This pandemic year has brought incredible challenges for nonprofits, regardless of size, location, or type. With January around the corner and holiday parties missing from calendars, now is an ideal season to do the next best thing – plan well for nonprofit corporate governance! Here are some top legal compliance tips for directors of nonprofit boards. Now, that’s a gift worth giving!
1. Remember the mission.
Does each director know the nonprofit’s stated mission? If he or she rode an elevator with a potential supporter (properly distanced, of course) or visited with the supporter via Zoom, could they share the mission accurately and enthusiastically? Make sure each director can do so well, as part of each director’s fiduciary duty of obedience.[1] And if the mission no longer fits the organization’s actions, then modify one or the other.
2. Review the corporate bylaws.
Is the nonprofit’s mission statement as set forth in the bylaws consistent with its website and other communications? If not, the bylaws may warrant updating. Other potential areas for bylaw updates include provisions addressing number of directors, director terms, specific officer positions, standing committees, how votes are taken, and how meetings are conducted. The bylaws should reflect whatever is being done in practice.
3. Address budgeting.
A key aspect of nonprofit governance is handling financial matters well. Indeed, each director and officer owes a fiduciary duty of care, or due diligence, regarding organizational finances.[2] Directors should be able to help develop a budget, check on how well the nonprofit is following it throughout the year, and consider what kind of budgeting changes are warranted for the coming year. 2021 may prove to be exceptionally tricky, coming on the heels of 2020, but financial oversight remains paramount. For nonprofits operating on a calendar fiscal year, budget approval should be part of their boards’ year-end work.
4. Follow the PPP money.
Many nonprofits benefited from federal Paycheck Protection Program (PPP) loans, which qualify for 100% forgiveness under certain conditions. Following up is key, however, for such favorable treatment. Nonprofit leaders thus should make sure that all the necessary paperwork is timely submitted and processed.[3]
5. Check on staffing.
As a linchpin of nonprofit organizations, executive directors should be evaluated by their boards – preferably annually, or at least on a regular schedule. Be sure to include “executive session” time with and without the E.D. as part of the board’s meetings, to address job performance issues. Additionally, hot topics for 2020 include mandatory anti-harassment training for Illinois employers,[4] as well as legal compliance and best practices for remote work arrangements.[5] The board should also monitor whether other employment matters are in good shape, like proper worker classification, employee handbooks, unemployment registrations, and employment contracts.
6. Prepare for IRS Form 990 filing.
Particularly for organizations that file the full IRS Form 990 version (rather than the 990-N “e-postcard” or the 990-EZ), Form 990 preparation should be kept in mind year-round. For example, an organization that previously only had to file the 990-N, based on annual revenues of less than $50,000, may now need to file the IRS Form 990-EZ or Form 990 – or vice versa. Additionally, leaders of a nonprofit that carries out some lobbying should monitor such activity so that it does not amount to more than “insubstantial” levels, as legally permitted.[6] Leaders of a nonprofit with significant “unrelated business income” also may need to consider whether to spin off a separate for-profit business, reduce such activity, or simply make sure to track such revenues and expenses well. Note too that organizations with multiple unrelated businesses may face additional “silo” reporting requirements, under newly issued Treasury regulations.[7]
7. Complete annual conflict of interest disclosures.
Consistent with their fiduciary duty of loyalty to govern in the organization’s best interests, each director, officer, and key employee should complete an annual conflict of interest disclosure statement.[8] The statement should be submitted to the board secretary or president, who should then address any disclosed conflicts with the full board in accordance with the organization’s conflict of interest policy. The nonprofit board’s December or January meeting is a great time to take care of this important governance matter, with the meeting minutes reflecting that the disclosure statements were completed, submitted, reviewed, and accepted (and with any conflicted directors recused from board deliberations and voting).
Remember that leaders may not use their positions of trust for personal advantage at the nonprofit’s expense. Consequently, to the extent any leader may have a financial or personal conflict by reason of family, business, or other relationships, such matter must be fully disclosed and satisfactorily addressed to determine whether it is permissible or impermissible. Impermissible conflicts must be rejected. Permissible conflicts may be accepted, on the other hand, by independent directors who accept a proposed transaction as fair to, and in the best interests of, the organization.
8. Hold elections.
Per most nonprofit bylaws, directors and officers are elected for specified terms of office. But organizations tend to forget to take care of this important governance matter. Well run nonprofits cultivate new leaders, honor departing leaders, and make sure each leader’s term is well identified. Remember too that directors and officers may be eligible for reelection or reappointment, or that term limits may apply.
9. Monitor state fundraising compliance requirements.
Our country has a patchwork of state charitable solicitation registration (CSR) requirements, which arise depending on the extent to which a nonprofit’s fundraising activities occur in more than one state. Generally speaking, CSR requirements are triggered by the nature of an organization’s solicitations with each state’s residents. An organization that is regularly and systematically soliciting residents in a particular state is typically required to registered and report under that state’s CSR requirements. Many states provide exemptions for religious and educational institutions as well as membership-based organizations to varying degrees. Some states do not impose any CSR requirements at all. For states that do, a yearly financial report is typically required (similar to IRS Form 990 reporting) and often an independent audit. Nonprofit leaders should stay on top of these significant legal compliance requirements.
10. Use a corporate notebook.
A highly beneficial tool is an electronic corporate notebook, which serves as a repository of corporate, tax, and financial information. The notebook should contain the organization’s articles and bylaws (which makes them easy to access!), recent board minutes (e.g., from the past year), corporate financials (e.g., audited statements, most recent Form 990), annual conflict of interest disclosure statements, key corporate policies, standing board resolutions, and other important documents related to the organization. Such a notebook may serve as a great reference tool for leaders and may be an attractive way to showcase a well organized and governed nonprofit to prospective board members. It also may save time and trouble later, when such key documents are needed for legal or financial matters.
So why spend your holiday hours warming your heart with Christmas movies you memorized years ago, when you could be updating the corporate notebook instead? Financials, minutes, and annual conflict of interest disclosures all should be current or dated within the past year. Corporate policies and standing board resolutions may need additional attention, for inclusion in the notebook as well.
Wrapping Up
With these governance tips in hand, nonprofit leaders should be well equipped to head into next year’s challenges and adventures. Every nonprofit needs sufficient resources, a strong mission, and effective leadership. May each of these elements ring true for your nonprofit organization as you prepare for 2021!
[1] For guidance on directors’ duty of obedience, see our blog Staying True to Your Mission: The Duty of Obedience.
[2] For guidance on directors’ duty of care, see our blog Directors' and Officers' Duty of Care - Pay Attention and Take Responsibility.
[3] For more information about PPP loans, see our blog Relaxed Requirements: Paycheck Protection Program Flexibility Act of 2020.
[4] See our blog Year-End Deadline for Illinois Sexual Harassment Training Program.
[5] See our blogs Legal Compliance for Out-of-State Remote Workers; and Home Office Expenses: What You Need to Know.
[6] See our blog Call Your Legislator Today! (or Not?): Lobbying Basics for Nonprofits.
[7] For more background on unrelated business income tax, see our blog When are Nonprofit Revenues Taxable?: UBIT Basics. For more information about the newly issued Treasury regulations, see UBIT Silos, Final Regulations.
[8] For more information about the fiduciary duty of loyalty, see our blog Wearing the Right "Hat": the Duty of Loyalty.
