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Yes. 501c3 organizations are required to communicate changes in their by-laws to the IRS. You can read more on this matter by visiting the FAQ section of the IRS website (www.irs.gov/charities/article/0,,id=139021,00.html)
No...but there are advantages to incorporating first. To apply for recognition of federal tax-exempt status the IRS requires that you complete IRS Form 1023. The form requires that you submit a "organizing document" that includes certain required language to qualify for tax-exemption. The organizing document can be articles of incorporation for an incorporated group, or a Constitution or similar document for an unincorporated association.
The organizing document must include specific IRS language regarding recognized charitable purposes and that directs that the assets of the organization, in the event that it goes out of business, be distributed to other recognized tax-exempt organizations. The organizing document must also include language prohibiting the nonprofit from engaging in financial transactions that benefit the founders and directors, and prohibiting any activities relating to political campaigns. Finally, lobbying activities must be limited to "insubstantial" amounts.
While incorporating a nonprofit group is not required, it is strongly encouraged. Incorporation provides some additional liability protection form the organizatin's founders and directors. In addition, an incorporated organization is better understood in the legal sense as to its structur than an unincorporated group. Finally, if you obtain federal tax-exempt status for an unincorporated organization and later decide to incorporate, you will need to apply for federal tax-exempt all over again. The IRS will not transfer the exempt status of an unincorporated group to the new incorporated entity...even i you continue to operate exactly the same. (Copyrighted information reproduced with permission by Pfau Englund Nonprofit Law, P.C., www.nonprofitlaw.com)
The forms that must be completed, and instructions to complete them, to incorporate and apply for federal tax-exempt status, are almost all available online. That said, the process can be daunting and time-consuming for someone unfamiliar with the IRS and legal forms. Therefore, while an attorney is not necessary, many groups find it helpful to seek professional assistance if they can afford to do so. (Copyrighted information reproduced with permission by Pfau Englund Nonprofit Law, P.C., www.nonprofitlaw.com)
Perhaps the most common question I'm asked it, "Can we be sued for that?" Unfortunately the answer is, anyone can sue anyone for anything...and someone probably will. And, whether or not your organization or its officers, directors and members are liable, the cost of defending any legal action can be high. Therefore it is recommended that all organizations develop at least a simple risk management plan and take steps to reduce the group's legal risks, including securing appropriate insurance coverage. (Copyrighted information reproduced with permission by Pfaa Englund Nonprofit Law, P.C., www.nonprofitlaw.com)
Unfortunately, anyone can be sued at anytime and the cost of defending yourself, regardless of ultimate liability can be quite high. Officers and directors are less vulnerable if your organization is a separately incorporated nonprofit organization. The corporate form generally insulates the officers and directos from most liability. Even if your organization is incorporated, however, I recommend that you develop a risk management plan, including (but not limited to) obtaining officer and director liability insurance. (Copyrighted information reproduced with permission by Pfau Englund Nonprofit Law, P.C., www.nonprofitlaw.com)
“Founderitis” is often used to describe the situation when a founder is very resistant to change. Understandably, new ideas may make the founder fear he or she is losing control. New directions may collide with the legitimate vision that the founder holds for the organization. On the other hand, change is often necessary to propel the organization forward. To combat founderitis it is important to foster open-minded and two-way communication between the founder and the board. Regular information sharing is necessary. Ultimately, if the founder is not able carry out and support the decisions of the board, the two may have to part ways.
Through its vision statement, an organization defines its ultimate motivation, its dreams, and its image of a desired future. A vision statement describes the ideal situation if the organization could fulfill its utmost wish. Some examples:
- “No child in our city will go to bed hungry.” (Soup kitchen)
- “In two decades, our services will no longer be needed.” (Literacy program)
- “We will be recognized as the best symphony orchestra in America.” (Music ensemble)
Conflict of interest arises whenever the personal or professional interests of a board member are at odds with the best interests of the nonprofit. Example: A board member performs professional services for an organization or proposes that a relative or friend be considered for a staff position.
Such transactions are perfectly acceptable if they benefit the organization and if the board makes any decisions that have the potential for conflict of interest in an objective and informed manner. Even if they do not meet these standards, such transactions are usually not illegal. They are, however, vulnerable to legal challenges and public misunderstanding if mismanaged. Because public confidence is important to most nonprofits, boards should take steps to avoid even the appearance of impropriety. These steps may include:
- Adopting a conflict-of-interest policy that provides rules for handling conflicts between board and staff member personal interests and the best interests of the organization.
- Disclosing conflicts when they occur so that board members who are voting on a decision are aware that another member’s interests are being affected.
- Requiring board members to withdraw from the final discussion and decisions where they have a personal stake.
