What’s the Plan? Nonprofit Business Planning for Success

Planning is key for any nonprofit – as it gets started, as it grows with new funding opportunities and program activities, and as pivotal changes occur (internally and externally) that may dramatically affect its impact.  Also essential is strong leadership, legal compliance, and responsiveness to changing circumstances.  The following guidance addresses key legal aspects for launching a new nonprofit successfully, along with reminders for keeping existing nonprofits well on track.

Start at the Beginning

No nonprofit venture should begin without a great deal of careful, advance planning.  Key questions include the following:  Who will serve as leaders?  What is the organization’s purpose?  What will the organization’s revenue stream look like?  Related legal questions include the following:  What legal responsibilities will the leaders owe, and to whom?   Will the organization’s purpose qualify it for tax-exempt status?  And what accompanying legal requirements, if any, will apply for its fundraising activities?  Another helpful perspective may be to start with the end in mind:  Where will the organization go, and how it will get there? 

In short, every nonprofit needs a business plan that includes provision for legal aspects.  The plan should include core elements such as the organization’s name, purpose statement, leadership, anticipated funding, planned activities for achieving its purpose, governance structure, and accountability measures.  After this business plan is developed, this tool may be used in a variety of ways: guidance for founders; marketing to donors and other supporters; recruiting for new board members; and groundwork for the organization’s IRS Form 1023 tax-exemption application. 

Nonprofit Financial Controls

Is your nonprofit at risk for fraudulent financial activity?  Nonprofit organizations tend to be more trusting of their employees, have less resources devoted to administrative costs, and have less stringent financial controls than for-profit organizations.  They are more likely to be victims of such fraud. 

According to a 2013 Washington Post report, more than 1,000 nonprofit organizations disclosed hundreds of millions in losses attributed to theft, fraud, embezzlement, and other unauthorized uses of funds and organizational assets, from 2008 to 2012.  Nonprofits were second only to the financial services industry, experiencing one-sixth of all major embezzlements.  In one recent example, a California CPA reportedly stole $4 million while managing a church’s books for nearly seven years.  He is now headed to prison.

How can nonprofits reduce their risk of fraud?  A key answer is internal financial controls, and other options can provide valuable safeguards too.

Is There a Risk? Volunteer Directors' Standard of Misconduct

Nonprofit directors often ask if they can be held personally liable for their board actions.  The somewhat unsettling answer is probably not, but maybe.  In other words, state statutory immunity and indemnification protections generally apply to a volunteer director’s misconduct, but subject to certain exceptions for misconduct.  More specifically, a director may have heard that he or she may be personally liable for “gross negligence” or “intentional or reckless misconduct.”[1]  What do these terms mean?  The following guidance addresses how nonprofit laws define the type of misconduct that triggers personal liability for volunteer directors and discuss additional safeguards such as indemnification and directors’ and officers’ insurance. 

Willful or Wanton Conduct – Explained.

Most states’ statutes provide a limited level of immunity for volunteer directors serving on nonprofit boards.  By way of background, directors and officers owe fiduciary duties of care, loyalty, and obedience to the corporate mission.  Under these statutory provisions, a director will not be personally liable for damages resulting from their actions carried out in furtherance of such fiduciary duties, so long as these actions do not rise to a certain level of misconduct.  This level is often described as “gross negligence” or “reckless misconduct.”  The Illinois General Not-for-Profit Corporation Act (the “Act”) uses the classic legal phrase “willful or wanton conduct.”  The federal Volunteer Protection Act (“VPA”), which protects volunteer directors at the federal level, uses similar language.  (Notably, a lower legal standard of “ordinary negligence” typically applies to paid directors and officers, so payments of stipends or other modest compensation may likely be inadvisable.)

So, what exactly does “willful or wanton conduct” mean?   Willful or wanton conduct means a course of action which either “shows an actual or deliberate intention to cause harm” or which, “if not intentional, shows an utter indifference to or conscious disregard for the safety of others or their party.”