Nonprofit Startups and the Value of a Nonprofit Attorney

Insightful founders of new ventures understand the value of involving legal counsel in the early stages of planning.  A knowledgeable attorney can identify issues, opportunities, and threats which allows founders to react appropriately as they plan the organizational and operational structures.  As a result, investing in legal assistance at the outset can help to avoid costly reactionary steps in later stages that might otherwise be necessary if the founders had unknowingly or unintentionally built their plan on a foundation of structures that are wrought with problems.  Founders of nonprofits – both large and small – who hope to build strong, viable, and effective organizations may gain the same benefits from early stage legal counsel.

10 Benefits of Using a Nonprofit & Exempt Organizations Attorney

  1. Setting up the proper form of entity to best achieve the goals of the founders.  Should the nonprofit be formed as a nonprofit public benefit corporation, mutual benefit corporation, religious corporation, trust, (for-profit) corporation, limited liability company, partnership, benefit corporation, L3C, or other type of entity?
  2. Determining the appropriate tax-exempt and tax status, if applicable.  Does the nonprofit qualify as a 501(c)(3), public charity, private operating foundation, private (grantmaking) foundation, 509(a)(1), 509(a)(2), 509(a)(3) supporting organization, 501(c)(4), 501(c)(6), 501(c)(7), 527, or taxable entity?
  3. Crafting an appropriate mission (exempt purpose) statement.  Should it be broad or narrow?  Should it include geographic references?  What is its importance?  How will it affect your organization’s growth or evolution?
  4. Creating an appropriate governance structure.  How many directors should we have?  What are their required qualifications?  How will they be elected?  Should we have voting members?  What if we want certain individuals to always be part of the board?  Can we create an affiliation with an existing entity (for-profit or nonprofit)?  What are appropriate term lengths?  Should we have term limits?  What are the differences between directors and officers and how do we specify their respective roles?
  5. Drafting legally compliant governing documents (articles of incorporation, bylaws, conflict of interest policy) that also include desired best practices (e.g., compensation of executives), levels of indemnification (protection of directors, officers, employees, and others), and recommended references to applicable laws (e.g., electronic communications).  Would adopting another organization’s bylaws be a breach of our board’s legal duties if they were noncompliant or not observed in practice?  Are the modifications we made to a template bylaws form still legally compliant (e.g., email voting)?  What are the important benefits of drafting and adopting the other governance-related documents that are referenced in the Form 990 annual return?
  6. Educating your board members regarding their legal duties and responsibilities.  Do our board members know their legal duties, their potential exposures to personal liability, and ways to mitigate these risks?  Have we made it a priority to educate our board?  Would empowering our board members with information be of value to the organization and its ability to advance its mission?
  7. Educating your team on corporate and tax law compliance.  What are our reporting requirements?  What activities and financials do we need to monitor to safeguard our tax-exempt and public charity status (if applicable)?  What business, lobbying, and political activities can we carry out and how much of it can we do?  Can we enter into contracts with our directors, officers, and substantial contributors, and if we can, what kinds of limitations apply?  What do we need to think about before engaging in foreign activities or making grants to foreign organizations?
  8. Developing and operating programs that are consistent with 501(c)(3), other applicable laws, and your governing documents.  Are any of our programs sources of earned revenues?  Are there unrelated business income tax implications with these programs?  Are we in legal compliance with charitable solicitation registration requirements for each state in which we fundraise?  Do we engage in international activities and if so, are we complying with applicable international laws?  What risk management steps have we developed with respect to our programs?
  9. Filing an exemption application that has the best chance of a quick approval and shows your professionalism, competence, and understanding of applicable laws.  Did we carefully draft our exemption application and with an understanding that the exemption application we file will permanently be a public document that must be disclosed upon request?
  10. Providing confidence to your entire team that you are setting up the organization diligently with care.  Are we taking steps that will positively impact our recruiting of board members, officers, employees, and volunteers and send favorable signals to potential donors and funders?

While there are many important benefits to using a nonprofit attorney in the startup process, it’s not absolutely essential.  But if you proceed without a nonprofit attorney, you should move forward with great care and diligence. At minimum, proceed with the guidance of a trustworthy book and the assistance of persons experienced in working with nonprofit and tax-exempt organizations.


Continue reading “How Do I Decide on an Attorney?” and “10 Tips for Working with an Attorney” after the jump.

This is Part Five of our five-part series this month on starting a nonprofit.

Part One – 10 Keys to Starting a Nonprofit – Public Charity
Part Two – Starting a Self-Sustainable Nonprofit
Part Three – Incubating a Nonprofit Social Enterprise
Part Four – 10 Keys to Starting a Nonprofit – Private Foundation

How Do I Decide on an Attorney?

Consider the following:

Pro bono attorney

Pros:  Cost (free!).
Cons:  May have limited experience working with and counseling nonprofits.

Small firm focused on nonprofit law

Pros:  Experience counseling nonprofits and legal fees may be lower than a full-service firm.
Cons:  May not provide counsel on other areas of the law (e.g., employment, trademark).

Full-service firm

Pros:  Experience in a variety of legal areas.
Cons:  Attorney handling matter may have limited experience working with nonprofits and legal fees may be cost prohibitive.

10 Tips for Working With a Nonprofit Attorney 

  1. Be open and honest.
  2. Share your goals and limitations (including legal budget and timelines) up front.
  3. Ask questions.
  4. Fully disclose what you understand and don’t understand.
  5. Share with your attorney at the start of the representation a written basic business plan including your mission, your activities, and a 3-year budget.  Be prepared to be flexible as new considerations are raised though discussions with your attorney and in order to obtain the desired tax-exempt status.
  6. Strongly consider using your attorney’s draft forms such as articles of incorporation and bylaws (it will generally be more cost effective) and inform your attorney at the start of the representation of any unique governance provisions you desire.
  7. Be open to recommended changes to your plans and desired governance structures based on legal compliance, best practices, and your attorney’s judgment.
  8. If the attorney does not give you a checklist of items to complete with respect to the exemption application, take a first shot at completing IRS Form 1023 (at least the check-the-box items you know you can answer) and give it to the attorney for review.
  9. After receiving a draft document from the attorney, have the board (or authorized committee) go over the document and send all the questions and comments to a point person who can consolidate and forward them to the attorney.
  10. Have the attorney speak to the board about the duties and responsibilities of the directors. Increasing the participation and productivity of board members may be the best part of your legal investment.

Learn more about starting a nonprofit and how we can help here.

– Gene Takagi & Emily Chan