Representing nonprofit organizations can be incredibly rewarding but challenging on many levels. Last month, Gene shared the tips and traps of representing tax-exempt organizations regarding corporate, tax, and other issues in a podcast hosted by West LegalEdCenter. Here is a summary of his many enlightening and constructive points:
- Failing to inform the client at the outset of representation that you represent the organization and not any individual directors or officers.
- Assisting a client in starting a nonprofit that lacks a plan for viability and has not been sufficiently researched, without discussing potentially more advantageous alternatives like fiscal sponsorship.
- Drafting a very specific and restrictive purpose statement that can create problems should the organization’s mission evolve, particularly if the board neglects to amend its governing documents and/or fails to use past-acquired assets for the original purpose for which they were raised.
- Including “non-voting directors” in the organization’s bylaws (under most states’ laws, there is no such thing as a “non-voting director” and, subject to very limited exceptions, each director has the right to vote on all matters before the board).
- Providing in the bylaws that the board of directors may combine in-person votes at a meeting with email votes to take board actions.
- Reinforcing the myth that nonprofits should always minimize overhead expenses (even at the expense of building an appropriate foundation on which to build the organization’s operations).
- Failing to inform the client about the differences among volunteers, independent contractors, and employees, and the risks of misapplying these classifications.
- Advising the founder to elect a board of directors that shares the founder’s vision for the organization without emphasizing the benefits of a board with diversity in both background and skill, and the need to elect only directors who are prepared to meet their fiduciary duties of care and loyalty.
- Ensuring that the client understands “nonprofit” does not mean tax-exempt, and receiving a determination of tax-exemption from the IRS does not necessarily mean the organization is also tax-exempt for state tax purposes.
- Failing to discuss with the client the benefits of having organizational policies that address the legal and management implications of conflicts of interest, proper gift receipts, misuse of social media, expense reimbursements, acceptance of noncash gifts, document retention/destruction, and whistleblowers.
- Consider providing important advice in writing to help assure the legal advice is not miscommunicated to the board and/or other decision-makers.
- Suggest, when appropriate, alternatives to starting a nonprofit such as working with an existing organization, fiscal sponsorship, or a donor-advised fund.
- Encourage the organization to carefully consider all the pros and cons before deciding whether to adopt a voting membership structure, especially if the organization is small.
- Review the governing documents to make sure the written consent provision, if any, complies with applicable state law (e.g., in California, unanimous written consent is required, and a written consent signed by a majority of directors would not be sufficient).
- Recommend, where appropriate (which will be in most cases for all but the biggest public charities), that the organization make the 501(h) lobbying election, which will generally allow the organization to spend more on lobbying within defined and generous limits, simplify recording keeping, and worry less about losing its tax-exempt status due to lobbying activities.
- Emphasize that the client must understand who the organization’s directors are, when and how they must be elected, and what their duties and roles are.
- Recommend, where appropriate, that the client invest in prudent overhead expenses (e.g., organizational policy creation, risk management, and technology).
- Advise the organization to create an orientation process for new directors so they are more fully informed of the organization’s policies and structure, and importantly, their legal responsibilities and fiduciary duties.
- Inform directors that under certain circumstances (e.g., excess benefit transactions, unpaid payroll taxes) they may be held personally liable for their actions and/or failures to act, and that state and federal volunteer protection laws may not shield them from a lawsuit.
- Encourage the organization to contact an insurance agent, broker or company that has experience working with nonprofits in order to obtain appropriate insurance protection for organization and its directors and officers.
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