Is your nonprofit legally compliant? That’s a great question anytime, especially at year-end or when starting a new year. Depending on the nonprofit’s nature and type of activities, the answer may involve a wide range of legal considerations, including corporate governance, tax, risk management, employment, property, and more. The resulting compliance list could become daunting.
Below is a consolidated list of key legal compliance considerations, to check off certain items now as sufficiently addressed and to identify others as warranting further attention. Please note too that this list focuses on periodic compliance matters, rather than episodic legal issues, and may be especially helpful for a nonprofit’s governing board and executive leadership. Other related W&O articles are linked throughout, to provide further information about specific topics.
Check the Board
Are directors and officers leading effectively, with specified terms of office, sufficient guidance to do their work, and evident capability?
Remember that the proverbial nonprofit buck stops with the board. Each nonprofit director and officer owes fiduciary duties of care, loyalty, and obedience to the organization. Leaders are not specifically required to work on legal compliance areas directly, especially if their organization has an executive director or other staff handling such matters. But the leaders should remain attentive to all such matters, especially to keep the nonprofit in good standing with state and federal government agencies, consistent with their fiduciary duty of care. More guidance about such responsibilities is available through our law firm’s blog articles on the duties of care, loyalty, and obedience. Make sure too that all such leadership responsibilities are sufficiently clear, such as through a “Great Expectations” document effectively communicating director and officer responsibilities.
Check State Filings
Are state registrations up to date, and do they fit the nonprofit’s operations?
Most nonprofits must file compliance reports with state agencies, ranging from annual (or other periodic) reports owed the Secretary of State, to franchise tax exemption returns, and state charitable solicitation renewals too. Specific requirements can vary widely, depending on each organization’s particular operations and applicable state law. Organizational leaders should periodically evaluate whether the nonprofit needs to either register or de-register state business registrations or state charitable solicitation registrations. These decisions are often informed by reviewing dynamic program activities, updated operations (including employment and remote work), and evolving fundraising efforts that may change registration obligations.
Through sound leadership, nonprofit board members should be aware of the organization’s filing requirements and exercise oversight to ensure they are satisfied. A key way to do so is through capable accountants, legal counsel, and internal staff. In particular, leaders can help identify filing deadlines, provide related reminders, and help ensure that the filings are timely made. Of note, the following filing requirements are common but vary by state and may only apply in certain situations. Depending on the organization’s span of operations, it may be helpful to utilize a chart or other internal calendaring system to ensure the organization stays compliant with all state-level filings
Corporate Annual Reports
Most states require annual, or otherwise regular, updates of corporate information to the state agency in which the organization has registered to do business (often the Secretary of State). This includes not only the “domestic” state of incorporation but also other “foreign” states where business activities are conducted (for example, through “foreign business registration” or an “authority to transact business”). Within corporate annual reports, state agencies typically request the organization’s current mailing address and list of officers and directors. If these filings lapse, an organization’s nonprofit corporate registration or foreign business registration may be subject to dissolution or other adverse action. Compliance is key! Our law firm’s Q&A blog article on corporate annual reports addresses such considerations in much more detail.
Franchise/Income Tax Reporting
Certain states require that nonprofits apply for exemption from franchise or income tax, and to complete related annual reporting. Particularly if an organization is registered in California, Texas, D.C., or other states with related requirements by law, it is important to not let these compliance filings slip through the cracks. For example, if an organization fails to file its California Form 199 annual information returns with the Franchise Tax Board for several years, statutory revocation of an organization’s tax-exempt status is enforced, for which reinstatement can be a lengthy process.
Charitable Solicitation Registration Renewals
Organizations registered for charitable solicitation through a state’s Attorney General’s office or akin regulatory agency must complete renewal filings to keep their registration active. While reporting requirements vary state to state, failure to comply typically means that the organization is not permitted to solicit contributions from donors within the state until such compliance reporting is satisfied. Please see our law firm’s related blog article for additional guidance about multi-state charitable fundraising operations.
Check IRS Form 990 Filings
Has the organization filed prior year IRS 990s sufficiently? Is the nonprofit ready for its next IRS Form 990 filing?
