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Should You Start a Nonprofit?

Admittedly, starting a nonprofit these days is easy enough—at least in terms of the paperwork. With the advent of online filing for corporate status and the 1023-EZ for 501(c)(3) status, the “paperwork” can be done almost immediately. But just because you can, doesn’t mean you should. Here are four questions to consider before moving forward.

1. What is the nonprofit’s purpose?

The first, most essential question is “Why?” Why will the nonprofit exist? Assuming the nonprofit will seek 501(c)(3) tax-exempt status, he nonprofit’s “reason for being” must be within the meaning of section 501(c)(3) of the Internal Revenue Code: religious, charitable, scientific, testing for public safety, literary, educational, or prevention of cruelty to children or animals. However, within these broad categories, the courts and the IRS have found a range of subcategories, like arts, for example. Your idea must fit somewhere within these categories.

The common denominator among these purposes is that the organization must serve a public interest, not a private interest. The nonprofit can’t be focused simply on providing employment for the founder, or services to one individual or family. Its vision must be far broader than that.

2. Who benefits from the nonprofit’s work?

The beneficiary of a nonprofit’s work—the recipients of its services, participants in its programs—must be the public or a large, indefinite subset of the public, referred to as a “charitable class. This can be the general public, homeless people, children, elders, etc. One individual, or five individuals, or even twenty-five individuals are unlikely to satisfy this requirement because the concept of charitable class is based on the idea that an unknown number of individuals will benefit from the work of the nonprofit.

3. How is the nonprofit funded?

Before starting a nonprofit, you must consider how it will be funded. Competition for charitable dollars is tough, and the founder most likely to succeed is the founder who addresses this problem early on. When I ask about this, people often tell me, “We’ll get grants.” But depending on grants is unrealistic, because of the nature of grant-making, rooted as it is in the priorities of grant-makers, who are seeking specific impacts. Successful nonprofits seek diversity in funding streams, with budgets reflecting a variety of funding sources, such as fees for services and merchandise sales, in addition to grants and private donations. Dependence on only one type of funding results in devastation if that funding stream dries up.

4. Who runs the nonprofit?

Unlike a for-profit, which truly can be a one-person operation (sole proprietorship or even a corporation), nonprofits are managed by a board of directors, usually three or more individuals. This is a matter of state corporate law, which specifies the number of directors required for a nonprofit corporation. Federal law isn’t specific on this point. However, as noted above, a charity must serve a public rather than private interest, and having a small board of one, two, or three people can suggest that the organization is more likely focused on private interests. What’s more, in practical terms, running a nonprofit is a lot of work—a larger board (but not too large!) means more help getting things done.

For nonprofit founders, the primary concern is usually who actually controls the nonprofit’s activities. Since the law gives authority over the nonprofit to the board of directors, the board has oversight and responsibility for the nonprofit’s policies and operations. Control of the nonprofit should not be in the hands of any one person. Once you have clear answers to these questions, you’re ready to move on to the next step—incorporation (or not?). Stayed tuned…

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.

Nonprofit Membership Can Be a Confusing Concept

One of the first questions to deal with when forming a nonprofit corporation is whether the nonprofit will have a voting membership. This seems like a simple concept, but in the nonprofit context, membership has a number of meanings, and the result is often confusion.

Voting members are analogous to shareholders. For-profit corporations have shareholders who invest in the corporation, and profits are shared with shareholders in the form of dividends, with certain matters brought before the shareholders for a vote.

In the nonprofit world, however, there are no shareholders. Instead, there may be members. Since the payment of dividends is prohibited, and profits are reinvested into the nonprofit’s charitable mission, what role remains for members? Like their shareholder cousins, nonprofit members retain a right to vote and have a say in the nonprofit’s governance.

When is it appropriate for a nonprofit to have voting members? If a nonprofit is “inward-looking”—as it would be if it is a professional society or social club that exists, in part, to provide some benefit to a group of individuals—a voting membership is appropriate because these individuals will have an interest in how the nonprofit is managed.

On the other hand, if the nonprofit is “outward-looking,” —i.e., it looks outward to the recipients of its charitable work—voting membership is not necessary. The board of directors should be focused on looking to the organization’s charitable beneficiaries, not to any interest group inside the organization.

Some nonprofit founders consider a voting membership if they are looking for an additional level of accountability, a body beyond the board of directors, to keep an eye on things and ensure the nonprofit stays on its proper path.

