nonprofit essentials 2013-2014
DESCRIPTION
Nonprofit Essentials 2013-2014. Presented by Institute for Public Engagement & HandsOn Northwest North Carolina. Today’s Agenda. 1:00-1:15 Introduction: Nonprofits in Context 1:15-2:20 Governance: Developing a common understanding - PowerPoint PPT PresentationTRANSCRIPT
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Nonprofit Essentials2013-2014
Presented by
Institute for Public Engagement&
HandsOn Northwest North Carolina
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Today’s Agenda
- 1:00-1:15 Introduction: Nonprofits in Context
- 1:15-2:20 Governance: Developing a common understanding
- 2:40 – 3:45 Identifying Best Practices and applying practices in hypothetical situations
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Introduction: Nonprofits in Context
Nonprofit Essentials
September 24, 2013
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What is a nonprofit?
‒ Legal definition:• State-level entity
• File Nonprofit Articles of Incorporation
• Federal-level recognition from the IRS• File 1023 to be recognized as tax-exempt
• File Form 990
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IRC Walkthrough
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IRC Walkthrough
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IRC Walkthrough
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IRC Walkthrough
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IRC Walkthrough
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IRC Walkthrough
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IRC Walkthrough
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IRC Walkthrough
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What is a nonprofit?
‒ See USC Title 26 - Internal Revenue Code, Chapter 1, Subchapter F, Part I, Section 501, Paragraph C, Subparagraph 3:
An organization described in subsection (c)…shall be exempt from taxation under this subtitle…
“Corporations, and any community chest, fund, or foundation, organized and operated exclusively for religious, charitable, scientific, testing for public safety, literary, or educational purposes…no part of the net earnings of which inures to the benefit of any private shareholder or individual, no substantial part of the activities of which is…attempting, to influence legislation (except as otherwise provided in subsection (h)), and which does not participate in…any political campaign…”
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Advantages
‒Organizations do not pay income taxes, sales taxes, etc.‒Donors’ contributions are tax deductible
‒ Example: WFU saves $3 million dollars annually because of this recognition
‒ …on state sales tax alone.
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What is a nonprofit?
A more holistic definition:
Organizations that do not exist primarily to generate profits, either directly or indirectly, and that are not primarily guided by commercial goals and considerations. They may accumulate surplus in a given year, but any such surplus must be plowed back into the basic mission of the agency and not distributed to the organizations' owners, founders, or governing board.
United Nations, 2003
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NP Heritage
The fabric of the country has included nonprofits since the beginning:
“Americans of all ages, all conditions, and all dispositions constantly form associations…religious, moral, serious, futile, very general and very particular, immensely large and very minute. Wherever at the head of some new undertaking you see government in France, or a man of rank in England, in the United States you will be sure to find an association.”
- Alexis de Tocqueville, Democracy in America (1840)
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NP by the Numbers
It is a large sector:‒Est. 2.3 million exempt nonprofits in the US
• 1.6 million are registered and recognized by the IRS
‒NC – 10,300+ NPs with over $50,000 in revenues
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NP by the Numbers
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NP by the Numbers
Economically Important‒5.5% of US GDP
• Approx. $820 billion annually• $300 billion in charitable contributions• Additional $300 billion estimated value of volunteer hours• NC – total impact of NPs estimated at $38 billion (up from
$17 billion in 2002…more than double)• Public charities (501(c)(3) orgs.) reported $1.51 trillion in
revenue and $2.71 trillion in assets in 2012
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NP by the Numbers
Important for people:‒Employment
• Worldwide - 7.4% employed with NPs• US – 10.2% employed with NPs and 9.2% of all wages paid• NC – 11% employed with NPs• NP employment has increased during recession
‒Service/mission recipients
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NP by the Numbers
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Why do NPs Exist?
‒ Government failure model• NPs started by people dissatisfied with the amount of
goods/services provided by the government
‒ Market failure• NPs step in where consumers cannot compare products,
negotiate with providers, or enforce contracts in a market economy
‒ Philanthropic failure• NPs established voluntarily and government takes over once
feasibility and necessity have been established
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Two Big Questions
1. What is your role in managing this large and influential sector?
2. What can you do to improve your organization?
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Curriculum Overview
‒ Nonprofit Essentials 2013-14 Curriculum:• Governance• Strategic Planning• Budgeting and Finance• Human Resources• Fund Development• Collaboration• Evaluation• Advocacy and Communication• Grant Writing
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Conclusion
“It is not enough to do good; it must be done well.”
