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In 501c3 organizations, do the bylaws have to state that board members' terms will expire or can board members serve until resignation or death? Term limits are considered a best practice for nonprofit boards for a variety of reasons. Term limits help organizations access a broader range of opinions and perspectives thus diversifying the board as well as helping prevent board member burnout by encouraging board members to take a sabbatical from board service. The bylaws should address how long term of service are for board members and if members can serve consecutive terms. It is common to see terms of two or three years and allow board members to serve two consecutive terms and then take a year off before returning to the board. Do we need to send a copy of our revised by-laws to the IRS?
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) Do we need to incorporate before applying for federal tax-exemption? 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) Do we need an attorney to incorporate and apply for tax-exempt status? 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) Can our organization be sued? 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) Can our officers/directors/volunteers be sued? 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) What is “Founderitis?” “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. What is a vision statement? 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:
What is a conflict of interest? 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:
What is the average size of a board? 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. What should I do if I don’t agree with a board decision? 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. Why should a board hold a retreat? 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:
Why does your organization need a mission statement? 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. What are restricted grants? 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. Should we invite outsiders to serve on our committees? 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. Should nonprofit boards have executive committees? 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:
What Makes a Successful Board Member? 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:
“Problem” board members may:
Why Should Boards Engage in Self-Assessment? Board self-assessment provides board members with an opportunity to:
Why is an executive director evaluation necessary? 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 to the board:
What is a Form 990? 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?
Where should we hold our board retreat? 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.
What actual documents do I need to start a nonprofit? Which filings come first? There are 3 basic steps to getting your group started as a nonprofit, tax-exempt organization:
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. How do we get our federal tax-exempt number? 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. Must all nonprofits be purely about helping others? No. That requirement applies to foundations and public charities designated as 501(c)(3), but there are many types with other requirements. What is business planning? How is it carried out? 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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