Legal Center for Nonprofits, Inc.

After 12 years of serving the legal needs of nonprofit organizations, 8 of them through the Legal Center for Nonprofits, Attorney Linnea Michel has decided that it is time to retire so that she can spend more time with her husband, who retired in January 2020, and with her children who reside in other states.

The board of directors of the Legal Center for Nonprofits, Inc., however, has been working to ensure that our nonprofit community will not be left bereft of legal assistance.

Justice Bridge, a law incubator sponsored by  the University of Massachusetts School of Law that is, like LCN, committed to delivering affordable high-quality service, is expanding its practice areas to include services for nonprofit organizations. Justice Bridge is a post-graduate residency program.  All of its participating attorneys are members of the bar in good standing and are mentored by over 75 senior attorneys, including many retired judges (and Linnea for at least the balance of this calendar year). We are pleased to suggest that nonprofit founders, boards of directors, and leadership staff may contact:

Justice Bridge Legal Center

257-259 Union Street

New Bedford, Massachusetts 02740

508-449-9296

www. justice-bridge.org

We are especially pleased because, in addition to legal services specific to nonprofit organizations, Justice Bridge gives nonprofits access to the full range of general legal practice, including assistance with leases, employment matters, contract, intellectual property, school law, municipal and zoning matters, and more.

Another option for Massachusetts nonprofits is the Massachusetts Nonprofit Network, a membership and advocacy organization for nonprofit organizations providing information about training for boards and staff, grants information, and access to its service-provider members who offer a full range of nonprofit-specific services, such as legal, accounting, insurance, fundraising, strategic planning and organization development, marketing, and communications.

Massachusetts Nonprofit Network

www.massnonprofitnet.org

Conflicts of interest are rooted in the fiduciary duty of loyalty owed by directors and officers to their nonprofit corporations. The duty of loyalty requires directors and officers to act at all times in the best interests of the nonprofit. (Employees also have a duty of loyalty to their employer, whether nonprofit or not.)

Conflicts run counter to charitable purpose, in that serving private interests, as occurs in a conflict of interest situation, is inconsistent with furthering charitable purposes. Private benefit[1] occurs when a nonprofit’s funds or other assets benefit a private party who is not within the scope of the nonprofit’s charitable work. Charities must serve a public interest, not a private interest.

In general, conflicts of interest in the nonprofit sector are not illegal, but they must be recognized and managed. A conflict of interest occurs when a director, officer, key employee, or other person in a position to influence the nonprofit (an “insider”) may benefit personally in some way from a transaction or relationship with the nonprofit organization that he or she serves. This definition may seem straightforward, but recognizing a conflict of interest can be difficult. In addition, conflicts are often viewed in only financial terms, but a benefit can also take the form of an advantage that is not financial, such as access to information or opportunity.

Nonprofit directors who are appointed to serve on a board of directors by another nonprofit face a particular form of conflict. If an individual is a director on both the appointing board and the receiving board, an inherent conflict exists because the director owes a duty of loyalty to both organizations. At whichever board table he or she is sitting, the director must balance carefully the interests of the other nonprofit.

Conflicts of interest exist in a spectrum:

• An actual conflict of interest exists when a current transaction before the board may benefit an insider;
• An apparent conflict of interest exists when a transaction may be viewed by the public or an outsider as being beneficial to an insider.
• A potential conflict of interest exists when a transaction could benefit an insider.

The following situations present conflicts of interest:

• A board member proposes to provide a service to the nonprofit for which he or she will be compensated. Another common variation is the board member who is also the nonprofit’s landlord (or landlord’s representative), or the board member who owns a business desiring to provide services to the nonprofit.
• Nonprofit A’s board member is appointed to A’s board by the board of Nonprofit B, on which he/she also serves, or by whom he/she is employed. This situation results in conflicted loyalties. If the two nonprofits offer similar services, they may seek similar grant or contract opportunities, for example.
• Nonprofit A’s board member serves on the board of Nonprofit B where Nonprofit B may be in a position to make grants to Nonprofit A or may enter into contracts with it.
• A board member is also a client or employee of the nonprofit on whose board he/she serves; here, the board member may have a direct interest when the board must establish fees for services or pay rates, for example.
• A board member of the nonprofit is the spouse, parent, or other relative of an employee or client of the nonprofit.
• Nonprofit A’s board member serves on another nonprofit board that may be in a position to compete with A for clients, donors, or grants.

