I recently contacted Gene Takagi, a noted California nonprofit lawyer, to confirm or deny an assertion regarding California nonprofit law that was made to one of our clients. He was kind enough to clarify the matter. We discussed that there are many such “nonprofit law urban legends” and he suggested that would be a good topic for a blog post! So, here is my list of popular “nonprofit law urban legends.” Please feel free to add a few of your own.
1. Nonprofits Can’t Make Money. I covered this surprisingly persistent legend in a related post, but it bears repeating. The designation of an organization as “non-profit” or “tax-exempt” does not mean that the organization can’t have money left over in its bank accounts at the end of the year. Money that is not required to meet current expenses should be used to further the organization’s mission or can be set-aside as a reserve to cover future expenses.
2. Nonprofits Can’t Lobby. This legend is actively harming the sector. Most nonprofits can actively lobby. While there are some restrictions on 501(c)(3)’s lobbying activities, only private foundations are prohibited from lobbying. Public charities may lobby within limits that can be quite generous. For excellent resources on this topic, visit http://www.afj.org/.
3. Grant makers Can’t Fund Organizations That Lobby. Another harmful legend. Grant makers that are private foundations cannot earmark funds for lobbying. Grant makers that are public charities may make grants specifically to fund lobbying so long as they count such grants within their own lobbying limits. There are specific steps both types of grant makers may take to protect themselves from having lobbying activities attributed to them. Grants from either type of grant maker are not flatly prohibited merely because the grantee is engaged in lobbying activities.
4. Nonprofits Must Follow Roberts Rules of Order. Not only is following Roberts Rules of Order, Sturgis, or any other parliamentary procedure not legally required, it’s a bad idea to require Roberts Rules of Order in the organization’s governing documents. See Jack Siegal’s blog post on his Good Governance blog. Enough said.
5. Nonprofit Staff Can’t Participate In Political Campaigns. Everyone, even a staff member, a CEO, or a founder of a nonprofit has a first amendment right to engage in political speech in his or her individual capacity. Staff of 501(c)(3)s should, however, take care to restrict campaign activities to their personal time and avoid any impression of organizational support.
6. Nonprofits Have To Make Their Books, Financial Statements, Board Minutes, etc. Public. In most states, nonprofits do not need to make documents other than their Form 1023, Application for Exemption and past three Forms 990, 990-EZ, and/or 990-T available for public inspection. There is an exception for organizations with voting members. Voting members may have broader state law rights to examine the organization’s books and records.
7. Nonprofits Must Adopt All the Governance Policies Mentioned on the New Form 990. This is a fast growing legend. The IRS has indicated their belief that weak governance is a strong indicator of weak tax-compliance. None, I repeat, None, of the policies are legally required to be adopted, although many could be said to be a good idea for most nonprofits. Our approach is to recommend a conflict of interest, whistleblower, and document retention and destruction policy for nearly every tax-exempt client. We consider the necessity of the other policies on a case by case basis.
8. They IRS Won’t Really Levy Penalties on Nonprofits. “I know our Form 990 is a year late and we didn’t extend it, but we only have a budget of 1.2 million and a staff of 12? They won’t really charge us a $50,000 late fee will they?” They will if you don’t have reasonable cause for being late. Being a nonprofit is not reasonable cause.
9. Nonprofits Can Hold Meetings and Vote by E-mail. Many states, including Arizona, require meetings to occur in a format where all parties can simultaneously hear each other. This means telephonic meetings are okay, but e-mail meetings are generally not. An alternative is to vote by written consent resolution and have each board member reply to the consent resolution by e-mail using a digital signature. This will work in states where digital signatures are accepted. In most states board votes by consent resolution must be unanimous to be effective. For more information regarding voting by e-mail, see http://is.gd/4L9zf.
Even with the wealth of information floating around on the Internet, there are and always will be urban legends that laypersons (and even some lawyers!) will insist must be adhered to, often in support of an agenda. Be prepared to do your due diligence to find out what is required, what is a best practice, and what is just plain made-up.