Daniel S. Welytok

Cheat Sheet / Updated 03-27-2016

If you're forming a nonprofit, it's important to start from a well-informed base. These basic start-up guidelines can get your organization up and running smoothly, and being aware of current tax and finance standards can help your nonprofit avoid legal pitfalls.

Article / Updated 03-26-2016

Issues of executive compensation and governance are closely intertwined thanks to the influence of the Sarbanes-Oxley Act (SOX). The IRS is always concerned as to whether governing boards of nonprofit organizations exercise a sufficient degree of due diligence in setting the compensation for leaders of their organizations. The media seems to delight in reporting on executives of both private foundations and public charities who are receiving what many consider to be unreasonably large compensation packages. When talking compensation, the IRS believes that exempt organizations should focus on five key governance areas: Creating legal structures: Every board should strive to set compensation in advance by disinterested board members on the basis of appropriate comparability data. Reporting all the benefits: This means timely reporting of all economic benefits to officers, directors, and key employees on IRS Form 990. Being timely: Organizations should take care to report the benefits in the time period that they're paid. Staying accountable: Boards that delegate compensation issues to committees still have the ultimate responsibility over the compensation decision. Avoiding payments to private individuals: The Internal Revenue Code says that the assets of an organization can't be diverted for the benefit of private individuals. If an organization pays or distributes assets to insiders in excess of the fair market value of the services rendered, it's running afoul of this rule, and the organization can lose its tax-exempt status. Exempt organizations are generally safe if they develop and follow procedures for setting compensation and if they make honest, responsible efforts in line with their size and revenues to determine what the appropriate level of compensation is. Neither a public charity nor a private foundation can pay more than reasonable compensation without running afoul of IRS issues. And reasonable compensation is determined by weighing all facts and circumstances, considering the market value of the services performed. Generally, reasonable compensation is measured with reference to the amount that would ordinarily be paid for comparable services by comparable enterprises under comparable circumstances.

Article / Updated 03-26-2016

An organization's board of directors is responsible for forming committees when necessary. Committee members must be drawn from the current members of the board itself, so having a talented and diverse board is an extremely important ingredient to the success of an organization. The board's power to form committees is usually addressed in the organization's bylaws. A typical bylaw provision on this subject usually allows the board to form any type of committee it deems appropriate, and also allows the board to delegate certain powers to a committee. It's important to note that although a board can delegate certain powers to a committee, it's the board at large that's ultimately responsible for the decisions it makes based on the work of a committee. When committees are formed Standing committees are generally formed at the onset of an organization's existence — usually at the first or second meeting of a newly formed board. Special committees, on the other hand, usually evolve from a board discussion of a pressing matter or issue that needs attention. At this time, the board asks volunteer directors to sit on the committee in order to study the issue and make a recommendation to the full board. The formation of a special committee is noted in the minutes of the board meeting, along with what the committee's mission is, who will serve on it, who will chair it, and what time frame it is on to accomplish its mission. Who sits on a committee The function of a committee drives who will serve on it. The board of directors looks at its roster and decides who would fulfill the functions of a particular committee — this is especially important with standing committees that require special expertise. An organization's audit committee generally requires that at least one committee member be well-versed in financial matters. Where a committee is formed to accomplish a specific task, special expertise may not be as important as other considerations, such as which committee members have the time to devote themselves to the task. What a committee's process looks like After a committee is appointed, it usually schedules its own meetings. Unless face-to-face communications are required, many committees conduct some meetings by teleconference. The first point of order at an initial committee meeting is to decide what the scope of the task is, what form the committee's work product will take (for example, a report, a recommendation, an evaluation, and so on), and who will do what to accomplish the committee's goal. A timetable with milestones is generally set and at the conclusion of the meeting, the committee sets a date to reconvene so that each member can report on the progress of an assigned task. Minutes of committee meetings may be taken, depending on the formality of the meetings, the type of committee, and the tasks assigned. However, where a committee needs to report to the board on a periodic or ongoing basis, minutes are usually required. When a committee concludes its task, the committee chair reports the findings and recommendations to the full board of directors. Discussion of the committee's conclusion generally follows, and individual committee members may supplement the conclusion and answer questions from the board at large. If the committee's conclusion requires some form of action from the board, a vote usually follows the committee's report and is made part of the board minutes.