A few key points about voting members to keep in mind:

  • Members must meet and vote. Usually an annual meeting of the members is held. At a minimum, voting members usually elect the board of directors.
  • Members have rights. Precisely what rights members have depends on the state and on the nonprofit’s bylaws. In Massachusetts, the bylaws may specify or limit the rights of members; otherwise, the members will have the right to elect the directors and to vote on other major transactions of the corporation. In any event, the bylaws should state the parameters of membership and voting rights.
  • Member records must be kept. Where there are members, their vote may be required by law for certain actions of the nonprofit, and if the membership cannot be ascertained, a specific procedure may be necessary for the action to occur.
  • Members must be engaged. Getting members to attend meetings is a function of their level of engagement, and engagement requires focused effort to keep them interested and involved in the work of the nonprofit.

Finally, a word about the other kind of members—what we might call fundraising members. These are the members whose role is to support the nonprofit through their membership fees. This has become a reliable source of additional income for nonprofits. Organizations invite their supporters to become members, but instead of a vote, members are invited into a closer relationship with the nonprofit through newsletters, events, and of course, the opportunity to give further in support of its mission.

Both types of membership can be important to the structure and operation of the nonprofit organization. But it’s essential to be clear about the type of members and their role in the nonprofit.

In our next blog, we’ll discuss the 1023 EZ form and how you can tell if you are compliant.

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.

Your Nonprofit Board: Do You Know Your Officers’ Duties?

As noted in a previous blog post, Massachusetts law requires a nonprofit corporation to have a president, treasurer, and secretary. One person may wear all the “hats,” but that’s not recommended. Nor should the president and secretary be the same person, since the secretary may occasionally have to certify the president’s signature.

Remember, the officers are the agents of the corporation and should carry out the work of the board. The work is traditionally divided among the three, with general operations going to the president, financial matters to the treasurer, and record-keeping to the secretary. Let’s flesh out their roles a bit further.

At the most basic level, the president’s job is to preside at meetings of the board of directors. In terms of authority, the president is generally authorized by the bylaws to manage day-to-day operations of the nonprofit corporation and to sign documents, such as checks or contracts, that arise in the usual course of the nonprofit’s business. This is especially true when the nonprofit is an all-volunteer organization; in this case, the president may also carry the designation of “chief executive officer” or “CEO.”

When the nonprofit moves to the next level and requires the commitment of paid staff, authority to carry out day-to-day operations is delegated to the executive director, who is then typically designated the chief executive officer. The board will usually authorize the executive director to carry out day-to-day signing duties as well, but it should specify parameters for which matters must come before the board before the executive can be authorized to sign.

Bylaws typically authorize the treasurer to manage the finances of the corporation, but the treasurer’s role may be more broadly or tightly defined. In the all-volunteer nonprofit, the books of accounting are usually in the treasurer’s care, while in the staffed nonprofit, the books may be in the care of another person (variously titled), and the treasurer’s role becomes one primarily of oversight.

The secretary is authorized to maintain the records of the corporation, especially the minutes of the board’s meetings. In Massachusetts, because he or she is the officer who may receive service of process (that is, notice of a lawsuit), the secretary should be a resident of Massachusetts; but if the secretary does not reside in Massachusetts, a “resident agent” must be appointed. As the custodian of the board’s records, the secretary is also the officer tasked with issuing certificates of board action; for example, in connection with a grant, the board may take an action authorizing the executive director to sign the grant agreement, and the secretary would issue a secretary’s certificate to that effect.

Other typical officer positions include one or more vice-presidents who are authorized in the bylaws to act in place of the president if the president is for some reason unable to do so. Assistant treasurers and assistant secretaries may also be authorized, especially in the case of a large board. Some nonprofits use these assistant roles as training grounds for the first-line officers, and the bylaws may state this. At a minimum, the bylaws should state clearly that such officer positions are authorized, and outline their roles and authority to act.

In our next post, we’ll look at the role of voting members.

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.

Why Does Your Nonprofit Need Officers? How Much Power Should You Give Them?

As we noted in our last post, officers are the individuals elected by the board of directors to carry out its directives. In legal terms, officers are the agents of the board of directors; an agent is a person who performs a task on behalf of another (referred to as the “principal”).

State law dictates which officers are required. In Massachusetts, nonprofit corporations are required to have a president, treasurer, and secretary (formerly called “clerk,” a term still seen on most Massachusetts forms). The officers are subject to the same fiduciary duties as directors. Many nonprofits like to add a vice-president or other assistant officers, but this is not required by law.

