Building Trust. Providing Solutions
in Our Community.

Is your nonprofit organization a well-meaning model of “disorganization,” overly susceptible to legal risk?

Anyone closely affiliated with a nonprofit group recognizes gaps. For those who care enough to lead, the immediate question is this: How to take proper steps and time to identify, recognize and close the risk gap so as to minimize legal mistakes and avoid risking the mission?

Here are some hints:

Watch the Money

Charging one single person with group finances allows for a rampant host of problems. How many times have you heard media reports where a longtime treasurer was later discovered to have embezzled thousands of dollars. In some cases, tens of thousands of dollars. A string of volunteer fire companies in Virginia have recently received attention for just this reason. From PTO groups to charities, no type of nonprofit organization seems immune. Look for ways to have multiple eyes on the funds and document transactions through a paper trail. Avoid the temptation to tolerate covering mistakes and shift away from individual blame to focus on fixing organizational systems and practices.

Require regular, clear and informative financial reports and statements. Hire an outside, independent auditor. If you’re unable to afford such a resource, then have an outside party review your financial reports and records. Identify who has authority to approve/perform certain functions/roles and adhere to a businesslike duty of care.

Properly Observe Tax-related Obligations

Although most nonprofit organizations have been exempted from many federal taxes, this is a privilege which can be revoked. Know and pay any tax liabilities (i.e., sales tax on sold merchandise). Starting in 2008, many such organizations must file an “e-Postcard,” known as Form 990-N, or risk losing their exemption. Recently, an organization I know had (temporarily) lost its tax exempt status when its volunteer treasurer failed to file the e-Postcard for several years. Your organization’s mission can be undermined by a revoked tax exemption privilege. So, identity and file proper forms. When in doubt, check with your accountant or legal adviser.

Heed Early Signs of Wrongdoing

Look for ways to simplify procedure, but make known that everyone must follow the established protocol for it to effectively work. Even proper procedures will not alleviate a lack of discipline. So while organizations often run on trusted intentions, that should not exempt you or anyone else from having their behavior questioned. Things like borrowing from petty cash, taking postage, and using organizational resources for personal use – all lead to laxness. Accept, expect, and encourage legitimate criticism from all volunteers. Remember, you, as an officer, owe a fiduciary duty of loyalty to the organization, which means you must avoid favoritism or behavior which smacks of self-dealing. Encourage and tolerate dissenting opinions, as this will enforce accountability.

Have Proper Insurance Coverage

Reduce susceptibility to uninsured losses. Like tax problems, such losses can impose staggering costs or shut down an organization altogether. Review insurance policies, check with your agent regularly, and ask to identify what coverage best suits your organization. Inquire especially into director and officer coverage, as well as umbrella coverage. Additionally, create and review annually a risk management plan.

Identify risks, assess risk levels on what would constitute a bad day, and determine what outcome would be necessary and at which cost.

Follow the Rules of the Mission

Your charter is your mission. Your bylaws are your rules. As an organizational caretaker, your board’s duty is to exercise informed care while making decisions. Your decisions don’t have to be right, but they have to be reasonably within the rules. Like students who admit having never read the U.S. Constitution, many board members suffer from optimism bias, meaning their belief in their own good intentions act as a valid substitute for reading and following the charter. Think risk, without sliding into despair.

According to my own observation, the organizations who follow these steps this consistently well are a few in number. I think the ultimate question for any board is to ask itself, “What is our nonprofit organization’s mission and what best strategies and objectives are necessary to help legally fulfill it?” Seeking this answer will be more fulfilling and your organization’s mission will be better served.

Richard Howard, Jr. is one of the most respected, dedicated and hard-working litigation attorneys in Bucks County. As a trusted advocate and counsel for his clients, Rick draws upon his strong judgment, undaunted work ethic, and extensive 24-year experience handling wide varieties of challenging and simple civil litigation matters, to effectively handle each client’s most difficult legal matters in today’s world. Rick prides himself on getting to the “real issue,” in truly relating to each situation, and doing what is “right” for his clients and in accordance with the Golden Rule.

This blog is designed for general information only. The information presented should not be construed to be formal legal advice nor the formation of a lawyer/client relationship.