detail how its name must look and be used on the chapter’s website and other promotional materials.
Most chapter affiliation agreements specify a particular territory within which the chapter will operate. Sometimes the chapter’s status is exclusive within this territory. This helps to avoid competition between chapters and duplicative fundraising efforts, although the borderless nature of online fundraising has complicated this issue in recent years.
3. Required and Permitted Activities
This provision sets forth the activities the chapter should or must undertake as well as activities that are prohibited or require advance authorization. The approach to this provision can vary widely, depending on how much autonomy the parent organization prefers its chapters to have.
4. Formal Requirements (Incorporation and Tax-Exempt Status)
A very basic consideration is whether chapters are required to form independent corporations with formal boards of directors and governing documents. This is highly recommended, as a parent organization is more likely to be held liable for the activities of its chapters if the chapters are not incorporated.
It is also generally advisable for chapters to obtain tax-exempt status from the Internal Revenue Service. This can be accomplished either by having the chapters individually submit an IRS Form 1023, 1023-EZ, or 1024 (as applicable) or by having the parent organization submit a group exemption application to the IRS.
5. Recordkeeping, Reporting, and Inspection
It is essential that the parent organization have adequate oversight of the chapters so that it can fix any problems or revoke chapter status before the problems turn into public scandals. At a minimum, the chapter is generally required to issue an annual report to the parent organization, keep adequate financial and corporate records, and allow the parent organization to inspect its records.
6. Fees and Dues
Fees and dues paid by the chapter to the parent organization can be structured in various ways, including flat annual or monthly payments, a percentage of money raised, payments for a la carte services provided by the parent organization, or any combination thereof. This revenue is essential for the parent organization, as administration of the chapter relationship usually requires significant outlays of funds and staff time.
7. Obligations of the Parent Organization
A chapter will not be an effective representative unless it sees value in aligning itself with the parent organization. The parent organization should set forth in detail the assistance it will provide to the chapter. This might include administrative assistance, insurance and other benefits, fundraising help, training, and more.
8. Revocation and Modification of Chapter Status
The parent organization’s most crucial protection is its right to revoke the chapter’s affiliation or otherwise modify the chapter’s role (e.g. by forcing a merger of two or more chapters from different territories). Revocation is sometimes subject to a notice period or dispute resolution procedures. A revoked chapter must cease all use of the parent organization’s trademarks, including by amending its corporate documents, if necessary.
Written by Benjamin Takis, and originally published at www.asaecenter.org. Copyright 2015, ASAE: The Center for Association Leadership, Washington, DC. Republished with permission.Posted in Local Affiliates, Local Chapters | Comments Off on 8 Key Provisions of the Chapter Affiliation Agreement March 18, 2015
Running a nonprofit organization requires managing a dizzying array of details under stressful circumstances, including overseeing staff and service providers on a limited budget, seeking donations and grants, and navigating the various personalities and preferences on the Board of Directors. It is no surprise that so many nonprofits have trouble keeping track of the many reporting, filing, and registration requirements that may apply at the federal or state level. However, failing to keep up with required filings can have serious consequences.
For example, the Internal Revenue Service has reported that since 2010, about 550,000 organizations have had their tax-exempt status revoked for failure to file the Form 990 (or 990-EZ, or 990-n, where appropriate) for 3 consecutive years. Many other organizations have lost their status as a “corporation” for failure to keep up with required state filings. The first step in avoiding the hassle and expense of correcting missed filings is becoming aware of the various reporting requirements that may apply to your organization.
Below are some of the main reporting and filing requirements that generally apply to nonprofits (though this list is not comprehensive and there may be other requirements depending on the organization’s specific activities):
1. Federal Tax Filings
Virtually all tax-exempt nonprofits (with the exception of churches, certain religious organizations, and governmental entities) must file some version of the Form 990, depending on the organization’s revenue, assets, and tax-exempt status. This will be either the Form 990-N, Form 990-EZ, Form 990, or Form 990-PF. As mentioned above, failure to file the applicable version of the Form 990 for 3 years in a row results in automatic revocation of tax-exempt status. In addition, organizations with $1,000 or more of gross income from an unrelated business in a given year must file Form 990-T.
2. State Tax Filings
Some states have their own tax filing requirements for nonprofits (although many states simply defer to the federal Form 990 and impose no extra requirements). Sometimes, states impose state-specific tax filings only on organizations with unrelated business revenue, and sometimes these tax filings apply only to sales and/or property taxes. These filing requirements could potentially apply in any state in which an organization operates or generates revenue.