- Establishing procedures, such as competitive bids, that ensure that the organization is receiving fair value in the transaction.
Organizations with larger budgets also tend to have larger boards. In most states the laws dictate the minimum size for nonprofit boards is three members, but in some states only one or two board members are required.
When determining the size of your board, start by thinking what your board needs to accomplish. Optimal board size may vary according to how established the organization is (though an odd number os members is recommended), its mission, its fundraising needs and whether it is a national or a local board.
Many board decisions are not made unanimously. Board members contribute varying and, at times, controversial perspectives to a deliberation. New and different ideas assist the board in reaching an objective and balanced decision. Board decisions are based on a majority rule, which automatically creates compromises and occasionally dissenting opinions. However, consensus building and healthy debate are ways of making better decisions. It is important to remember that once a decision is made, the board speaks with one voice. Individual board members are obligated to present this view to the outside world. However, during the voting process, if a board member strongly disagrees with a motion and votes against it or abstains from voting, the vote and dissenting opinion should be recorded in the meeting minutes.
Board retreats are special meetings organized around an issue too significant to be handled within a normal meeting agenda. Most boards can benefit from an annual retreat simply to strengthen relationships and focus on future challenges. Here are some topic areas that are ideal for a retreat setting:
- Conducting a board self-assessment.
- Orienting new board members.
- Refreshing board members’ understanding of their responsibilities.
- Strengthening board relationships and team-building.
- Preparing for strategic planning and refocusing on the mission and vision.
- Working out a critical issue (merger, major division among board members).
Every organization needs to define its fundamental purpose, philosophy, and values. The mission statement clarifies the reason for the organization’s existence. It describes the needs the organization was created to fill and answers the basic question of why the organization exists. Without guidance, it is difficult to establish programmatic priorities. The mission statement provides the basis for judging the success of the organization and its programs. It helps to verify that the organization is on the right track and making the right decisions. It provides direction when the organization needs to adapt to new demands. Attention to mission helps the board adhere to its primary purpose and helps during conflicts by serving as a touchstone for every decision. The mission statement can be used as a tool for resource allocation. A powerful mission statement attracts donors, volunteers and community involvement.
Restricted grants refer to contributions and donations that arrive with strings attached. These restrictions can determine for what purpose the money can be spent, by when it must be used or whether matching grants are required to make the funds available.
It’s the rare board that would not benefit from outside skills and expertise. Some organizations choose to invite outsiders with specific contacts and knowledge to serve on committees or task forces. Committee members do not have the same liabilities and pressures as full-fledged board members. It is an excellent way to bring new talent and perspectives to the board and to allow busy professionals to serve an organization of their choice. Other benefits include: no need to increase the board size, former board members can stay active as committee members, and future board members can be cultivated into board service.
A governing board may form an executive committee to act on its behalf when a full board meeting is not possible or necessary. An executive committee can be an efficient tool but not every board needs one. An executive committee should never replace the full board. Here are some situations that might warrant using an executive committee:
- You have a large board. A smaller group authorized to act on its behalf in certain circumstances can speed up decision making.
- Your board members are scattered all over the country. It is easier for a core group to get together during an emergency.
A board member’s success is determined not only by their business skills and experience, but by their personality traits, or character. In his book, Welcome to the Board,* Fisher Howe identifies several characteristics of successful, happy board members:
- They are honest.
- They are enthusiastic.
- They keep an open mind.
- They are team players.
- They tackle complex problems with relish.
- They take an orderly approach to decision making.
- They are competent.
- They have a sense of humor.
“Problem” board members may:
- Focus on a single issue.
- Always take the contrarian view - just for show.
- Expound on strongly held opinions that are rarely backed up by fact or research.
- “Board hop” - sit on many boards, but serve none well.
- Regularly miss meetings.
- Not accept or complete tasks.
- Be motivated by personal agendas.
- Monopolize discussion or never participate in discussion - except after the meeting.
- Treat peers disrespectfully or refuse to cooperate.
- Betray confidentiality.
- Fail to disclose conflicts of interest.
- Fail to understand when it is time to retire and allow others to carry the torch.
Board self-assessment provides board members with an opportunity to:
- Reflect on their individual and corporate responsibilities.
- Identify different perceptions and opinions among board members.
- Point to questions that need attention.
- Use the results as a springboard for board improvement.
- Increase the level of board teamwork.
- Clarify mutual board/staff expectations.
- Demonstrate that accountability is a serious organizational value.
- Provide credibility with funders and other external audiences.
- Look internally in addition to assessing the CEO and programs.
