Nonprofit Corporation Management Compliance: Corporate Governance Made Easy, 2017
Volunteer organizations, busy benefiting the cause, need help remaining both legally and tax compliant. There are concerns for indemnity for directors and trustees, who volunteer resources, expertise, time and skills to the organization, for involuntary and unintentional acts or omisssions.
Entity Creation, Articles and Bylaws12th Annual Nonprofit Management Conference,
Walsh College, Troy, Michigan
Thursday, May 18, 2017
"Corporate Governance Made Easy"(C)
Larry E. Powe, Esq., KELLER THOMA, PC
Most non-profits govern by the generosity of volunteers, gathered from a cross-section of businesses, that have a relevant interest in the cause of the not-for-profit organization. These can range from chambers of commerce, to club organizations, to home owners associations, to country clubs, to art and historical museums, to performing arts facilities, to charitable foundations, to professional associations, or to regional/national fundraising conglomerates. Each can establish valid and recognized non-profit status for the public welfare and benefit. Typically, the compensated administrative staff of such organizations have their focus upon the charitable or non-profit causes. Many times, the legal governance, led by a volunteer president or chair, can be neglected, inadvertently, hopefully not intentionally, simply because, by way of priority, such items are way down the list. Nevertheless, compliance with state and federal laws are mandatory, in the eyes of state and federal law, to assure the viability of the organization's success, federal and state taxation insulations, insurance and indemnification for the benefit of assets, personnel and business invitees, compliance with fiduciary responsibilities under the law and personal indemnification of all volunteer officers and director/trustees. Like any other entity under the law, in exchange for allowing the charitable, non-taxable effort to continue, the governance of the non-profit organization must remain in compliance under federal and state laws. Putting a process in place, with a template of organizational requirements, will help to eliminate such concerns.
I. Reasons to Incorporate Your Not-for-Profit Organization
A. You generate a "profit" from your activities
B. You want to apply for public or private grant monies
C. You want to solicit tax-deductible contributions
D. You want protection from personal liability for the organization's activities (concern for charitable time and expertise donated for the cause)
E. Since advocacy can sometimes provoke differences of opinion as to causes, sometimes generating litigation, individual protections for officers and directors is important.
II. Entity creation
A. Michigan Nonprofit Corporation Act. MCL 450.2101 et seq.
B. Selecting a Name - Search of the State of Michigan, Department Licensing & Regulatory Affairs (LARA) www.dleg.state.mi.us/bcs_corp/sr_corp.asp
- Limitations on name use similar to any other Michigan corporation
- A charitable purposed corporation may use the word "foundation" in its name, with limitations. MCL 450.2212
C. Articles of Incorporation - www.michigan.gov/lara/0,4601,7-154-61343_35413_36736-118749--,00.html
1. Sample LARA Instructions and Form www.michigan.gov/documents/lara/BCS_CD_269_08-15_527658_7.pdf
2. Sample variations for different sorts of non-profit entities
a. Domestic non-profit www.michigan.gov/documents/lara/502_08-15_527692_7.pdf
Tax Exempt StatusTax exemption status
A. Application to the Internal Revenue Service. Most common exemptions under Sections 501(c)(3) and 501(c)(4) of the Internal Revenue Code
B. Types of tax-exempt organizations - includes charitable, churches/religious, political organizations, private foundations, and miscellaneous others www.irs.gov/charities-non-profits/types-of-tax-exempt-organizations
Information, explanations, guides, forms, and publir exemption from federal income tax.