3. State Corporate Filings
An organization must generally submit an annual (or sometimes biennial) filing in the state in which the organization incorporated, reporting basic information such as the organization’s address, directors, and officers and paying a fee.
4. State Licensing Requirements
Operating or raising money in a particular state may give rise to a requirement to register and/or obtain a license in the state, even if the organization has no office and was not incorporated there. State charitable solicitation registration requirements, which apply in approximately 40 states, are the most common example applicable to nonprofits. Subject to various exceptions, nonprofits are generally required to register and file annual reports in the states in which the organizations solicit donations for charitable purposes. In some cases, these reports require filing a copy of the Form 990 and audited financial statements.
5. Employment Reports
Nonprofits with employees are required to file Form 941 (reporting withholding and payroll taxes) quarterly with the Internal Revenue Service, and certain nonprofits must also file Form 940 (reporting federal unemployment taxes) quarterly. Separate quarterly payroll and tax reports are generally required at the state level as well. Additionally, annual Form W-2 and Form 1099 reporting is required with respect to employees and independent contractors, respectively. Nonprofits with employee benefit plans may also be required to file Form 5500 with the Department of Labor, and, starting with the 2015 year, certain employers (or their health plan providers) may need to file Form 1094-B, 1094-C, 1095-B, and/or 1095-C pursuant to the Affordable Care Act.
6. Lobbying and Political Activity
Nonprofits, including 501(c)(3) organizations, are allowed to engage in varying amounts of lobbying activities. Besides disclosing these activities on the Form 990, lobbying activities may need to be disclosed pursuant to the Lobbying Disclosure Act on reports called the LD-1, LD-2, and LD-203. In addition, nonprofits permitted to engage in political campaign activities may be required to file Form 1120-POL with the Internal Revenue Service, and/or various reports with the Federal Election Commission.
7. Foreign Assets
Nonprofits with financial accounts overseas must generally file an annual Foreign Bank Account Report (“FBAR”) called the FinCEN Report 114. Additional requirements to report foreign assets to the Internal Revenue Service through Form 8938 currently applies only to individual taxpayers, but may be extended to organizations and business entities in the future.Posted in 501(c)(3), 501(c)(4), 501(c)(5), 501(c)(6), Form 990, Reporting | Comments Off on Nonprofit Reporting Requirements Present Traps for the Unwary February 9, 2015
Serving on the board of directors of a nonprofit organization can be a rewarding experience that offers the chance to contribute to a meaningful cause and deepen one’s connections and stature within the community. However, the directors on a nonprofit board can be exposed to personal liability under some circumstances, so it is important to be aware of the legal risks and responsibilities that board service entails, as well as the ways to mitigate these risks.
The main source of personal liability exposure stems from a director’s fiduciary duties. Under state nonprofit corporation law, directors generally owe a duty of care, duty of loyalty, and duty of obedience to the organizations on whose boards they sit. In summary, the duty of care requires directors to stay reasonably informed of the organization’s activities, exercise oversight, attend and prepare for board meetings, ensure the organization’s records are accurate, and generally act in good faith and with the care an ordinarily prudent person would exercise in comparable circumstances. The duty of loyalty requires directors to act in the interest of the organization rather than in their personal interest. The duty of obedience requires directors to adhere to the organization’s mission and comply with applicable laws and the organization’s governing documents.
Directors can be held personally liable for breach of fiduciary duties. These duties can be enforced by fellow directors, as well as the organization’s officers, members, and in rare circumstances by other individuals or stakeholders with a special relationship to the organization. Fiduciary duties are also enforced by the state attorney general. Directors can be protected from fiduciary liability by obtaining directors & officers (D&O) insurance and by requiring the organization to indemnify its directors against attempts to hold them liable. D&O insurance and indemnification generally protect directors in most situations, except those involving fraud, criminal activity, or the director’s improper receipt of a personal benefit.
Outside of their fiduciary duties, directors are not generally personally liable for the debts, acts or omissions of a nonprofit organization. Nonprofits are typically organized as “nonprofit corporations” under state law, which are considered legal entities separate and distinct from the individuals who run them. Accordingly, claimants who sue an organization under contract laws, personal injury, employment discrimination, and other laws generally cannot reach the personal assets of an organization’s directors and officers, except in rare circumstances involving fraud, or if the formalities required of a corporation (keeping separate bank accounts, following bylaws, having board meetings and keeping minutes, etc.) are not followed. This rare situation is called “piercing the corporate veil.”
As with fiduciary liability, directors can generally be further protected against liability for the acts or omissions of the organization by requiring the organization to indemnify its directors against attempts to hold them liable, and by maintaining insurance covering errors and omissions and/or employment practices liability.