The roles of the officers are subject to long-standing corporate tradition based in the common law. The nonprofit corporation’s bylaws generally give the basic parameters of the officers’ authority to act. The board can add additional tasks if it so chooses. More detailed task descriptions (officer “job descriptions”) are outside the scope of the bylaws, however, and are better set forth in a separate document that is adopted separately by the board.

In all cases, as the agents of the corporation, the officers should act only under the direction and supervision of the board of directors. This is often forgotten until a problem results.

We’ve all heard of the all-volunteer nonprofit whose board president—often the founder—runs the whole show, with the board coming together only occasionally to rubber-stamp the president’s acts. It happens in organizations with staff as well, when the executive director is allowed to be the sole organizational decision-maker. In these cases, the board has abdicated its responsibility to oversee and manage the entire nonprofit. But ultimately, the board is responsible, and the officers (volunteer as well as paid) are accountable to it. When things go wrong, the board—collectively and, in certain circumstances, individually—will be liable.

When the board of directors sits at the table for their meetings, each person in attendance wears one or two hats—a director hat and/or an officer hat. It should always be clear who is wearing which hat at any time. Officers who are not also directors should not vote; without the status of “director,” they have no power to vote. They attend the meeting only to receive the direction of the directors and to report to them about their activities. However, in many nonprofits, the board elects officers from among themselves; thus some of the directors will wear a second hat—their officer hat—and in this case, everyone votes. (The possible exception here is the executive director, who should usually be in attendance. In most nonprofits, the executive director is not a voting director.)

This clarification of officer roles also applies to the task of completing your annual report to the Secretary of the Commonwealth, due every year on November 1. Any individual who serves as both officer and director should have their name listed in each capacity.

In the next post, we’ll look at the individual officers’ roles.

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.

Directors and Officers—Do You Know the Difference?

Directors vote, and officers implement. In a nutshell, that is the difference between directors and officers.

State law gives authority over the nonprofit corporation to the board of directors, and the board acts collectively. Individual directors have no power over the corporation. In practical terms, this means that, to conduct its business, the board must come together in a properly convened meeting at which a quorum is present.

“Director” is the title given to the individuals serving on the board of directors. Directors are in a fiduciary relationship with the nonprofit corporation—that is, they owe legal duties to the corporation by virtue of their position as directors possessing voting power.

Individuals come to their board service in different ways, depending on the type of organization. In most nonprofits, the board is self-perpetuating, meaning that the board appoints or elects individuals to serve. In membership organizations, the voting membership elects the directors. Sometimes, directors serve “ex officio,” meaning that the individual serves as director because of another position he or she holds. For example, the Executive Director of the nonprofit may serve as a director ex officio, or a representative of another organization that is seen as an important constituent may be an ex officio director. (In no case does “ex officio” mean “non-voting”—unless the bylaws so state, and to return to the nutshell statement above, anyone who does not vote is not a director.)

Since a board is a collective body, how can it get its work done? If it decides to enter a contract, how can a board sign it? All the hands pile up on the pen? Not very efficient. The problem is solved by the election of officers. The board chooses these individuals to carry out its directives. In our next blog, we’ll discuss the officers your organization needs and the roles they play.

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.

Grant Writing — Easy as 1, 2, 3! UPDATE!

Our first session is Saturday, March 10. This will be a double session to make up for the session postponed due to the storm.
All those registered to attend have received email regarding scheduling.

Responsibilities of Boards of Directors For Small Nonprofits

  1. Understand and embrace fiduciary duties of care and loyalty.
  2. Identify the mission and overall direction of the nonprofit.
  3. Plan for the nonprofit’s future, establishing a vision and values for the nonprofit, and oversee implementation of an action plan.
  4. Ensure adequate human resources to carry out the mission, hiring and supervising a chief staff person if appropriate, or recruiting and training sufficient volunteers for an all-volunteer organization.
  5. Ensure transparency, legal compliance & accountability.
  6. Fundraise vigorously and steward resources effectively.
  7. Understand the nonprofit’s programs and services, and regularly evaluate performance and effectiveness.
  8. Represent the organization effectively to the public & community.
  9. Ensure a healthy, engaged & knowledgeable board of directors.