The Internal Revenue Service recommends that nonprofit boards adopt Conflict of Interest policies to protect the nonprofit from any appearance of impropriety and to guard against the inappropriate redirection of charitable funds. The hallmarks of a strong conflicts policy and procedure include the following:

• Requirement to disclose actual or potential conflicts of interest as they arise throughout the year;
• Disclosure of all relationships that may result in conflicts of interest;
• Requirement that the conflicted individual be absent while the board discusses and votes on the conflict (simple abstention is not sufficient);
• Evaluation of the conflict by the board of directors, as to whether the transaction may still be in the best interests of the nonprofit, or whether an alternative can or should be found; and,
• Documentation of the board’s decisions related to, and management of, disclosed conflicts.

As noted above, conflicts of interest in the nonprofit sector are not illegal.  Boards have discretion to decide how to manage any conflict that may arise. However, as nonprofit organizations strive for transparency and accountability, a strong conflict of interest policy provides important protection for the nonprofit—but only if the board of directors follows the policy and procedure to the letter at all times.

[1] Tax law recognizes two types of situations in which a private individual benefits inappropriately from the activities of the nonprofit, distinguishing between people outside the organization and insiders. When the person benefitting is a board member, key employee, or other individual in a position to influence or control the organization—an insider—this type of private benefit is known as private inurement; when excessive, it can result in significant fines and penalties to the nonprofit and individuals involved. For simplicity in this Introduction, both private inurement and private benefit—where “outsiders” benefit—are referred to as “private benefit”.

Due to technical difficulties, our phone number is not working and will probably be changed. Please contact Linnea via email to Linnea@LegalCenterforNonprofits.org or call (508) 264-5996 (our old pre-move telephone number). We have notified Comcast and the problem will be corrected as soon as possible.

Note that Linnea will be on vacation from July 21 through August 1 with limited access to phone and email.

Thank you!

If you haven’t already done so, now is the time to lay the groundwork for a successful new year. Here are 3 steps you can take to help ensure success in 2019.

1. Reconsider how your organization raises funds.

Many small or new nonprofits think “small” about fundraising. They identify a local chain restaurant, for example, that will give a percentage of the sales on a specified evening. While this is less labor-intensive than other types of fundraising, it may not offer the most bang for the buck.

Perhaps it’s time for your nonprofit to graduate to the types of fundraising that more established nonprofits use, including an appeal letter. Nonprofits send these letters because they work. Yes, you’ll have to write the letter, stuff the envelopes, and affix address labels, but for small organizations, the work is usually minimal because the mailing list is typically small. And a $100 investment of paper and postage could bring in $2,000 or more in donations! But money isn’t all you’ll get out of your annual appeal. The responses you receive can provide clues as to who might have the potential to give larger gifts in the future. With this information, you can begin building relationships that could have substantial payoffs later on.

 2. Plan now to ensure legal compliance.

Your nonprofit, regardless of size or income—or lack of income—is required to file an annual financial report with the Internal Revenue Service, and in Massachusetts, with the Attorney General’s Office (other states may require filing with a different state agency). About a third of nonprofits are small and file a 990-N with IRS, which contains no financial information. All other nonprofits must file a 990-EZ or the full 990. In Massachusetts, the Attorney General’s Office requires submission of the 990-EZ when a nonprofit has more than $5,000 in gross income during the year. These filings are due 4½ months after the close of the fiscal year, or May 15, for calendar fiscal years.

The board of directors is responsible for ensuring timely and accurate filings and so should review the reports before submission. Distributing the reports and allowing time for review and approval means some careful planning now, especially if your board meets less frequently.

