From time to time, themes emerge in my practice. Lately, a recurring question has been why does a nonprofit corporation have to follow its articles and bylaws. Yes really. While its true that the sky won’t fall and you won’t necessarily be arrested on the spot, there are number of unsavory consequences that can flow [...]
Daily Dose of Nonprofit Law
Category Archives: Nonprofit Governance
Executive Committees: The Good, The Bad and The Ugly
An executive committee can be an effective governance tool, but not every board needs one. Executive committees should never ever replace the full board.
Who Owns a Nonprofit Corporation?
Let’s be clear about one thing. No one owns a nonprofit corporation.[1]
While there is no outright ownership, there is control. One of the fundamental questions I ask when forming a new nonprofit corporation is how board members will be selected. This is a key question because those who hold the power to select board members retain the ultimate authority over the corporation.
The possibilities are limited by the nonprofit corporation statute in the state where the corporation is domiciled.
IRS Releases Governance Check Sheet to be Used by EO Exam Agents
The Internal Revenue Service is at it again. The IRS recently released a Governance Check Sheet that its examination agents will use when examining charitable organizations (other than private foundations), along with a Guide Sheet providing instructions on how to use the Check Sheet. According to the IRS’s webpage for exempt organization governance issues, the Check Sheet “will be used by IRS’ Exempt Organizations Examination agents to capture data about governance practices and the related internal controls of organizations being examined. The data will be included in a long-term study to gain a better understanding of the intersection between governance practices and tax compliance.” These materials are in addition to the governance training materials previously released by the IRS.
Nonprofit Law Jargon Buster – Private Inurement v. Private Benefit
The private inurement rule and private benefit rules exist to ensure that charitable assets are preserved for the benefit of the public and not diverted to private use. This is a fundamental concept that distinguishes tax-exempt organizations from for-profits.
The rules originate in the language of Code Section 501(c)(3). Code Section 501(c)(3) contains the specific requirement that:
[N]o part of the net earnings of [the exempt organization] inures to the benefit of any private shareholder or individual . . . .
In addition, under the regulations, an organization is not treated as organized and operated for exclusively exempt purposes “unless it serves a public rather than a private interest,” Based on this provision, tax exempt status is not available to any organization if its net earnings inure to the benefit of private individuals “in whole or in part.”
In practice, the law distinguishes between different degrees of inurement depending upon who is being benefitted. The two types of inurement are referred to as “private inurement” and “public benefit.”
Top 10 Nonprofit Governance Mistakes (From a Lawyer’s Perspective)
Failing to Understand Fiduciary Duties. When you volunteer to serve as a director or officer of a nonprofit, you accept the responsibility to act with the duties of good faith, due care and loyalty. You also accept the potential liability for failing to fulfill those duties. Increased scrutiny from the I.R.S., Congress, state attorneys general, the Department of Justice, donors and the media require vigilance at every step. It is no longer sufficient to rubber stamp committee or staff recommendations or to simply “abstain” from dicey decisions. Today, board service comes with real responsibilities and real consequences for those that fail to live up to them.