C. Application for Exemption pursuant to IRS Form 1023-EZ or IRS Form 1023
Instructions for Application for Exemption Form 1023-EZ and
Form 1023-EZ Eligibility Worksheet www.irs.gov/pub/irs-pdf/i1023ez.pdf
Form 1023-EZ www.irs.gov/pub/irs-pdf/f1023ez.pdf
Instructions and Application for Exemption Form 1023 www.irs.gov/pub/irs-pdf/f1023.pdf
D. Forms 990 and Financial Information (public) - Non-profit profiles - GuideStar.Org www.guidestar.org/Home.aspx
1. Literacy nonprofit
2. Charitable foundation (public and private)
3. Homeowners/condominium owners association
4. Church, religious or ecclesiastical institution
5. Cemetery association
6. Chambers of Commerce
7. Arts/Education association
8. Service clubs and social organization
Conflict of Interest PolicyConflict of interest policy
A. Sample for grant-making foundations
The law requires those who manage and govern foundations ("fiduciaries") to exercise due care in administering the charity's affairs. This requirement is known as the duty of care. The law also prohibits fiduciaries from using their position to obtain personal gain for themselves or others at the charity's expense. This requirement is known as the duty of loyalty. Paying careful attention to transactions where there may be a conflict of interest ensures that a fiduciary does not breach his or her duties of care and loyalty to the organization. It can also help instill public trust by demonstrating that fiduciaries are committed to managing an organization with the utmost integrity and good faith and in the best interest of the organization and its charitable mission. Conflicts of interest occur in our everyday lives when multiple loyalties pull us toward opposite courses of action. In the context of charities, a conflict of interest may occur when personal interests prevent an individual from making an impartial decision that is in the best interest of the charity. Applicable legal standards and prohibitions differ depending on whether the charity involved is a public charity or a private foundation, whether the transaction is financial or non-financial in nature, whether state or federal law is most pertinent and whether the charity is organized as a trust or a corporation. www.c.ymcdn.com/sites/www.philanthropynetwork.org/resource/collection/D7B306E0-13DB-4C30-B5D5-8B4C88FC06F4
Sample Bylaw Provisions Addressing Conflicts of Interest\
Samples Testing for ComplianceTest situations and Analyses
Situation 1: Foundation A owns its office building. It has extra space that it leases to a public charity grantee for a below-market rent. One of A's board members is on the board of the charity.
Answer: Because the grantee is a charitable organization, the transaction would not be an act of self dealing or a breach of fiduciary duty. It would be treated like an in-kind grant from the foundation to the charity. However, because one of A's board members is on the charity's board, there is a conflict of interest and the transaction should be approved by board members who do not have a conflict.
Situation 2: Foundation B hires a board member's law firm to provide legal services at the firm's normal hourly rates, which are consistent with the rates charged by other law firms in town.
Answer: Because the transaction involves the provision of personal services at reasonable rates, it would not be an act of self-dealing or a breach of fiduciary duty. However, there is a conflict of interest and the transaction should be approved by board members who do not have a conflict.
Situation 3: Foundation C compensates its board members. One of the board members works for C's law firm, and he bills C at his normal hourly rates for attending board meetings.
Answer: Board compensation must be reasonable; the rate of pay should be comparable to what foundations pay board members for board service, not legal service.
Situation 4: Foundation D plans to lease office space from the father of a board member at a below-market rent.
Answer: The parents of board members are disqualified persons, and the lease is an act of self dealing even though the terms are favorable to D.
Situation 5: Foundation E is a family foundation. It makes grants only to public charities that provide social services to low-income persons in the community. Some of E's board members and staff choose to provide volunteer services to its grantees.
Answer: The provision of volunteer services does not constitute the type of "financial or personal" interest that raises conflict-of-interest concerns.
Situation 6: Foundation F wants to sell an extra parcel of land. It obtains an appraisal of the value of the land and lists it with a broker. The sibling of a board member is the high bidder.
Answer: There is no act of self-dealing because siblings of board members are not disqualified persons, and no breach of fiduciary duty because the process ensures a fair purchase price. However, there is a conflict of interest and the decision to sell should be made by board members who do not have a conflict.
Source: Conflicts of Interest at Foundations: Avoiding the Bad and Managing the Good. (C) BoardSource 2005
Directors & Officers LiabilityDirector & Officers Liability
a. Places of vulnerability:
- Breach of duties - self-dealing
- Liability resulting from board actions
- Actions as officers
- Contractual liability - personal guaranties
- Liability for staff activity - failure of oversight
- Lack of corporate status - lapse
- Statutory liability
- Sarbanes-Oxley Act - as to non-profits:
- Dodd-Frank Act - executive compensation principles
b. Protections afforded by the Organization
- Limit the liability of volunteer directors - money damages
- Assume liability to third parties for "good faith errors" - indemnity
- Acting in good faith and with the scope and authority conferred
c. Indemnity - including undertaking defense and attorneys' fees and costs for same
d. Commercial insurance - in place for protection of Organization and directors and officers