Time to Schedule a Legal Check-Up?

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With the year’s end in sight, now is a great time for nonprofit board members and other key leaders to think ahead to next year’s plans and goals.  From a legal perspective, the beginning of a new year may be an optimal time to check up on the organization’s annual and other legal compliance matters as follows.  By doing so, nonprofit leaders can better fulfill their fiduciary duty of due diligence to responsibly govern the organization.  The following guidance is an updated version of our law firm’s year-end reminders.

1)  Check Filing Deadlines for Government Reports.

Most nonprofits must file periodic government reports, ranging from annual reports owed the Secretary of State (typically in the anniversary month of incorporation), the IRS Form 990, state charitable solicitation renewals, and employment-related filings (due quarterly and/or annually).  For effective leadership, nonprofit board members should be aware of these filing requirements and exercise oversight to make sure they are satisfied.  A spreadsheet or chart may be helpful for organizations that operate in multiple states to track the applicable filing deadlines, since they can vary from state to state.  Coordination with the organization’s accountant and payroll service may be key, as well, especially for significant employment changes.  Since the proverbial buck stops with the board, directors need to stay informed and on top of these requirements. 

Note that the IRS Form 990 deadline is May 15 for organizations operating a calendar fiscal year (i.e., four and half months after the fiscal year close).  Early preparation can be critical, particularly for organizations that receive more than $200,000 in annual revenues and therefore must file the full-blown Form 990.  (And one question on the Form 990 asks whether board members have had an opportunity to review it.  The “right” answer is “Yes.”)  Other organizations with lower revenues may be eligible to file the considerably shortened Form 990-EZ or even the “e-postcard” Form 990-N.  

2)  Review Corporate Charter Documents.         

Another key area for periodic checking 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 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.

3) Complete Annual Conflict of Interest Disclosures.

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 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, and it may be used when a conflict arises in a particular situation.  (Also note that New York recently amended its nonprofit law to require such disclosures both annually and by new board members.)  

4)  Check the Corporate Notebook.

A highly beneficial tool for nonprofits is a 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.  

For optimal effectiveness, make sure to annually update the corporate notebook.  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.    

5)  Remind Leaders of Their Confidentiality Obligation.

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. 

6)  Make Plans to Review Board 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 times later in the year for reviewing the organization’s policies.  To ease the burden, it may be helpful to delegate responsibility for policy review to committee members (e.g., review of employee and volunteer handbook – human resources committee; review of financial policies – finance committee; risk management – property committee/other quality control) and then have the board exercise oversight.  Legally compliant policies should fit each organization well, particularly with respect to evolving and other critical legal areas such as risk management, employee discrimination issues, and technology-related aspects including use of social media and privacy.

For faith-based organizations, it may more important than ever to review legal documents, policies, and programs to ensure optimal religious freedom protections.  The legal landscape has drastically changed over the last few years and continues to evolve, particularly in relation to sexual orientation and gender identity issues.  Careful attention thus may be warranted for corporate governance documents (such as doctrinal statements in bylaws), employment policies and practices (e.g., standards of conduct, updated job descriptions, and “ministerial exception” designations), and facility usage protocols.  Such attentiveness may also be highly beneficial for improved governance and operations overall.