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Corporate Corporate GovernanceGovernance

Issues forIssues forNonprofit Nonprofit

OrganizationsOrganizations

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Tax Exempt StatusTax Exempt Status

Nonprofit is a tax status; not a business plan.Nonprofit is a tax status; not a business plan.– Operating any organization at a deficit or without Operating any organization at a deficit or without

a sufficient "rainy day" fund is not good business. a sufficient "rainy day" fund is not good business. In order to maintain the viability of any In order to maintain the viability of any organization, it is important to operate with some organization, it is important to operate with some "net revenue" at the end of a year. What "net revenue" at the end of a year. What distinguishes nonprofits is not whether they can distinguishes nonprofits is not whether they can make a profit, but what happens to profits. make a profit, but what happens to profits. Nonprofits are prohibited from distributing profits Nonprofits are prohibited from distributing profits in the same way for-profit corporations can. All in the same way for-profit corporations can. All revenue must be earmarked for the organization's revenue must be earmarked for the organization's mission. mission.

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Who Regulates Nonprofits?Who Regulates Nonprofits? Boards- Boards- All nonprofits are governed by a board of directors All nonprofits are governed by a board of directors

or trustees (there's no real difference), a group of or trustees (there's no real difference), a group of volunteers that is legally responsible for making sure the volunteers that is legally responsible for making sure the organization remains true to its mission, safeguards its organization remains true to its mission, safeguards its assets, and operates in the public interest.assets, and operates in the public interest.

Private Watchdog GroupsPrivate Watchdog Groups - Several private groups (who are - Several private groups (who are themselves nonprofits) monitor the behavior and themselves nonprofits) monitor the behavior and performance of other nonprofits.performance of other nonprofits.

State Charity RegulatorsState Charity Regulators - The attorney general's office - The attorney general's office maintains a list of registered nonprofits and investigates maintains a list of registered nonprofits and investigates complaints of fraud and abuse.complaints of fraud and abuse.

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Who Regulates Nonprofits?Who Regulates Nonprofits? Internal Revenue ServiceInternal Revenue Service - A division of the IRS (the Tax - A division of the IRS (the Tax

Exempt/Government Entities division) is charged with Exempt/Government Entities division) is charged with ensuring that nonprofits are complying with the requirements ensuring that nonprofits are complying with the requirements for eligibility for tax-exempt status. As a result of the for eligibility for tax-exempt status. As a result of the thousands of audit investigations, a handful have their tax-thousands of audit investigations, a handful have their tax-exempt status revoked; others pay fines and taxes.exempt status revoked; others pay fines and taxes.

Donors & MembersDonors & Members - Some of the most powerful safeguards - Some of the most powerful safeguards of nonprofit integrity are individual donors and members. By of nonprofit integrity are individual donors and members. By withholding their financial support, donors can strongly withholding their financial support, donors can strongly encourage nonprofits to reappraise their operations.encourage nonprofits to reappraise their operations.

MediaMedia - Many nonprofit leaders may feel misunderstood or - Many nonprofit leaders may feel misunderstood or even maligned by negative media coverage, however, this even maligned by negative media coverage, however, this media watchdog role has resulted in increased awareness media watchdog role has resulted in increased awareness and accountability throughout the sector. and accountability throughout the sector.

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501(c)(3)501(c)(3)

Most significant group of Most significant group of organizations exempt from federal organizations exempt from federal income taxation.income taxation.

Contributions to a 501(c)(3) is Contributions to a 501(c)(3) is generally tax deductible.generally tax deductible.

Also generally exempt from state Also generally exempt from state income and sales taxes, property income and sales taxes, property taxes and franchise and use taxes.taxes and franchise and use taxes.

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PurposesPurposes

Must be operated Must be operated exclusivelyexclusively for one or for one or more of the following purposes:more of the following purposes:– ReligiousReligious– CharitableCharitable– ScientificScientific– Testing for public safetyTesting for public safety– LiteraryLiterary– EducationalEducational– Fostering amateur sportsFostering amateur sports– The prevention of cruelty to children or animalsThe prevention of cruelty to children or animals

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RestrictionsRestrictions

The net earnings may not inure to The net earnings may not inure to the benefit of any private the benefit of any private shareholder or individual;shareholder or individual;

Carrying on propaganda, influencing Carrying on propaganda, influencing legislation and participating in legislation and participating in political campaigns are strictly political campaigns are strictly prohibited.prohibited.

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Public Charities/Private Public Charities/Private FoundationsFoundations

More stringent tax rules and More stringent tax rules and operating restrictions for private operating restrictions for private foundations.foundations.

Public charities are those with a Public charities are those with a broad base of public support.broad base of public support.

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Tax Exempt Does Not Mean Tax Exempt Does Not Mean Tax FreeTax Free

Tax-exempt status means that an Tax-exempt status means that an organization does not pay corporate organization does not pay corporate federal income tax on income from federal income tax on income from activities that are substantially activities that are substantially related to the purposes for which the related to the purposes for which the organization was given exempt organization was given exempt status. The organization does pay status. The organization does pay that tax on other types of income that tax on other types of income called “unrelated business income.” called “unrelated business income.”