3. Set some goals.

Without goals, your nonprofit is a ship drifting aimlessly at sea. Specific, attainable goals provide guidance and direction for all of your organization’s activities.

Boards of directors should assess 2018’s performance against its strategic and annual plans, if they have them, and set new goals in view of the new year’s action plan. (Strategic plans should always include annual action plans, but that’s another post!) At a minimum, the board should engage in some simple goal-setting, perhaps following a SWOT (Strengths, Weaknesses, Opportunities and Threats) analysis activity, and of course, develop a strategic plan if they do not already have one. (One goal—see #1 above—should be to gather names and contact information for a first appeal letter, or to update the existing list.)

The Legal Center for Nonprofits offers “entry level” strategic planning and goal-setting assistance; contact us for more information.

Thanks to our donors, the Legal Center for Nonprofits is continuing to make a difference in our community and beyond by providing low-cost legal services to charities and nonprofits.

With your help, we can continue this important work. Your gift helps many nonprofits, like these:

Mobile Ministries, Inc.—Helping the Homeless and Needy in New Bedford

When the national Mobile Loaves and Fishes food-truck ministry began terminating contracts with ministries around the country, George Bailey, leader of New Bedford’s program, knew he had to keep it going—but he also knew he needed help setting up the nonprofit corporation and applying for tax-exempt status. George turned to LCN. Today, the ministry, now called Mobile Ministries, continues to deliver needed food and beverages, clothing, toiletries, and occasionally, tents and sleeping bags, to the homeless and needy in New Bedford. And with its 501(c)(3) status in place, this ministry is well on its way to self-sustainability.

Freed Seed Federation, Inc.—Engaging the Community in Seed Stewardship

While many of us are aware of environmental issues like climate change and declining bumble bee populations, few think about seeds and the important role they play in our food supply. But Bill Braun, founder of Freed Seed Federation, Inc., knows that preserving and fostering seed that’s adapted to weather extremes, disease epidemics, and other environmental conditions is essential to sustaining our food supply. So, he contacted the Legal Center for Nonprofits to set up a nonprofit organization dedicated to the preservation, improvement, and diversification of place-based seed for all to freely share and improve upon.

As you can see, important work is happening right here in the South Coast—and oftentimes, it all begins with LCN! With your support, LCN will continue to help these nonprofits—and many more—that are so essential to our community’s well-being and quality of life.

As costs continue to rise, your tax-deductible gift is more important than ever. Please help us help those who are helping others in the community.

Your gift means so much—through one gift you touch nonprofits across our region and beyond! Thank you in advance for your generosity!

Make your gift here!

All too often, when founders come to discuss an idea for a new nonprofit, and I ask, “How will you fund it?” the answer is, “We’ll get grants.”

But can they? And is that all there is?

As we’ve noted in a prior post, grants can be part of the funding plan, but should not be the entire plan. Where else should a nonprofit look for funding?

One of the reasons nonprofits seek 501(c)(3) public charity status is because it enables donors to deduct their charitable gifts on their taxes. While this is impacted by the new tax law, private giving will continue to be an important area of fundraising for nonprofits—many people do not and have not itemized their taxes, yet continue to give generously to nonprofits.

In fact, Robin Cabral, professional development counsel and founder of Development Consulting Solutions, says, “The most reliable sources of nonprofit funding are from private giving. Giving USA’s most recent statistics note that out of the $410.02 billion given in 2017, 70%, or $286.65 billion, was given by individuals.”

Considering those statistics, it’s clear that your fundraising plan should include soliciting private individuals. One common way to do this is through annual appeal letters that tell a compelling story about your nonprofit’s work. But you need not limit such appeals to an annual occurrence. If you can round up  a sufficient number of volunteers or staff to help, your organization can and should send appeal letters more often.

In addition, you should look to private donors for larger gifts; developing a major gifts program should be a goal for most nonprofits.