-St. Vincent de Paul
(1581-1660)
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Governance of Nonprofit Organizations
Nonprofit Essentials
September 24, 2013
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Goals
Explore the meaning of “governance” in the nonprofit context.
Give nonprofit leaders tools to impact the governance of their organizations.
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I. Governance
Governance has both technical and operational aspects.-Technically – a legal relationship between a group of people and a corporation or other entity-Operationally – a functional relationship between an organization and a group of people
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Key to governance: The Board
"Board" or "board of directors" means the group of natural persons vested by the corporation with the management of its affairs whether or not the group is designated as directors in the articles of incorporation or bylaws.
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The Board’s Role
The role of the Board of Directors is to direct and manage the organization.
Board has ultimate obligation to manage the organization’s assets and activities.
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Board’s Responsibilities – By Statute
Except as otherwise provided in the articles of incorporation, all corporate powers shall be exercised under the authority of, and the affairs of the corporation managed under the direction of, its Board of Directors. See North Carolina Nonprofit Corporation Act,N.C.G.S. § 55A-8-01.
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Board Delegates
As a general rule, unless prohibited by the articles or bylaws, the Board of Directors may delegate the management of activities of the corporation to committees, provided the committee is comprised of two or more members.
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Limits on Power to Delegate
While the Board may appoint committees, such committees may not exercise extraordinary powers.
Specifically, a committee of the board shall not:- Authorize distributions;
- Recommend to members or approve dissolution, merger or the sale, pledge, or transfer of all or substantially all of the corporation’s assets;
- Elect, appoint or remove directors, or fill vacancies on the board or on any of its committees; or
- Adopt, amend, or repeal the articles of incorporation or bylaws.See North Carolina Nonprofit Corporation Act, N.C.G.S. §
55A-8-25.
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Governance: Operational
Governance is the process of setting goals, defining expectations, allocating resources, and verifying performance.
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Board Member Duties in the nonprofit sector
Directors of nonprofit corporations have a unique duty to manage the affairs of the organization so that its property will be used for the “public purposes” for which it was entrusted.
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II. Board Composition
Electing the Board:
Bylaws provide rules for board election- Membership Organizations – Board is elected by
members at annual meeting- Non-membership Organizations – Board
nominates and appoints board members directly.
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Composition is a Question of Mission
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Terms and Succession
Organizations benefit from stability.
Terms should be defined in the by-laws and include:-Staggered seats-Some provision for succession (e.g. limited number of terms or years and nominating committee for new members).
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A note on required elements in Bylaws
Conflicts of Interest Policy (IRS) - Duty to disclose- Duty not to vote on self-interested matters- Annual statement from each board member
Document retention policy (Sarbanes-Oxley§802)- Crime to knowingly destroy documents and records- Policy defines how long records will be retained
Whistleblower (SOX)
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III. What is Governed
The Nonprofit Corporation: A corporation formed under state statute which:-Does not distribute earnings in excess of expenses to any individual or group.-Maintains tax-exempt purpose through activities that are consistent with IRC 501
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Non-distribution Constraint
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Once In…
Distribution Constraints – income in excess of expenses may not be distributed.
Dissolution Constraints – on dissolution, property may only be distributed to another nonprofit.
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Purposes
Every corporation incorporated under this Chapter has the purpose of engaging in any lawful activity unless a more limited purpose is set forth in its articles of incorporation.
See North Carolina Nonprofit Corporation Act,N.C.G.S. § 55A-8-01
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IV. The Board’s Responsibilities
The role of the Board of Directors is to direct and manage the organization.
Board has ultimate obligation to manage organization’s assets and activities.
• The board may use agents and employees to carry out day to day activities and to run the organization’s programs. See North Carolina Nonprofit Corporation Act, N.C.G.S. § 55A-8-01.
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Fiduciary Duties of Directors
Nonprofit directors and officers have two primary duties;
- The Duty of Care- The Duty of Loyalty
These are owed to the organization and in some circumstances to third parties such as members.
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Duty of Care
A director shall discharge his or her duties in good faith with the care an ordinarily prudent person in a like position would exercise under similar circumstances and in a manner the director reasonably believes to be in the best interests of the corporation.
See North Carolina Nonprofit Corporation Act, N.C.G.S. § 55A-8-30.
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Duty of Care: Informed & In Good Faith
The Duty of Care requires that a Director be informed and act in good faith.
