When you are on the board of a nonprofit organization, you are handed the important trust of ensuring that your organization is complying with all legal obligations and is adhering to financial best practices in how it handles donor money. In addition to having a good accountant to help you figure out the best way to handle funds, it is important that you keep up with legal requirements for your nonprofit. Here are a few important steps every nonprofit should take to ensure long-term stability and legal compliance.
1. Draft a Constitution and Bylaws
Most people are vaguely aware of the requirement that nonprofits have bylaws that govern their existence. Once a nonprofit is properly formed, it is important to have an operating agreement that governs the rights and responsibilities that directors, officers, employees, and even sometimes the general public have in regard to the nonprofit. This includes answers to the following questions:
How many members are on your board?
How many committees will the board have?
Will you require more than one signature on checks before expenditures of a certain amount are made?
Does your organization hold to a specific statement of faith or political creed (and what hiring and other decisions will this affect)?
In your bylaws, these questions should be answered. They do not have to be lengthy and shouldn’t be hard to understand. Your bylaws should be setup like an owner’s manual—but one that you’ll actually consult! Good bylaws are empowering, allowing everyone to know their obligations and responsibilities, and foreseeing how to resolve difficult conflicts that inevitably arise in even the best-run nonprofits. Best of all, a good set of constitution and bylaws relieve everyone of the nagging fear that they’re not doing something right.
A common question we hear is what the difference is between a constitution and bylaws. As you can see above, we’ve used the term interchangeably. There once was a difference, but today, one document, called the “bylaws,” is more than enough to get your organization set and running on the right path.
2. Draft Resolutions and Keep Meeting Minutes
Once your bylaws are in place, it is important to produce “meeting minutes” at all of your meetings. These minutes can be the notes that your secretary takes, but ideally are typed up in a standardized format, reflecting the general flow of discussion of the board, and approved at the following meeting after everyone has had a chance to see them.
So what’s the point of meeting minutes? Meeting minutes act as the history of your organization showing what actions were authorized or rejected at various meetings. At first, it can be tempting to rely on one individual’s memory or on the board’s collective memory for these actions. However, in the case of legal action against the board by a donor or government agency, or even by a disgruntled board member, having meeting minutes can strongly support the validity and propriety of actions that the board has taken on behalf of the nonprofit.
Furthermore, organizations which keep track of minutes and are consistent with them provide helpful information for new board members and new officers of the organization to look back on and understand the trajectory of your organization. Meeting minutes are one of the first things to be sacrificed by nonprofits who have just formed. Often, officers and directors feel that they are a lot of work to keep up with. But meeting minutes are a vital form of guaranteeing that your nonprofit is operating according to law and protecting it from threats within and without.
What is the difference between minutes and resolutions? In general, minutes are for meetings that were held, while resolutions are actions the board takes by vote without a formal meeting being called. They are number of situations where this is necessary and many more situations where it is merely the most convenient. Sometimes the organization authorizes bonuses annually, or an emergency comes up in everyone’s absence. A resolution can be signed by everyone authorizing action and confirming that the board is in agreement with a specific proposal.
There’s no reason that meeting minutes are required over resolutions or resolutions over minutes. Both serve the same essential function in different ways.
3. Ensure no excess benefit
For smaller nonprofit organizations, this piece is easy, but as you grow, it presents new challenges. You must avoid excess benefit to any individual or group of individuals arising out of a nonprofit’s property. A few examples of this are when your organization enters into a transaction with a private party or group to give them a piece of real estate at less than full value. Any property exchanged that is not in an “arms-length transaction” can fall under suspicion and can put the nonprofit corporation at risk. Another common example is when an executive director and his family are all driving vehicles owned by the corporation, making money off of their private company’s services to the nonprofit, and bringing in large paychecks from the nonprofit for their labors. While any or all of these can be legal, they must be done in a way that does not transgress the IRS’s rules on excess benefit.
This is a complicated area of law, and sometimes the best you can do is manage the risks. But working with an experienced nonprofit attorney is an important step in ensuring that your nonprofit doesn’t lose tax exempt status or otherwise expose itself to lawsuits or other challenges.
At Cornerstone Law Firm, our attorneys help nonprofit boards and leaders to manage their legal responsibilities and ensure compliance with best practices. If your organization could use a helping hand, call us for a consultation on your next steps.