 

 

 

Plan for Action:  Strategic Planning for the Small/New Nonprofit

          Small or new nonprofits, once formed and tax-exempt status received, must move assertively into their missions, but once the flurry of formation activity is passed, what next?  The sticking point for many new boards of directors is how to start that forward momentum.
          One way to do it is with some structured planning that the board can undertake in its regular meeting. A planning process can help the board come together around its work, developing a shared understanding of its reason for being, building priorities and a team orientation, fostering communication. Most importantly, the planning process will result in active steps that will move the organization forward–its “To-do List”.
          The board may have developed a mission statement during its formation, but more is needed to direct the work of the organization.  Boards should also establish a vision–what the future will look like if the nonprofit succeeds in its mission–and values statements that will guide the work going forward. These can be developed with some directed brainstorming.
          With Vision, Mission, and Values statements in place, the board can begin to create its Action Plan. The Action Plan is built around Goals and Objectives, which, if achieved, will bring about the Vision.
          Formatting the Action Plan in to a checklist and revisiting it at every meeting, helps the board stay on track. Calendarizing an annual review of the plan ensures that action steps are carried out.
          Committed boards can carry out this work themselves, but sometimes an outside facilitator can help the board see its way more clearly.
          Want to learn more? Contact us, or attend our October 12 program!

Plan for Action:  Strategic Planning for the Small/New Nonprofit

Thursday, October 12 at 6:00 pm
presented by Tom Butero
$10/pp
One of the primary responsibilities of nonprofit boards of directors is to plan for the nonprofit’s future.  Tom Butero will give you essential tools to help your nonprofit become a planning organization–one that looks ahead strategically and develops an action plan to take it to the next level.  $10/pp
Presented at the Legal Center for Nonprofits, 412 County Street (inside Inter-Church Council house), New Bedford, MA
Call (508) 264-5996 or email Linnea@LegalCenterforNonprofits.org

Does our nonprofit need insurance?

This is another question I’m often asked in the early stages, as a nonprofit board is coming together, and the answer this time is, “It depends, but probably.”

A primary responsibility of a nonprofit board of directors is assessing and managing the nonprofit’s risk. Risk is anything that threatens the nonprofit’s mission and stability; that is, what can go wrong? Risk ranges from financial (will we have enough money do what we need to do? Where will the money come from? What if the money doesn’t come in at all?) to mission implementation (Can we hire enough good people? We work children—what might go wrong?) to potential crises and catastrophes (We just rented space—what if someone falls? What if there’s a hurricane/tornado/earthquake?) A thorough risk assessment methodically asks all these questions about all aspects of the nonprofit’s operations.

As a nonprofit is starting, the board can begin to look at the bigger picture of the nonprofit’s risk. What risks does this nonprofit face right now? A year from now? The nonprofit will need a plan to manage its risk, and insurance is just one part of that plan. In this initial stage, it may be impossible to assess all the nonprofit’s risks, since risk will change over time as the nonprofit adds or changes programs; accordingly, a risk management plan will change over time as well.

Once the nonprofit’s risks are identified, the board can begin to pinpoint ways of addressing these risks.  A variety of approaches are available–not everything requires insurance. Indeed, some risks are not even insurable.

Insurable risks include loss of assets, injury, interruption of service, litigation.  Uninsurable risks include loss of audience or membership, loss of funding, social or scientific changes that eliminate the need for a service (e.g., March of Dimes), increased competition.

Some risks can be mitigated through preventative measures. Safety procedures are a good example—ensuring fire extinguishers are handy; eradicating trip hazards.

Once the board has assessed its risk, it must also assess the nonprofit’s tolerance for risk. In other words, does the nonprofit have the capacity to deal with a risk should it occur? For example, can it pay for the costs of storm damage?  Can it afford to deal with a lawsuit?  With these assessments, the board  can begin to develop a plan to address risk, using mitigation as much as possible and practicable, developing an emergency fund, and purchasing insurance.  At this point, consultation with an insurance agent knowledgeable about nonprofit organizations will be most helpful.

A helpful article from Blue Avocado is available here, and the Nonprofit Risk Management Center has many resources.

Thinking of Starting a Nonprofit?

Wednesday, April 13,  6:00 – 8:00 pm

Do you have a great idea that will help your community? Maybe it should be a nonprofit! We’ll discuss the difference between nonprofits & for-profits, some preliminary considerations before you take action, and an overview of the steps in the process of getting a nonprofit up and running, with a quick look at getting tax-exempt status. Join us at the Legal Center for Nonprofits, located inside the Inter-Church Council House at 412 County Street, New Bedford, MA. Cost to attend is $10 per person. Pre-registration is recommended. Call (508) 264-5996 or email to Linnea@LegalCenterforNonprofits.org for more information or to pre-register.