The group of individuals charged with the governance of nonprofits are often referred to interchangeably as “directors” or “trustees.” These terms are similar in that they both refer to the group of individuals who have a fiduciary duty to oversee the nonprofit organization. However, from a legal perspective, there are important distinctions.
The state form does not include the tax provisions that the IRS requires tax-exempt organizations to have. Would be founders that file using the state’s form Articles of Incorporation without including an attachment with the appropriate tax provisions will end up with a taxable nonprofit – a result almost no one intends.
n the context of a nonprofit corporation, a quorum is the number of board members that must participate in a board meeting to permit official business to be transacted at the meeting.
A legal audit is an overview of an organization’s non-financial compliance, governance and risk management issues. Organizations typically consider a legal audit when new management takes over and wants to ensure they are starting with a clean slate or the in the wake of a costly mistake.
Often prospective clients call us wanting to know whether we know of any dormant nonprofits that are going out of business that they could take over. The idea is that taking over an existing entity avoids the hassle and expense of incorporation, creating a governance structure and obtaining tax-exempt status for a brand new entity. Presumably, a new board of directors would be substituted in place of the old board and new officers would be elected.
When considering whether to include voting members in a nonprofit corporation, it is important to understand that voting members of a nonprofit corporation are generally analogous to shareholders of a business corporation. Voting members have statutory rights under state law; therefore, it is important to clarify the right of members to avoid inadvertently creating a voting membership class and vesting ultimate control in the members when that is not your intention. Once a membership has been established, it may be difficult to eliminate, and it may be impossible without the consent of the members.
Proxy voting is legal mechanism for a member of a voting body to delegate his or her voting right to another member of the voting body. In the context of nonprofit corporations, voting bodies include the board of directors as well as voting members. Some nonprofit corporations rely on proxy voting because it allows directors or members who have confidence in the judgment of other directors or members to vote for them and allows the voting body to convene a quorum of votes when it is difficult for all members of the voting body to attend. In proxy speak, the individual delegating his or her voting authority is referred to as the “principal” and the individual exercising the delegated voting authority is referred to as the “proxy” for the principal.
Too often, nonprofits include provisions in their bylaws that are old-fashioned, unnecessary, redundant, or that complicate rather than streamline governance.
It is important to take a thoughtful approach when drafting or revising bylaws. Boards and board committees sometimes spend months or even years trying to draft the perfect set of bylaws . Too often, they look to bylaws of other nonprofit organizations or samples gleaned from the Internet with no regard to whether the bylaws match the structure and style of the organization or comply with state and federal law. Unfortunately, this approach usually leads to confusion, delay, and conflict on the board. The better practice is to work with a knowledgeable attorney from the beginning, starting with a compliant template, and tailoring it to the needs of your organization.
An executive committee can be an effective governance tool, but not every board needs one. Executive committees should never ever replace the full board.
Let’s be clear about one thing. No one owns a nonprofit corporation.
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.
Ellis Carter and Deanna Rader will be co-presenting a webinar on December 15th at 4:00 pm as part of the Arizona Charter School Association’s Charter Starter program. One of the first sessions that the program will offer is a webinar on the legal aspects of starting an Arizona charter school.
In my practice representing nonprofit and tax-exempt organizations, there are often themes that emerge. Over the last few weeks I have had a spate of calls from would be nonprofits that paid either a nonprofit start-up “consultant” or a document preparation company to form their nonprofit and handle their IRS filings. In each case, the work product that made it to my office required substantially more work to fix than it would have taken to do properly the first time around. You get what you pay for, and sometimes, you pay dearly for what you get. Before hiring someone to help you with the legal and tax aspects of starting a nonprofit, make sure they are licensed to provide the type of assistance they are offering, have specific experience representing nonprofits, and are in fact representing you rather than helping you to commit malpractice on yourself.
Once a non-profit founder has surveyed the non-profit landscape and found a legitimate need, recruited an initial board, created business and fundraising plans, and scraped together some start-up funding, he or she is ready to proceed. In Arizona, it usually makes the most sense to form the entity as an Arizona non-profit corporation. The steps required to form a nonprofit in Arizona are covered.