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Duty of Care: Attend Meetings
To meet the Duty of Care, Directors must-- Attend Board meetings,- Have access to all organizational information,
and- Make ‘informed’ decisions.
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Duty of Care: Obtaining Needed Information
The Duty of Care requires board members to seek out information they know they need in order to make an informed decision. This includes information that a board member should know he/she needs in order to make an informed decision based on a reasonable person standard.
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Duty of Loyalty
Board members have a duty to pursue the corporation’s best interests rather than those of your own or others.(e.g. avoiding conflicts of interest, whether over money or politics)
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Duty of Loyalty: Prohibits Self-Dealing
A director is prohibited from engaging in self-dealing unless there is full disclosure to the board AND the transaction is clearly in the corporation’s best financial interest AND a majority of the board must authorize, approve, or ratify the transaction.
Conflict of interest provisions may be found at N.C.G.S. § 55A‑8‑31.
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Duty of Loyalty: Requires Faithfulness
The Duty of Loyalty requires a director’s faithful pursuit of the interests of the organization, rather than the financial or other interests of the director or another person or organization.
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Note : Conflict of Interest Policy
The organization should adopt a clear conflict of interest policy
-Define conflicts and provide for resolution-Make sure every board member has a copy of the policy -Incorporate the policy into your bylaws and board training materials
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Board Member Duties When Fulfilling Responsibilities
Directors of nonprofit corporations have a unique duty to manage the affairs of the organization so that its property will be used for the “public purposes” for which it was entrusted.
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V. To Whom is the Board Accountable?
Nonprofit and for-profit boards differ in who they are accountable to:-For profits – Shareholder-Nonprofits are accountable to their members, to the IRS, the Secretary of State and funders.
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Standing to Sue
Potential plaintiffs include:
-The Attorney General’s Office -Beneficiaries with a Special Interest-Fellow Directors-Members
The general public lacks standing.
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Potential Liability
A member of a nonprofit board may be personally liable for any distributions made by the nonprofit in violation of the North Carolina Nonprofit Corporation Act, when made in breach of the Duty of Care.
See North Carolina Nonprofit Corporation Act, N.C.G.S. § 55A-8-33.
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Standard of Liability
Nonprofit directors are required to discharge their duties of Care and Loyalty:
1.In good faith
2.With the care an ordinary person would exercise in a similar situation.
3.In a manner the officer reasonably believes to be in the best interests of the corporation and its members.
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Acting with Care Protects the Board Member
A director is not liable to the corporation, any member, or any other person for any action taken or not taken as a director, if the director acted in compliance with N.C.G.S. § 55A-8-30.
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Impact on Tax Exemption
A board’s failure to govern an organization in a way that is inconsistent with the “public purpose” can lead to a loss of the organization’s tax-exempt recognition.
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Three “I’s”
Idemnity
Immunity
Insurance
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VI. Internal Revenue Code 501 and the Board
501(c)(3) – Charitable, educational or religious organization
501(c)(4) – Social Welfare Organization
501(c)(6) – Business or Professional Association
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Board Duties & The 4 Tests
1. Manage assets to comply with I.R.S. regulations.
2. Maintain public purpose
3. Avoid private benefit
4. Monitor political activity and lobbying
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Manage Assets to Comply with Tax Exemption
A nonprofit must be operated in a way that is consistent with its tax status. For example:
-Not operated for the benefit of private interests or designated individuals, the creator, or family members.
-Transactions between the 501(c)(3) and board members that result in gain must be looked at carefully.
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Maintain a Public Purpose
Activities must substantially serve the organization’s nonprofit purpose.
-Avoid substantial unrelated activity-Avoid primarily commercial purpose
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Private Benefit and Lobbying
Nonprofit can not become a conduit for private benefit.
Nonprofit may not engage in substantial lobbying and is prohibited from political activity.
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VII. What does this mean for a board?
What is board service for many Board Members?
-Volunteer service-“Advisory” and not “active”
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What does this mean for the organization?
The board’s responsibilities are not aligned with the expectations of the members.
Therefore:-Support for decisions can be difficult to build.-Division of work suffers.-Funding and marketing are not efficient.
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The Value of Board Training
By clearly communicating board member responsibility and the role of board governance, you can facilitate board involvement and create additional resources to promote the organization’s mission.
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Training Topics
Board structure, role and composition
Board procedures
Nonprofit’s tax-exempt purpose and activities
Financial procedures
Organizational structure
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Questions?