Fundraising events are another traditionally used tactic, but event planning is labor intense, and does not always deliver the expected results.

In reality, traditional fundraising should not be the only funding stream in your nonprofit’s quest for sustainability. Your nonprofit’s board of directors must think strategically about funding, and look to other options, such as merchandise sales or fees for services, or for some nonprofits, governmental contracts.

A word of caution: As your board develops new funding strategies, it must always consider whether a planned activity will run afoul of the tax code’s unrelated business income rules. While fundraising—that is, solicitation of charitable gifts from the public—generally will not result in unrelated business income because of its intermittent nature, other activities, such as merchandise sales, can result in “unrelated income.”

Unrelated in this context refers to the activity’s relationship to the nonprofit’s exempt purpose—charitable, educational, religious, scientific, etc. Let’s consider a food pantry. A food pantry’s exempt purpose is charitable, specifically, to provide “relief of the poor and distressed or of the underprivileged.” If the food pantry opens a restaurant that is operated like any other commercially established restaurant, the income from this activity will be deemed unrelated, because it has nothing to do with providing food to the poor and needy. But if the food pantry opens the restaurant to provide on-the-job training to the poor and under-employed, this activity may in fact be related to the food pantry’s exempt purpose.

The problem with unrelated business income is that it is subject to tax. Thus, your board must consider whether the income that might be realized is worth the risk. The area of unrelated business income is complex, with many exceptions and exemptions; legal or accounting professionals can assist with the analysis and planning to minimize tax liability.

As you can see, successful fundraising requires a lot of thought and effort, but by carving out time to focus on your plan and seeking out the right help, you can tap into important resources that will facilitate the advancement of your nonprofit’s mission.

We’re sorry!

Taxes & Nonprofits — our 10/26 program — is cancelled.

One of the first decisions in forming a nonprofit, once the initial questions have been answered (see prior post), is to choose a legal structure for the new organization. While there are a number of choices (trust, corporation, or LLC), a nonprofit corporation is most often chosen. But why?

In choosing a legal structure, the first consideration is usually the level of risk that the nonprofit will incur. For example, will the organization simply serve as an opportunity for people with similar interests to meet, maybe hear lectures on various topics? Or will it conduct activities and programs for children or elders? Will the nonprofit own real estate in the future? Will it have paid staff?

A very simple organization that meets occasionally may be suited to an unincorporated association. But a more complex organization, whether all-volunteer or staffed, that will conduct active programs, enter agreements with third parties (for example, speakers, teachers, vendors, etc.) and so forth, will have a higher level of risk that something could go wrong, inviting law suits or other legal action. For these organizations, a corporation offers protection from liability for the nonprofit’s assets—both its people and its property. The corporation is also a permanent entity that can continue to exist and operate, even after the founding group moves on. For more, look at this Comparison of Unincorporated Association with Corporation.

Unlike an unincorporated association, a corporation can own property and make contracts (think of leases, insurance, and vendor agreements, for instance). It can conduct financial activities in its own name. Corporations are also well understood by the agencies that will interact with the nonprofit—the IRS, state agencies, the courts.

When deciding on the legal structure of your nonprofit, you should also consider disadvantages. The things that make a corporation attractive can also be disadvantages. For instance, a nonprofit corporation, once formed, is permanent. In Massachusetts, this means it can only be dissolved by court order. Thus, if you’re not sure you want to do this work for the long term, forming a nonprofit corporation right away may not be the best option.

Corporations must also adhere to corporate formalities—certain activities that must always be carried out to ensure the entity’s legal existence. These include having a board of directors that meets regularly, maintaining corporate records (such as board meeting minutes), using the corporate name correctly, maintaining a corporate bank account, and the like. (Take a look at our Checklist of Corporate Formalities.) If you’re not willing to commit to these activities, forming a nonprofit corporation may not be the right path for you.

The foregoing is provided for information and educational purposes only and does not constitute legal advice. Consult an attorney or accountant for advice regarding your organization’s specific situation.