Every board has an annual responsibility to evaluate the executive director’s performance. Many chief executives may feel uneasy about the idea, and if a process is not in place, they are not eager to remind their boards. However, when properly administered, performance evaluations benefit both sides.
Benefits for the executive director:
- Establishes a clear job description and boundaries on responsibilities.
- Spells out annual expectations to help the executive focus on what’s most important.
- Provides a formal opportunity to bring up major concerns, budding disagreements, or future issues to which the board should pay attention.
Benefits to the board:
- Structured opportunity to communicate with its one and only agent and address the biggest issues in the organization.
- Tangible opportunity to express satisfaction by approving a salary increase.
- Forum to address performance concerns. The discussion held during this review can lead to a formula to improve the situation or, if the discussion has already taken place earlier without results, to the resignation of an ineffective executive director.
Form 990 is an annual information return that nonprofits file with the IRS to justify their tax-exempt status. Accountability and transparency are keys to retaining public trust, and nonprofits can accomplish it by providing easy and open access to this document. Form 990 explains the mission and program activities of the organization. The organization’s financial information details revenues, expenses, and net assets. It is also necessary to list the names of the board members, key staff and their compensation, whenever it exceeds $50,000 annually.
How can we turn our rubber-stamping board into a more involved board?
Boards that automatically approve or “rubber-stamp” the proposals of their chief executives, committees, or a hard-working peer undermine their own responsibilities, take their fiduciary duties lightly - and most likely do not enjoy their service very much. Here are five steps to help turn your phlegmatic board into a group of engaged decision-makers.
- Recognize that your board has a problem. Identify the source of the dilemma. Is it misunderstanding of the role of the board? Have board members lost their fire? Or is it inability to work with a strong chief executive or a powerful peer?
- Clarify the expectations, responsibilities and liabilities that come with board service. Stress that individual board members have individual legal obligations as fiduciaries of their organization.
- Encourage individual board members to express their opinions and actively participate in deliberation. Stress that good decisions can be made only after all perspectives have been introduced. Expect issues to be brought to the full board’s attention before they are ready to be implemented.
- Refuse to vote on an issue or a proposal before it has been duly presented to the board and before its merits have been recognized.
- Practice how to solve differences of opinion. Identify issues that need board attention. Assign a board member to serve as a devil’s advocate. Force your board to reach consensus through a process rather than inactivity.
Community centers, libraries, nature centers. Spaces that are open to the public on a daily basis may be available at low or no cost for meetings. As a lunch break, arrange for a tour, a game, a walk, or some other activity that will provide an opportunity to relax and shift focus from the work.
- Civic organizations’ offices. Groups like the Lions or Rotary Club may have meeting spaces available free or for a small fee.
- Churches or spiritual retreat centers. Boards of faith-based organizations may already have connections with such resources, but many churches or spiritual centers welcome any community group wishing to engage in thoughtful work.
- A board member’s home. This can be a good solution when you need a location on short notice and cost is paramount.
- Corporate boardrooms and retreat centers. Corporate supporters and board members who are corporate executives may be able to provide their bank or corporate meeting room. They are also likely to be familiar with a variety of meeting facilities and may be able to help the organization negotiate favorable costs - or even to underwrite some or all of the costs.
There are 3 basic steps to getting your group started as a nonprofit, tax-exempt organization:
- "Organizing" the group as a legal entity, typically by filing Articles of Incorporation in the state in which you will have your primary office to create a nonprofit corporation;
- Drafting Bylaws, the rules by which the organization's governing board (i.e. Board of Directors) operate; and
- Applying to the Internal Revenue Service for recognition of federal tax-exempt status using IRS Form 1023.
Once your group is incorporated and recognized as tax-exempt by the IRS, it can apply for additional benefits, such as exemption from state income, sales and property taxes, and applying for a nonprofit postal permit with your local postmaster.
There really isn’t any such thing. The federal Employer Identification Number (EIN) is sometimes called a 'taxpayer identification number or TIN' is used by the Internal Revenue Service to identify a business or group. An EIN or TIN identifies the group for the IRS like a personal social security number identifies an individual. All organizations, whether for-profit or nonprofit, must have their own EIN to open a bank account. In addition, a nonprofit organization must obtain an EIN before completing the IRS tax-exemption application so that they can include the EIN on the tax-exemption form. You may apply online for, and instantly obtain, an EIN at the IRS website at www.irs.gov.
Local tax exemptions are set by local jurisdictions and must be researched locally.
No. That requirement applies to foundations and public charities designated as 501(c)(3), but there are many types with other requirements.
A business plan specifies your nonprofit’s business idea. It’s sometimes needed for funding or to justify a new program. The plan often includes a market study, strategic plan and financial projections.
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