There are also circumstances under which directors can be held personally liable under certain tax provisions. Nonprofits qualifying as 501(c)(3) or 501(c)(4) organizations are subject to “intermediate sanctions” rules under section 4958 of the Internal Revenue Code. The intermediate sanctions rules relate to conflicts of interest, and impose penalty excise taxes on financial transactions between organizations and “disqualified persons” (i.e. directors, officers, key employees, and other insiders of the organization) under which the disqualified person receives more value than he or she confers on the organization. These excise taxes apply personally to the disqualified persons who received the benefit of the transaction, and on any directors or officers who willfully and knowingly participated in the transaction. Similar but more stringent rules apply to 501(c)(3) organizations that are classified as “private foundations.”
Lastly, directors can be held personally liable for failure to pay federal payroll taxes owed by the organization.
While serving on a board of directors carries some risk of personal liability, the risks are minimal for directors who are aware of their legal responsibilities, exercise diligence, and ensure that they are adequately protected by insurance and indemnification.Posted in Corporate Governance, Fiduciary Duties, Personal Liability | Tagged Personal Liability | Comments Off on Personal Liability Exposure from Serving on a Nonprofit Board September 29, 2014
I have a guest blog post at the Center for Nonprofit Advancement with some tips on how to find the right service provider for your nonprofit, which previews an upcoming workshop I am teaching at the Center titled “Getting the Most Out of Your Consultants and Service Providers.” I’ve reprinted the post below.
There are few decisions more crucial for a nonprofit than the decision to hire a consultant, accountant, attorney or other service provider. Choosing the wrong service provider can waste precious time and money, and lead to mistakes that damage your organization’s reputation.
Finding the right service provider is no easy task. There are thousands of consultants, accountants and attorneys in the D.C. metro area alone, each with different specialties, styles, and prices. And it’s often hard to know what type of service provider you need (all too many are happy to take your money, whether they can help your organization or not).
The most egregious hiring mistakes can be avoided by following a few simple guidelines:
• Get free advice from different perspectives first. Run your issue by a number of people to sharpen your understanding of your needs before scheduling consultations. Insurance brokers, other nonprofits, and workshops are great sources of free or cheap advice.
• Seek referrals from trusted advisors. It’s crucial to develop a network of smart, well-connected advisors with good character. Referrals from trusted advisors will be more reliable than slick ads or websites.
• Always interview a few companies before making a decision. Most service providers know how to make an impressive pitch. Any gaps in their expertise usually won’t be apparent until you’ve spoken to a few different experts.
• Pay for expertise, not size and prestige. Paying for bigger companies does not necessarily guarantee great service. Bigger companies sometimes delegate nonprofit client matters to staff with less training. Small and specialized firms can often get you the best bang for your buck.
• Consider changing service providers every so often. This will ensure that you get a fresh perspective and work with someone who is motivated to earn your business.
The “Getting the Most Out of Your Consultants and Service Providers” class on October 9 will examine tips like these for finding the right service provider for your need, review the core competencies of various service providers used frequently by nonprofits, and discuss other ways that nonprofits can get the most for their money when working with service providers.Posted in Uncategorized | Comments Off on Finding the Right Service Provider August 15, 2014
Tax Analysts has a new piece on the Form 1023-EZ, focusing on the challenges the IRS will face in enforcing the restrictions on 501(c)(3) organizations engaging in political activity. The piece includes a few quotes from me.
State and federal regulators alike may have a hard time tracking down some politically active 501(c)(3) groups. An organization can be exempt under state law and not under federal law, Hill said, adding that some states permit various types of nonprofit organizations to engage in considerably more political campaign activity. Even if some organizations ultimately lose their federal exemptions, they might keep their state tax-exempt status, she said.
Owens said that if, as he fears, a swarm of ostensibly educational but truly political 501(c)(3)s develops close to an election, those groups will likely have a lifespan of less than a year. And if they never file a Form 990, all the IRS will have to use in tracking them down is the Form 1023-EZ.
Applicants will file the new Form 1023-EZ electronically, which will allow the agency to more easily screen applications with inconsistent answers or ones that raise questions before it issues approvals, Koskinen said. The agency will also test the accuracy of the short form by taking a statistical sampling of streamlined applications and subjecting them to the more rigorous, full exemption application, he said. The IRS will do still another sampling of Form 1023-EZ applicants a year after they’re approved and audit “how they’re doing and what they are doing,” Koskinen said.