Article / Updated 03-26-2016

Non-profit organizations are generally tax-exempt and don't need to file revenue forms, but the Internal Revenue Service still requires lots of information — all to be painfully extracted and meticulously organized on IRS Form 990. Not every tax form requires a payment of tax. Sometimes information is what the IRS is after. For example, Forms 990, 990-EZ, and 990-PF (the three, um, forms of Form 990) are considered information returns or reporting forms. The public uses the information on these returns to evaluate nonprofits and how they operate. On these forms, you can see what a nonprofit's income and expenses are, how much it pays its key people, and other useful information that can help you assess what a nonprofit does. Form 990 is a fairly critical form for the public disclosure of information because the law doesn't require typical annual reports from nonprofit organizations. Even financial audits by independent accountants aren't required by law (except in special circumstances). The organizations that must file the Form 990s don't have to pay federal income tax on income that's related to their exempt purposes and programs. However, many private foundations do have to pay an excise tax that's based on their investment income. After an organization files its completed Form 990 or Form 990-EZ, it's available for the world to see. This public access is required under Section 6104 of the Internal Revenue Code. Form 990-PF (for private foundations) must also be made available for public inspection by the private foundation, but that usually requires an appointment and a trip down to the foundation's main office. Organizations that must file a Form 990 The IRS wants to know about some groups every year. These groups include the following: Private foundations: Every private foundation must file a Form 990-PF, regardless of its size. Larger nonprofits: Most nonprofits that have incomes of more than $25,000 generally have to file either Form 990 or 990-EZ. Everyone else: Organizations that are tax-exempt under Sections 501(c), 527, or 4947(a)(1) of the U.S. tax code and that don't fall into the exemptions listed in the next section must file a 990 or 990-EZ every year without fail. Organizations that don't have to file a 990 Some organizations are exempt from filing any of the Form 990s. To be sure that your organization is exempt, check out the following list of exempt entities: Small nonprofits: Organizations with annual incomes of $25,000 or less get a free ride, probably because the IRS itself has staffing and cost constraints. Faith-based organizations: Just about all faith-based organizations get to skip filing Form 990, regardless of size. Hallelujah! Subsidiaries of other nonprofits: The IRS believes in nepotism! Any subsidiary organization whose parent organization or national headquarters filed a 990 for the entire organization gets to skip the formalities. Nonprofits that aren't in the system yet: Nonprofits that haven't applied to the IRS for exemption from federal income tax don't have to file a Form 990 because the IRS wouldn't even know who the form is from. Religious schools: A school below college level that's affiliated with a church or operated by a religious order doesn't have any Form 990 homework. Missions and missionary organizations: This category includes a mission society sponsored by or affiliated with one or more churches or church organizations, if more than half of the society's activities are conducted in or directed at persons in foreign countries. State institutions: A state institution that gets a free tax ride because it provides essential government services (a university for example) doesn't have to file a Form 990. Government corporations: A corporation organized by an act of Congress that's an "instrumentality of the United States" doesn't have to file a Form 990 because it's an arm of the government and is exempt from federal income taxes under 501(c)(1).

Article / Updated 03-26-2016

U.S. nonprofit organizations are entering an era of the most intense federal and state regulation in history. After cracking down on corporate America by enacting the Sarbanes-Oxley Act (SOX) in 2002, lawmakers and enforcement officials are now setting their sights on the country's 1.8 million nonprofits. Many provisions in the Pension Protection Act of 2006 are a direct response to high-profile scandals in the nonprofit sector. The following are examples of developments currently converging into a perfect legal storm for the nation's nonprofits: Federal legislation: On August 17, 2006, President George W. Bush signed into law the Pension Protection Act of 2006 (PPA), which includes a package of charitable giving incentives and safeguard measures as well as a series of reforms designed to deter individuals from using public charities for private benefit. Sweeping state reforms: States are passing tough new laws, such as California's Nonprofit Integrity Act of 2004, which is rapidly becoming a template for other state initiatives. The act requires charities with at least $2 million in revenue to conduct annual audits, to follow certain procedures in compensating executives, to establish a board-level audit committee, and to work with the attorney general's office before fundraising. At this writing, similar bills cracking down on nonprofits have also been proposed in at least a dozen other states, including New York, Arizona, and Maine. West Virginia even funds programs to educate board members who oversee the state's nonprofit organizations. Many states already have stringent laws on the books, and nonprofits anticipate them being enforced with new vigor. Fortunately, most state laws contain common elements for accountability and governance, and it's possible for nonprofits, which often operate and solicit donations in many states, to adopt policies and governance structures that will fulfill all emerging state requirements. IRS initiatives: The Internal Revenue Service (IRS), which grants tax exemptions to nonprofits, is dedicating more auditors to its tax-exempt unit. Various legislative initiatives have been proposed to increase the resources available to the IRS to monitor nonprofits and would require the IRS to pass more stringent regulations for nonprofits. Under these emerging state and federal regulatory schemes, nonprofits not only face new regulatory requirements, but they also face much higher risks of litigation. Regardless of whether a lawsuit or an investigation is meritorious, the associated publicity can place nonprofits in peril, as donors awaiting the outcome withdraw critical financial support.

