Board of Directors

Congratulations! You’ve been recruited and elected to serve on a board of directors for your favorite nonprofit organization!

Now what?

Being a board member is an important and enjoyable way to give back to a community or organization that matters to you. The board of directors is tasked with ensuring that the organization carries out its exempt purpose. But what does that mean exactly?

You have three primary legal and fiduciary duties:

1. The duty of care means that you must take care of the assets of the organization, whether monetary, staffing, volunteers, facility, or goodwill. Be a good steward of the organization’s funds.

2. The duty of loyalty requires you to put the organization and its mission first. This includes recognizing and disclosing conflicts of interest, and making decisions that are in the best interest of the organization and not in the best interest of an individual board member or for-profit entity. It’s your job to make sure that the organization is working to fulfill its stated mission.

3. The duty of obedience covers your role in making sure that the organization follows all applicable laws and regulations, and its own bylaws.

What does this look like in practice?

As a board member, you are responsible for advancing the mission of the organization. I recommend reviewing your mission statement regularly, such as at every board meeting, so as to keep that mission at the forefront of your discussions. It is also important to track what other similar organizations are doing, whether in your area or across the country. If your organization is membership-based, it is helpful to keep communication open with your members. In a membership organization, you also “represent” the members.

If your organization has an executive director, the board of directors is responsible for hiring, setting compensation, and supervising this person. This is a key relationship, as the executive director typically manages the other staff and volunteers (directly or indirectly), fund raises with donors, and is often the “face” of the organization.

The board of directors is responsible for setting the budget for the year and overseeing that income and expenses stay on track. It is helpful to learn how to read and interpret financial statements, including profit/loss statements and balance sheets. Similarly, you are responsible to make sure the minutes and agendas are accurate, as this is the best legal protection should a potential issue arise. This is also a great time to brush up on Robert’s Rules of Order.

You are a walking advertisement for your organization. Spreading the word about your organization helps it grow, and part of the duty of care is to make sure your organization is growing. For most board members, this means sharing the mission with people you meet. For some, in can include public relations and talking with the media.

Board members should be involved in the work of the mission. This could be working on a committee, taking a lead role in a fundraising activity, or volunteering in another capacity. It’s hard to know if the organization is advancing its mission by reading a report. The more you are able to be a part of the work, the better you will be able to make decisions in the best interest of the organization.

Board members are fundraisers. This means both that you are contributing financially to the organization, and that you are helping to solicit donations too — whether by helping to put together a fundraising event or by asking the people in your network to contribute.

Lastly, board members are always recruiting new board members. It may seem odd to think about finding your own replacement as soon as you are elected, but many board members find that their time goes fast. Continual recruitment allows for greater continuity.

If you are welcoming new members to your board, I strongly recommend having an orientation to review their legal and fiduciary duties, your organization’s mission and bylaws, and their particular role and responsibilities. This should be an annual event, as you welcome new members every year, and separate from any all-board retreats that focus on long-term planning and mission.

If you are interested in setting up a new-members orientation and would like more information, please let me know.

Nonprofit Organizations

When most people think of a nonprofit organization, they think of a 501(c)(3) nonprofit corporation. But did you know that there 28 different kinds of nonprofit entities and many of them are easier to form and operate than a 501(c)(3)? When I first meet with a client who is interested in applying for tax-exempt status, I ask whether their goals might be better served by a different form of nonprofit.

So what is a 501(c)(3)?

The most common type of nonprofit is the “charitable organization.” It qualifies for tax exemption under the IRS tax code, section 501 (c) (3). To qualify, organizations must be operated to fulfill one of these purposes: religion, education, science, literature, public safety testing, amateur sports, and the prevention of cruelty to children or animals This is the category that includes museums, churches, libraries, low-income housing, colleges, food banks, hospitals, and symphonies. While the income received by the organization related to its purpose is tax-exempt, these organizations are also limited (but not totally prohibited) in how and whether they can engage in lobbying activities.

And what is a 501(c)(4)?

This section of the code regulates social welfare organizations, civic leagues, and local employee associations. These tax-exempt organizations are NOT limited from lobbying activities. If you donate money to an exempt organization that engages in lobbying activities, there’s a good chance you are actually donating to two sister organizations — a 501(c)(3) that carries out the mission and a 501(c)(4) that lobbies for the best laws to support that mission.

Both 501(c)(3) and 501(c)(4) organizations are vetted through an lengthy application process, that can take months to complete. In addition, to continue to qualify as tax-exempt, these organizations must submit detailed annual reports of their activities, income and expenses, and publicly identify their key staff and board members.

That still sounds like a lot of work. Are there any easy nonprofit organizations?

There are many nonprofit organizations that are easy to form and maintain, but my favorite is the social club. I have worked with several recreational and hobby clubs who did not need 501(c)(3) status to carry out their charitable purposes. For example, I worked with a model airplane and drone club who was interested in a more formal business structure. They collected membership dues, which helped to pay for a small field that the club owned and maintained. Members were entitled to use the space whenever they liked to fly their airplanes, and the club used the space to host races and '“fly-ins." Another organization that I represented was a recreational bicycle racing team. They collected dues from team members and used that money to enter races and go out after races to celebrate. Both organizations qualified for tax-exemption under 501(c)(7) — Recreational or Social Clubs. While they still need to file annual tax returns for the organization, they are not required to apply for tax-exempt status and do not need to disclose their activities or leadership. Moreover, their annual return is a simple postcard, since neither organization received more than $50,000 in income in a year.

Among the other 25 types of nonprofit organizations are trade or professional associations (like the Chamber of Commerce), fraternal societies (anything that follows the “lodge” model of governance), veterans organizations, and state chartered credit unions.

But our club when through the hassle of getting 501(c)(3) status. Are you saying we didn’t need to do that?

Not necessarily. There are certain benefits to having 501(c)(3) status. First, if you intend to apply for grant money from foundations, it is helpful to have 501(c)(3) status. Many (if not all) foundations require it, as it helps them to guarantee that their funds are being used for exempt purposes. While the IRS doesn’t require foundations to give their money to 501(c)(3) charities, it does require that they only distribute funds to tax-exempt organizations, and the easiest way for a foundation to know that your organization qualifies is for you to have 501(c)(3) status.

Similarly, other businesses may not recognize discounts or other benefits for your organization without 501(c)(3) status. A few years ago, the IRS issued a warning that churches should not allow bands or other musical groups to play in their churches, whether for set ticket prices or for a “free-will donation” to the band. This was because a church, as an exempt organization, may not allow its property to be benefit private individuals or entities, and when the local garage band plays and takes home money from that concert, it isn’t furthering the exempt purpose of the church. However, it is permissible for the church to lease its sanctuary to an organized musical group, like the NW Girlchoir, to perform (even though that concert will have set ticket prices and the choir will earn money from it) because the NW Girlchoir is an exempt organization. The church’s property can be used for the exempt purpose of another exempt organization. So for many music organizations, applying for and receiving tax-exempt status is helpful for booking venues.

If you are interested in possibly starting a nonprofit organization, or if you have questions about an existing nonprofit, let me know. I love working with all kinds of exempt organizations, and would be happy to help you.