Most nonprofits owe IRS Form 990 filings each year through one of several form variations in the series: Forms 990, 990-EZ, 990-N, or 990-PF (Form 990-T may also be required, though less common, to report unrelated business income). Nonprofits excluded from 990 filing requirements are generally churches and other houses of worship, as well as integrated auxiliaries and associations of churches. Accountants regularly work with nonprofits on this very important legal compliance requirement. Our law firm also assists clients with Form 990 compliance, such as to complete the IRS Form 990-N (“e-postcard”) online filing (for eligible organizations) and with certain aspects of the much more extensive Form 990 (e.g., descriptive program information, ongoing satisfaction of the public support test, related organizations, compensation disclosures, and other sensitive disclosures as required per specific questions).
The IRS 990 filing deadline is four and a half months after the organization’s fiscal year end. As a common example, an organization with a December 31 fiscal year end has an IRS 990 filing deadline of May 15 each year. Organizations filing IRS Form 990, 990-EZ, 990-PF, or 990-T may obtain an automatic six-month extension of time to file, through IRS Form 8868 filed prior to the initial deadline. Timely filing of these reports is critical since late filing penalties may accrue at a daily rate. If an organization is eligible to file the 990-N “e-postcard,” however, it may be filed anytime in the year following its fiscal year end and with no late-filing penalty.
Significantly, failure to file 990 reports for three consecutive years will result in auto-revocation of the organization’s tax-exempt status. It is thus critical that the organization’s internal records of filing obligations are well communicated, especially through any leadership transitions, to ensure such filing requirements are met. Reinstatement of tax-exempt status is possible, with retroactive treatment in many cases, but not without a new IRS application, additional expense, potential uncertainty with donors, and possible penalties too.
If an organization is required to file the full 990 version, detailed financials take time to prepare and review before filing. Nonprofit leaders can help proactively schedule for this work in advance of the filing deadline, which may be coordinated either internally or through the help of an accounting firm.
Note too, the IRS references a nonprofit’s fiscal year end as reported with their office, often first through an organization’s IRS Form 1023 application for recognition of tax-exempt status. Changes to a nonprofit’s fiscal year end operationally must also go on record with the IRS. Organizations may do so through the filing of a short fiscal year 990, followed by annual filings based on the new fiscal year end.
Check on Corporate Governance
Charter Documents
Are the nonprofit’s corporate documents: Available? Up to date? Any changes or evaluation needed?
Another key area for periodic review is an organization’s charter documents – its articles of incorporation, any articles of amendment, and bylaws. Does the purpose statement in the bylaws match the purpose statement in the articles? Is the purpose statement current (e.g., is it consistent with what is listed on the organization’s website and in its brochures)? Does it accurately reflect the organization’s current scope? If the answer to any of these questions is no, then some updating is likely in order. Ideally, a nonprofit’s purpose statement should serve as an organization’s guiding compass, not only operationally but also so that it can qualify for available legal exemptions consistent with such self-identification.
With respect to the bylaws, it is critical that board members have a working understanding of its provisions. For example, the directors and officers should be elected, appointed, and removed in strict accordance with its requirements. Meetings should likewise be called and conducted in compliance with applicable provisions. In addition, the board should understand how their committees are to be constituted and utilized. To the extent that board governance does not match the bylaw provisions, then either the bylaws or board practice should be changed. Many bylaw provisions also may warrant updating, such as to provide expressly for meeting notices via email, confidentiality, financial practices, and committee structures.
Bottom line: a nonprofit’s bylaws should be a helpful, accurate, and current reference tool for all board members, for clear understanding, effective governance, and avoidance of potential problems later in actual practice. If they are not, then the nonprofit leaders should follow up with corporate governance work, perhaps through a governance committee or other group tasked to address such matters in the coming year.
Corporate Governance Policies
Are corporate governance policies available and used correctly? Would the organization benefit from any new policies?
