Lawyers as Social Innovators: Guest Lecture 2018

Earlier today I had the wonderful opportunity to guest lecture at Scott Curran‘s  Lawyers as Social Innovators class at Chicago-Kent College of Law at the Illinois Institute of Technology. Here are my notes for the class:

Introduction – Nonprofit Law

On one side of the street you see: a theatre, a clothing store, a restaurant, a hospital, an art gallery, an afterschool learning center, a law office, and an outpost of philanthropic organization (e.g., Chan Zuckerberg Initiative) – all for-profits.

On the other side of the street you see: a theatre, a clothing store, a restaurant, a hospital, an art gallery, an afterschool learning center, a law office, and an outpost of philanthropic organization (e.g., Silicon Valley Community Foundation) – all nonprofit charities.

  • What makes the nonprofits different from the for-profits?
  • Why do we give tax-exemption to the nonprofits?
  • If you want to form an entity that will produce social good, which form do you choose and why?

Nonprofit Corporate Laws

Governance – board’s duties and responsibilities

  • Fiduciary duties and basic responsibilities (DOP)
    • How are these duties best met? – e.g., attend meetings, oversee programmatic impact as well as financials, adopt and enforce policies, plan for the future
    • What are the risks of failing to meet our duties? – generally, liability is very rare absent egregious circumstances but possible, particularly where there is gross negligence
    • How do we mitigate those risks? – e.g., meeting duties, insurance, indemnification
  • Governing documents and governance structures
    • Membership – Tip: Think carefully before establishing a voting membership structure for a charity; it may be resource-intensive to have members and consider that members may have standing to sue (even the directors) on behalf of the corporation (Read more here)
    • Board number and composition
    • Committees
    • Officers

Thoughts: Lawyers can advise beyond mere compliance and risk aversion. They can help boards understand and diligently pursue meeting their fiduciary duties. They can help boards incorporate organizational values into their governance structures and policies.

Charitable Trust Laws

The charitable trust doctrine requires that a gift accepted by a charitable organization must only be used for the expressly declared charitable purposes of the donee corporation at the time of the acceptance, even if the corporation changes its purpose, transfers those assets or dissolves.  Such restriction is imposed notwithstanding the fact that the donor did not expressly place any restrictions on the gift.  Accordingly, if a charitable corporation amends its charitable purposes, gifts received pre-amendment may be used only to further the original charitable purposes.  Pre-amendment gifts may not be used to further the new charitable purposes if such use is not in furtherance of the original charitable purposes. Read more here.

Currently, up to 42 states and the District of Columbia each require some form of initial and periodic charity registration. The Multistate Registration and Filing Portal, Inc. (MRFP), the National Association of State Charities Officials, and the National Association of Attorneys General started development of a Multistate Registration and Filing Portal, to make it easier for nonprofits to register in multiple jurisdictions using a one-stop online portal. Read Single Portal Multistate Charitable Registration: For Real This Time? (Cogency Global)

Federal Tax Laws – 501(c)(3)

Social Enterprise – Choice of Entity Factors

  • Personal wealth vs. social benefit
    • Favoring personal wealth – for-profit; favoring social benefit – nonprofit
  • What is your service or product?
    • Competing with for-profits in a similar manner, serving a similar market, with similar pricing – for-profit
  • Where will the money come from?
    • Equity capital – for-profit; philanthropic capital – nonprofit (though it’s possible for for-profits to raise philanthropic capital too)
  • How much control do you want?
    • Strong control – for-profit; weaker control subject to board of directors – nonprofit
  • Privacy or transparency?
    • Privacy – for-profit; transparency – nonprofit (though it’s possible for for-profits to be transparent with financials, etc.)
  • Importance of tax-exemption
    • Low net revenues may mean that income tax exemption is not the most important factor, particularly with the change in the tax laws likely resulting in less than 10 percent of taxpayers being able to benefit from a charitable contribution deduction

Notes for my 2017 guest lecture are posted here.