Article / Updated 03-26-2016

It's a sad fact of life that volunteer directors of nonprofits run the risk of being sued in the course of carrying out duties for which they aren't paid. Fortunately, many states realize the importance of philanthropy and volunteerism and have adopted laws to protect directors from lawsuits when they're acting on behalf of the organization and within the scope of their authority. This article covers several principles gleaned from court cases and other legal precedents. It's a summary of legal doctrines that support directors of nonprofit organizations in doing good work. Protection under the business judgment rule The business judgment rule is a legal doctrine that protects directors of for-profit corporations from having to second-guess their actions — as long as they're acting in a reasonable, informed manner that they believe to be in the best interests of their corporation. Many courts have applied this rule to nonprofit contexts as well. If a corporate director undertakes an action in good faith, exercises independent judgment, and has taken steps to be reasonably informed, courts have ruled that litigants shouldn't be permitted to second-guess their decisions. Hindsight is 20/20, the courts figure. By the same token, directors don't have to pass an IQ test. A bad business decision won't be the basis for a winning lawsuit unless the decision was made for bad motives (such as the director's financial self-interest). Access to corporate books and records Directors of both for-profit and nonprofit corporations have an absolute right to view the corporate books and records. If they can't look at them, who can? If you serve on a board, you can also usually permit your attorney or accountant to see the data so that he or she can advise you personally. Access to the minutes Directors have a right to receive a copy of the minutes from every meeting. Even though you may be tempted to toss them aside after hashing out an issue for hours, don't. Those minutes can come back to haunt you years later when the board needs to review them to see why an action was or wasn't taken. Minutes are the only record memorializing what took place at a meeting, and they can have unanticipated legal significance. So, even though you can't change time, do make sure the minutes are complete, and that the reasons for any controversial actions and votes taken are fully (and accurately) reflected. Communication with management If you're a director of a nonprofit, you have the right to communicate (reasonably) with management. If something doesn't make sense on the financial front, you can call up the chief executive officer or chief financial officer and ask questions. You don't have the right to restrict or interfere with these individuals in carrying out their own duties. You also can't make demands on staff or organizational resources without approval from the board as a whole. The right to dissention from board actions There isn't always rationality in numbers. It's amazing how opinions fall like dominos in some settings, with each person adopting another's viewpoint. Not only do you have a right to vote as a board member, in many states you can also go on record as having dissented (disagreed) with the majority.

Article / Updated 03-26-2016

Don't assume that since the federal government doesn't tax most nonprofit income that it doesn't require nonprofits to comply with tax-reporting requirements. Just like for-profit businesses, nonprofits need to report income, file tax returns, and file documentation to make certain their special status isn't being used to the benefit of private individuals or to further non-exempt purposes. Avoid these tax traps that many nonprofits stumble into: Not filing required returns and reports: The Internal Revenue Service (IRS) carefully monitors the revenue, expenses, and activities of nonprofit organizations and requires them to file annual returns and reports to retain their tax-exempt status. Fines can be stiff for organizations that fail to comply. Not filing complete or accurate returns: Not all duties in nonprofit organizations can be safely delegated to well-meaning volunteers. Tax forms are technical documents that require the attention of someone skilled in completing them. Paying unreasonable compensation: Paying board members and executives more than what's justified by the market can result in a prompt loss of your organization's tax-exempt status and in penalties for all those involved. Deviating from the tax-exempt mission: The IRS grants nonprofit organizations exempt status to carry out specific missions. So, if you engage in non-exempt activities, your organization's exempt status may be terminated. Allowing the organization's property to be used personally by employees: Nonprofit assets must be used for nonprofit purposes (and only nonprofit purposes). For example, it isn't all right to decide that land for a youth camp program should instead be used as the site for a vacation home for board members. Entering into transactions where a clear conflict of interest exists: Nonprofit funds should never be diverted to lucrative business transactions that benefit board members or executives (or their families). Nor should the organization's assets be used for other types of loans or perks. Not filing state tax returns in all states in which the nonprofit does business: States can be picky about what occurs within their borders. So, they have their own reporting requirements that must be satisfied. Engaging in activities that generate income from sources unrelated to the organization's mission: When nonprofits compete with private-sector businesses, they must pay taxes on the activities that generate the unrelated business income. Ignoring or not responding to correspondence from the IRS: Volunteer staffing and overlapping duties can cause critical notices to fall through the cracks. Don't let this happen to your organization.

Article / Updated 03-26-2016

To ensure the success of your nonprofit organization, you need to start with a solid foundation. Take a look at the following fundamentals checklist so your nonprofit is set up properly and legal issues are covered right from the beginning. Clearly define your mission and its scope: Every nonprofit has a mission. Make sure your nonprofit's mission is clearly defined and concisely written. It should reflect the shared goals of everyone involved in establishing the organization. Put together a business plan and system: The organization should identify the sources and uses of its funds. It should also figure out whether it can be viable in the long run. Adopt a set of bylaws: Bylaws serve as the constitution of your organization. You might start by using standard forms, but do make sure that issues of major importance to your organization are clearly addressed. Recruit a board: Nonprofit organizations are run by boards of directors or trustees. Recruiting the right board can mean the difference between success and failure of a nonprofit's mission. Hold an organizational meeting and define duties and responsibilities: This step is important to do early on because it allows you to make sure that formalities are dealt with before the organization becomes engrossed in fulfilling its mission. File for tax-exempt status with the IRS: Tax-exempt status is not automatic; it must be awarded by the IRS. Your organization must file the necessary paperwork and qualify under the law for exempt status. Register with your state: State requirements vary, but most require you to follow a certain registration process so that the states can track which nonprofits exist within their borders. Most states also require a separate registration process if funds will be solicited within their borders. Get staff and volunteers in place: If your organization has day-to-day operations to perform, it's important to figure out who will do the actual work. More importantly, you have to figure out who will supervise operations and be held accountable.