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Unrelated Business IncomeUnrelated Business Income

Only income from commercial Only income from commercial activities “substantially related” to activities “substantially related” to the organization’s purpose and which the organization’s purpose and which “contribute importantly” to the “contribute importantly” to the organization’s purpose is tax exempt. organization’s purpose is tax exempt.

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UBI – Three Part TestUBI – Three Part Test

The first part of the UBI test is to determine The first part of the UBI test is to determine if your activity is a trade or business. if your activity is a trade or business.

If you’ve determined that your activity is a If you’ve determined that your activity is a trade or business, the next part of the UBI trade or business, the next part of the UBI test is to decide if the activity is “regularly test is to decide if the activity is “regularly carried on.”carried on.”

The last part of the UBI test is to decide The last part of the UBI test is to decide whether the activity is substantially related whether the activity is substantially related to furthering your 501(c)(3)’s exempt to furthering your 501(c)(3)’s exempt purpose. purpose.

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UBI ExemptionsUBI Exemptions

Volunteer workforce Volunteer workforce Convenience of members Convenience of members Sale of donated merchandise Sale of donated merchandise Distribution of low-cost articles Distribution of low-cost articles Convention or trade show activity Convention or trade show activity Sponsorship Sponsorship Traditional bingo Traditional bingo

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UBI- ExclusionsUBI- Exclusions

Interests and dividends Interests and dividends Rents from real property Rents from real property Royalty income Royalty income Gains or losses from the sale of Gains or losses from the sale of

property property

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Fundraising ComplianceFundraising Compliance

The Division of Charitable The Division of Charitable Solicitations and Gaming administers Solicitations and Gaming administers the Tennessee the Tennessee Charitable Solicitations ActCharitable Solicitations Act and the and the Charitable Gaming Implementation LCharitable Gaming Implementation Lawaw, and regulates accounts established , and regulates accounts established pursuant to the Catastrophic Illness pursuant to the Catastrophic Illness Trust ActTrust Act..   

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Charitable Solicitations ActCharitable Solicitations Act

Requires that charitable organizations that Requires that charitable organizations that solicit contributions register with the division.solicit contributions register with the division.

Exemptions:Exemptions:– bona fide religious institutions; bona fide religious institutions; – educational institutions and supporting educational institutions and supporting

organizations (PTAs)organizations (PTAs)– volunteer fire departments, rescue squads and volunteer fire departments, rescue squads and

local civil defense organizations; local civil defense organizations; – political parties, candidates, and PACs; hospitals; political parties, candidates, and PACs; hospitals;

and and – organizations receiving less than $30,000 per organizations receiving less than $30,000 per

annum (must file an “Exemption Request”) annum (must file an “Exemption Request”)

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Charitable Solicitations ActCharitable Solicitations Act

Prohibits false and misleading solicitation Prohibits false and misleading solicitation practices, and empowers the division to practices, and empowers the division to investigate violations of the Act, and investigate violations of the Act, and impose a civil penalty of up to $5,000 for impose a civil penalty of up to $5,000 for each and any violation of the Act. each and any violation of the Act.

Prohibits false and misleading solicitation Prohibits false and misleading solicitation practices, and empowers the division to practices, and empowers the division to investigate violations of the Act, and investigate violations of the Act, and impose a civil penalty of up to $5,000 for impose a civil penalty of up to $5,000 for each and any violation of the Act. each and any violation of the Act.

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The Charitable Gaming The Charitable Gaming Implementation LawImplementation Law

RafflesRaffles LotteriesLotteries SweepstakesSweepstakes Duck RacesDuck Races CakewalksCakewalks

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The Charitable Gaming The Charitable Gaming Implementation LawImplementation Law

Authorizes qualified 501(c)(3)’s to hold an Authorizes qualified 501(c)(3)’s to hold an annual gaming event for the benefit of the annual gaming event for the benefit of the organization;organization;

The division reviews applications and The division reviews applications and sends the list of qualifying applicants to sends the list of qualifying applicants to the general assembly for approval; the general assembly for approval;

Organizations must submit financial Organizations must submit financial reports following the event for review;reports following the event for review;

the division may investigate violations of the division may investigate violations of the Act and assess a civil penalty of up to the Act and assess a civil penalty of up to $50,000 for each and any violation. $50,000 for each and any violation. 

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Other Fundraising MethodsOther Fundraising Methods

PrizePrize ChanceChance ConsiderationConsideration

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Corporate GovernanceCorporate Governance

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RecordkeepingRecordkeeping

CharterCharter BylawsBylaws Minutes of Board meetingsMinutes of Board meetings Minutes of Members meetingsMinutes of Members meetings Membership lists and communicationsMembership lists and communications Accounting and financial recordsAccounting and financial records Compliance with Form 1023 application Compliance with Form 1023 application

and IRS Determination Letter.and IRS Determination Letter.