“We’ll be better at the front end, but we’ll have more resources available to check on people at the back end and see are you doing what you said you were going to do,” Koskinen said. “Are you still doing the right thing? Now we’ll know.”
Takis interpreted the situation differently. “One challenge for the IRS will be that the Form 1023-EZ is likely to lead to many more organizations getting formed and applying for 501(c)(3) status, so it’s going to be that much harder for the IRS to keep track of all these organizations and find the bad actors,” he said.
You can read the full piece here.Posted in 501(c)(3), Form 1023-EZ, Lobbying and Political Activity | Comments Off on Form 1023-EZ and Political Activity July 17, 2014
I have written an article for Tidewater Community College discussing “Five Habits to Avoid Nonprofit Legal Disasters.” The article is a preview for an all-day course I am teaching at Tidewater on August 6 entitled “Navigating the Minefield of Nonprofit Law.” I have reprinted the article below.
In the world of nonprofit law, disaster scenarios are common. For example, since 2010, approximately 550,000 organizations have had their tax-exempt status revoked for failure to file the Form 990 (or 990-EZ, or 990-n, where appropriate) for 3 consecutive years. Similarly, many organizations are subjected to heavy fines for failure to report unrelated business income tax, for misclassifying employees as independent contractors, or for conveying improper benefits to directors or officers.
However, most of these legal mishaps can be prevented (or at least mitigated) by building good organizational habits and taking simple precautionary measures. This article discusses five key practices that lay the groundwork for any well-run nonprofit. Organizations that build these good habits early rarely suffer legal setbacks that cannot be corrected with minimal time and cost.
1. Have a Business Plan
Many small businesses are run in an informal way, without much forethought about revenue sources or essential expenses. Nonprofits do not have this luxury. Funding is too scarce and the administrative burdens too severe for a nonprofit to thrive without a rigorous planning process. A nonprofit’s business plan should include a fundraising plan (with a mix of donations, grants, and fee-for-service revenue that is tailored to your organization), a strategic plan (detailing how your organization will accomplish its mission), and a budget to pay for expenses and administrative help. The budget is particularly important, because skimping on necessary services such as insurance, accounting, legal and payroll help can lead to errors that cost a lot of money to fix later.
2. Get Adequate Insurance
Legal setbacks can happen even to well-run nonprofits. Getting adequate insurance will ensure these setbacks don’t have disastrous financial consequences. Directors & Officers (D&O) insurance protects board members and officers from personal liability for alleged wrongdoing such as mismanagement and breach of fiduciary duties (including the legal defense costs of such allegations), and is essential for any organization. Organizations with more than 1 or 2 employees should also look into Employment Practices Liability (EPL) insurance, which protects the organization against allegations of wrongful termination, discrimination, harassment and other employment practices – the most frequent source of litigation for nonprofits. Lastly, organizations engaging in any type of complex business practice should consider Comprehensive General Liability (CGL) and/or Errors & Omissions (E&O) insurance.
3. Keep Good Financial Records
An organization cannot function without good financial records (and failure to keep good records is usually the first step towards disaster). Good financial records are necessary to support the positions taken on the Form 990, to comply with restrictions on grants, and for the Board of Directors to fulfill its fiduciary duties. Nonprofit accounting raises unique and challenging issues that require the help of an expert, at least occasionally. Consider hiring an outsourced accountant to assist with your financial recordkeeping, and look into whether your organization should have an audit, review or compilation by a reputable CPA firm with nonprofit expertise.
4. Keep Good Board Meeting Minutes
Aside from the financial records, the Board meeting minutes tell the story of your organization more than any other document. In the event of any legal controversy, the minutes from your Board meetings will be closely examined to determine the facts. Unfortunately many nonprofits make the mistake of not including enough detail, or including too much detail in the Board meeting minutes. It can be difficult to strike the right balance. As a general rule, an organization should document the general gist of the discussion (there is no need to transcribe every statement made at a meeting), and include detail where necessary to protect the Board and document important transactions, such as when the Board exercises due diligence in business transactions or compensation decisions.
5. Adopt and Follow the Essential Corporate Policies
Most nonprofits adopt the three corporate policies mentioned in the Form 990: the conflict of interest policy, whistleblower policy, and document retention and destruction policy. In addition, it is advisable to adopt a travel and expense reimbursement policy, a charitable gift acceptance policy, and an employee handbook. However, it’s not enough to simply adopt these policies and file them away. An organization’s directors, officers and employees must also know the terms of all its policies and take steps to implement the policy terms into daily practice.Posted in Best Practices, Corporate Governance, Workshops | Comments Off on Five Habits to Avoid Nonprofit Legal Disasters ← Older posts