As with a nonprofit’s purpose statement and bylaws, it is critical that the organization have effective board policies in place that are accurate, appropriate, and legally compliant. Accordingly, the board may want to schedule specific times to review such policies. To ease the burden, it may be helpful to delegate responsibility for policy review to committee members and then have the board exercise oversight. Legally compliant policies should fit each organization well, particularly with respect to evolving needs and legal developments. For example, leaders of an organization with increasing financial resources may decide that an investment policy is now warranted. A gift acceptance and restriction policy may be advisable to clarify what types of donations are acceptable (e.g., cash, non-cash, stocks, international funds, bitcoin) and the extent to which any donations may be restricted (e.g., not at all, subject only to preferences). A conflict of interest policy is a must-have for any nonprofit, and a dispute resolution policy is highly recommended too.
Additional policies may overlap with operational matters, such as record retention, data privacy, and whistleblower policies. Still other policies may be proper to address in terms of staffing (e.g., employee handbooks, risk management, facility usage), with the board exercising oversight but not direct management. Such attentiveness may also be highly beneficial for improved governance and operations overall.
Annual Disclosure Statements
Have annual disclosure statements been completed in the past year by all directors, officers, and key employees?
Directors, officers, and other key leaders of nonprofit organizations owe a fiduciary duty of loyalty to govern in the organization’s best interests. Stated differently, 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.
A “best practices” approach to address this governance aspect is to utilize an annual conflict of interest form, to be completed each year and evaluated for any potential issues. This saves potential embarrassment and awkwardness, and such proactive disclosure guards against potential legal issues later. In addition, this disclosure form should be utilized for any new board member, or when a conflict arises in a particular situation. (Also note that New York law requires such disclosures both annually and by new board members.). A great time to address this “best practices” component is at the board’s annual meeting, whenever held.
Record-keeping
Does the nonprofit have complete and well-organized board governance materials? Does it operate with an organization-wide record retention policy?
Nonprofits should have a designated electronic filing system that serves as a repository of corporate, tax, and financial information. A corporate “notebook” or similar organizational tool could include 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, major employment documents (e.g., state registrations, or at least references to them), copies of compliance filings, property deeds (or leases), and intellectual property registration certificates. For optimal effectiveness, make sure to annually update this organizational tool. Financials, minutes, and annual conflict of interest disclosures all should be current or dated within the past year. This resource could not only aid leaders for ongoing governance matters but also serve as an attractive way to showcase a well-organized and well-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.
Such documentation may be maintained as well pursuant to a well-developed, organization-specific written record retention policy. Record retention and proper disposal should be carried out in a way that helps a nonprofit operate efficiently, meet potential document furnishing requirements by law, and to protect persons involved with the organization (i.e. donors, volunteers, participants, etc.). Organizational leaders thus may want to revisit or create a records retention policy that specifically outlines how the organization handles retention and disposal of paper and electronic records, as well as video records.
Check on Confidentiality and Data Privacy Issues Too
Leader Confidentiality
Do leaders understand and follow through with expected and protected confidentiality?
As part of each board member’s and key leader’s fiduciary duties to their nonprofit organization, they owe a duty to keep board matters confidential. The scope of this duty includes the organization’s financials, donor lists and similar contact information, and operational matters addressed through their board service. A gentle reminder each year may prove useful. In addition, it may be helpful to include a written acknowledgement as part of each leader’s annual conflict of interest disclosure statement.
Data Privacy
How is data being handled? Does the organization have sufficient protections in place for legal compliance and to mitigate risk?
On a related point to record retention, nonprofits are not spared from potential data breaches and confidentiality obligations. Nonprofit leaders therefore need to understand applicable data privacy regulations, such as the Consumer Privacy Act or the Children’s Online Privacy Protection Rule. Further, nonprofit leaders should ensure that the organization’s policies and processes appropriately comply with any legal requirements, as they continue to evolve among states, nationally, and internationally. These considerations are especially critical if the nonprofit allows donations through its website or otherwise collects personally identifiable information (“PII”), for which many legal guardrails may be warranted. A regular check-up will help set up the organization for success in this area, mitigating risk in a proactive way. The governing board need not wade into the weeds of such matters, but the leaders should make sure that they are being addressed.