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Fiduciary DutiesFiduciary Duties

DirectorsDirectors OfficersOfficers ManagersManagers

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Duties of Directors, Officers Duties of Directors, Officers and Managersand Managers

– A director shall discharge his or her A director shall discharge his or her duties as a director, including his or her duties as a director, including his or her duties as a member of a committee:duties as a member of a committee:

– (1) in good faith;(1) in good faith;– (2) with the care an ordinarily prudent (2) with the care an ordinarily prudent

person in a like position would exercise person in a like position would exercise under similar circumstances; andunder similar circumstances; and

– (3) in a manner the director reasonably (3) in a manner the director reasonably believes to be in the best interests of believes to be in the best interests of the corporation.the corporation.

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The Duty of CareThe Duty of Care

The responsibilities of nonprofit boards The responsibilities of nonprofit boards include:include:– Setting policies and ensuring that policies Setting policies and ensuring that policies

are carried out; are carried out; – Overseeing management, especially the Overseeing management, especially the

CEO; CEO; – Monitoring finances, including approving Monitoring finances, including approving

and monitoring the budget;and monitoring the budget;– Establishing and promoting the mission of Establishing and promoting the mission of

the nonprofit;the nonprofit;

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The Duty of Care (cont’d)The Duty of Care (cont’d)

Raising the funds necessary for the Raising the funds necessary for the nonprofit to fulfill its mission;nonprofit to fulfill its mission;

Ensuring compliance laws, rules and Ensuring compliance laws, rules and regulations; andregulations; and

Ensuring that the board functions Ensuring that the board functions effectively.effectively.

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Fulfilling the Duty of CareFulfilling the Duty of Care

Directors are expected to attend board Directors are expected to attend board and committee meetings.  and committee meetings. 

Directors are expected to be prepared and Directors are expected to be prepared and to participate in board and committee to participate in board and committee meetings.meetings.

Generally, a director may not vote by Generally, a director may not vote by proxy at meetings.  proxy at meetings. 

Directors and officers are expected to Directors and officers are expected to exercise independent judgment.    exercise independent judgment.   

Directors and officers must not willfully Directors and officers must not willfully ignore problems. ignore problems. 

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The Business Judgment RuleThe Business Judgment Rule

If directors and officers act in good If directors and officers act in good faith, and in a prudent, diligent and faith, and in a prudent, diligent and informed manner, they will be informed manner, they will be protected from liability under the protected from liability under the “business judgment rule” for any “business judgment rule” for any decisions or actions that may later decisions or actions that may later prove to be a mistake.prove to be a mistake.

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The Duty of LoyaltyThe Duty of Loyalty

Directors and officers are not allowed Directors and officers are not allowed to further their own interests at the to further their own interests at the expense of the nonprofit.  expense of the nonprofit. 

Directors and officers are expected Directors and officers are expected to act in a manner consistent with to act in a manner consistent with the best interests of the nonprofit as the best interests of the nonprofit as a whole, rather than representing a a whole, rather than representing a particular constituency.  particular constituency. 

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Duty of Loyalty – the 3 “C’s”Duty of Loyalty – the 3 “C’s”

CConflicts of interestonflicts of interest between between directors and officers and the directors and officers and the interests of the nonprofitinterests of the nonprofit

CCorporate opportunitiesorporate opportunities that become that become available to the nonprofit; andavailable to the nonprofit; and

CConfidentialityonfidentiality of non-public of non-public information. information.

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Protect YourselfProtect Yourself DISCLOSUREDISCLOSURE RECUSALRECUSAL

DOCUMENTATIONDOCUMENTATION

ADVANCE APPROVALADVANCE APPROVAL

SEEK PROFESSIONAL HELPSEEK PROFESSIONAL HELP

KEEP GOOD MINUTES. KEEP GOOD MINUTES.

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The Duty of ObedienceThe Duty of Obedience

ObedienceObedience to the nonprofit’s mission to the nonprofit’s mission, and, and

Obedience to allObedience to all applicable laws applicable laws.  . 

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Conflict of Interest Related to Conflict of Interest Related to Employment ContractsEmployment Contracts

A committee of the board of directors A committee of the board of directors should conduct research to determine should conduct research to determine comparable salaries for executives, who comparable salaries for executives, who make over $100,000 in similar positions. make over $100,000 in similar positions. This should be well documented.This should be well documented.

There should be competitive bids related to There should be competitive bids related to independent contractors who are paid over independent contractors who are paid over $100,000. $100,000.

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Conflict of Interest Related to Loans to Conflict of Interest Related to Loans to Directors and ExecutivesDirectors and Executives

Do not make loans to officers or Do not make loans to officers or directors.directors.

Existing loans may be “grandfathered”, Existing loans may be “grandfathered”, but should be paid off as soon as but should be paid off as soon as possible.possible.

The following are not considered loans:The following are not considered loans:– Travel advances in performances ofTravel advances in performances of

executive responsibilities executive responsibilities– Relocation payments subject toRelocation payments subject to

reimbursement. reimbursement.

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Contact InformationContact Information

Mary Neil Price – Miller & Martin PLLCMary Neil Price – Miller & Martin PLLCmprice@millermartin.commprice@millermartin.com

(615) 744-8480(615) 744-8480

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