Check Employment Matters
Are employment law updates being sufficiently addressed?
Legal developments in employment-related areas have been fast and furious in recent years. State paid leave laws have proliferated, wage laws have evolved particularly with respect to exempt/nonexempt employee issues, and religious liberty accommodation changes have been wrought through litigation too. Unemployment laws as applicable to nonprofit employers remain tricky too, ever challenging for nonprofits with growing work forces. Remote work arrangements only compound the HR headaches, especially when nonprofits are forced to confront a panoply of state law requirements – at potentially great expense for accompanying guidance and policy updates. (See, e.g., Minnesota legal trends as one example.) Don’t forget specific employee issues, like employee versus independent contractor classification or potentially applicable ministerial housing allowances for clergy members.
The preceding paragraph contains several links to our law firm’s related blog articles on these topics, and many areas are not necessarily specific to any regular legal compliance steps. In light of this very active legal area, however, wise nonprofit leaders should remain attentive to such matters through their executive director or other executive staff as well as through board oversight and accountability.
Consequently, make sure to have effective employment compliance protocols in place, especially to address all such matters proactively and reactively. One key proactive step is to have excellent, up-to-date and detailed employee handbooks that are well tailored to a nonprofit’s employee census, based on where each employee works. Another is to use job offer letters and written job descriptions that accurately describe the relevant information. One key reactive consideration is with respect to problematic job performance and accountability issues. When can or should a nonprofit employer terminate a person’s employment, and should any severance be offered. Such matters have been increasingly complex, against a backdrop of employment-related legal protections often warranting careful legal review particularly if severance pay is to be offered or otherwise considered.
Check Insurance Coverage
Does the nonprofit need to consider more or different insurance coverage?
As an organization grows, its insurance coverage needs will likely change. Periodically checking for sufficient liability, property, and other insurance coverage areas will help a nonprofit in the event of any incidents. As a starting point, nonprofit leaders may reference our law firm’s blog article regarding liability insurance coverage. Related considerations include whether directors’ and officers’ insurance should be obtained, whether the organization has “EPL” coverage (employee practices liability), and whether any coverages should be dropped in light of changed property ownership or program activity. Note too that insurance companies reportedly are increasingly unwilling to insure certain risks or to do so without charging steep premiums. Wise nonprofit leaders thus may need to focus on other risk mitigation measures, such as improved safety protocols and other measures to avoid loss.
Check Corporate Restructuring Options
Would the nonprofit benefit from any corporate structural changes?
Nonprofits can go through a variety of operational seasons over their existence. Occasionally, an opportunity to merge with another organization arises, and that may warrant careful evaluation of respective pro’s and con’s for whether to proceed. Other times, nonprofit leaders may wish to form a related organization, such as for general risk management (e.g., to separate valuable assets from higher-risk operations), to develop an endowment entity, to promote a new spin-off related entity, or to silo a specific for-profit activity such as through a separately formed LLC subsidiary. Still other times, the question may arise of whether it is time to end the nonprofit. All such matters should be addressed through careful strategic planning and, ideally, never in a rush. It’s good to periodically consider whether any of these circumstances may appear on the horizon, whether near or far, and then plan accordingly for the future.
Check Anything Else?
The above-listed items showcase a wide range of legal compliance and accompanying operational matters for nonprofit leaders’ attention. Even more extensively, additional items for attention could include real estate matters (e.g., lease renewals, property management), state sales tax exemptions (new or renewals), intellectual property (e.g., trademark registrations or renewals), service or other contract renewals, and emergent risk management issues. All, some, or none of these matters may be important for a nonprofit’s periodic legal check-up, and they reflect the importance of tailoring such efforts to the specific nonprofit’s operations, needs, and goals.
May this list prove helpful for both effective nonprofit legal compliance and for next steps - whether to fix now-revealed problems, to identify future plans, or to prioritize issues for further attention. And hopefully after performing a nonprofit’s legal check-up, leaders can take some comfort in checking off many of the listed items as legally compliant.
