Oct
10
2010

Does Your Board Vote by Email?

As email has become a primary form of communication, more and more nonprofit boards are taking action by email vote.  I personally believe email voting is an efficient method of board approval for very specific questions where little or no discussion is necessary.  Unfortunately, most states have declined to adopt specific legislation regarding email voting. 

Without a special rule, email voting likely constitutes voting by written consent.  Unlike in-person or telephonic meetings that only require a majority vote to approve a resolution, most states require a unanimous vote of all the directors in order for a written consent to be effective. (more…)

Written by in: Governance
Oct
07
2010

Why I don’t like “members”

As discussed in a previous blog, in most jurisdictions a “member” is someone (other than a director or delegate) entitled to vote for directors of a nonprofit corporation; members also generally get to vote for important corporate actions, like mergers and dissolutions. Most states ask for a response on the articles of incorporation to a question like the following: does the corporation have members?

Now, whether or not you like the concept of someone with rights like “members”, it is hard to imagine a worse term of art for nonprofit corporations. (more…)

Sep
20
2010

Compensation Scrutiny – Protect Your Charity

Recently, the IRS, state Attorney Generals, and charity watchdog groups have raised concerns regarding the payment of excessive compensation to charity executives.  For example, the redesigned Form 990 includes numerous questions regarding compensation and related practices.  The IRS has sent compensation questionnaires to thousands of hospitals and universities.  Recently, Protect the Hershey’s Children sent a letter to the IRS Commissioner, Senate Finance Committee, and Pennsylvania Department of Banking alleging board compensation abuses at the Milton Hershey Trust School and Milton Hershey School. 

I believe it is likely that charities will continue to experience heightened scrutiny of executive compensation from the public, IRS, and Attorney Generals, especially in light of the additional compensation data that is now available on the Form 990.  In addition to negative publicity, payment of excessive executive compensation may result in loss of the charity’s exempt status (private inurement), the imposition of excise taxes on the executive who received and the directors who approved the compensation (excess benefit or self-dealing rules), and other potential penalties imposed by the state Attorney General. 

So what can your charity do to protect itself against scrutiny?  The answer is simple – follow the procedures set forth in the Treasury Regulations!  (more…)

Sep
06
2010

Delaware Revised Statutes – Part II

I don’t like members. Not as individuals, but as a non-profit corporate law term of art, mostly because it so often leads to confusion.  I plan to rant more about this in a future blog. But for purposes of analyzing the changes to the Delaware General Corporation Law (“DGCL“) though, I will simply note that in many jurisdictions, a “member” is someone (other than a director or delegate) entitled to vote for directors; members also generally get to vote for important corporate actions, like mergers and dissolutions. And, in all jurisdictions I know of, a non-profit corporation may, but is not required to, have members. If it doesn’t, its directors themselves may vote for the next slate of directors and approve all corporate actions. As I noted in my August 19 post, unlike most jurisdictions, Delaware does not have a nonprofit corporation act; rather corporations that want to be exempt are organized as Delaware nonstock corporations under the DGCL. And I noted some of the changes to the DCGL that improved its application to non-profits.
 
Another change to the DCGL is that section 102 now provides that all Delaware nonstock corporations “shall have members”, (more…)
Aug
24
2010

Accepting Gifts… Should You?

Charitable organizations receive all types of donations, including cash,  personal property, and even business interests.  Often times, the charity is so excited about a potential gift that no diligence is completed prior to acceptance, and failure to complete diligence on gifts can turn out to be costly.    Take gifts of real property – these are very common and can be financially beneficial to a charity.  However, without completing diligence, the charity may find that it now owns a superfund site.   Another not-so-obvious example is a donation of stock.  Although most donated stock is marketable, certain types of stock, including stock in an S corporation (usually small, family owned corporations), are not.  This post explores the implications of a charity accepting gifts of S corporation stock.  

Subchapter S corporations can only have certain types of shareholders.  Generally, these “permissible shareholders” include individuals (who are not nonresident aliens), estates, certain trusts, and certain exempt organizations.  We will focus on the permissible exempt organization shareholder. (more…)

Aug
15
2010

IRS Offers Informational Workshops

The IRS Exempt Organizations Division is offering one-day workshops for small and mid-size section 501(c)(3) exempt organizations. Each workshop will explain what 501(c)(3) organizations must do to keep their tax-exempt status and comply with tax obligations. An introductory workshop is designed for administrators or volunteers who are responsible for an organization’s tax compliance. For additional information regarding these free IRS workshops, click here.  Similar virtual workshops are also available (click here). These are great opportunities for officers and directors of 501(c)(3) organizations.
Aug
12
2010

Board Duties Part III – Duty of Obedience

The first and second installments of this series briefly discussed the duty of care and the duty of loyalty.  A third duty fiduciary duty imposed on charity board members is the duty of obedience (although some characterize the duty of obedience as a sub-set of the first two duties).  To satisfy the duty of obedience, a board member must act with fidelity, within the bounds of the law, to the charity’s mission as expressed in its Articles and Bylaws.  Therefore, it is important for every board member to carefully review the Articles and Bylaws, understand the charity’s mission, and consider this mission when making board decisions.

Written by in: Governance
Aug
10
2010

Board Duties Part II – The Duty of Loyalty

In the first installment of this series on board duties, we briefly discussed the fiduciary duty of care.  This second installment briefly discusses the fiduciary duty of loyalty.  To satisfy the duty of loyalty, a board member must act in the interest of the charity, and not act in their own interest or that of another person or entity.

The duty of loyalty primarily relates to conflicts of interest, corporate opportunity, and confidentiality. A conflict of interest is present whenever a director has a personal interest, whether direct or indirect, in connection with any proposed contract, arrangement or transaction. The mere presence of a conflict of interest, however, does not necessarily render a transaction void or voidable, or expose a director to liability.  When faced with a potential conflict of interest transaction, the board should consult the Internal Revenue Code (IRC Section 4941 or IRC Section 4958) and applicable state law.  Some helpful suggestions regarding the duty of loyalty include, but are not limited to, the following: (more…)

Written by in: Governance
Aug
08
2010

Board Duties Part I – The Duty of Care

The board of directors of most charities are made up of good-hearted volunteers who are passionate about the charity’s exempt mission and eager to donate their time and experience.  Before agreeing to serve, however, a potential board member must understand the fiduciary duties that they will owe to the charity as a member of the board, including the duty of care, duty of loyalty, and duty of obedience.   The following is a brief overview of the duty of care.  A brief discussion of the duty of loyalty and duty of obedience will follow in subsequent blog entries.   

To satisfy the duty of care, a board member must discharge his or her duties as a director in good faith, with the care of an ordinarily prudent person and in a manner the director reasonably believes to be in the best interests of the charity.  This means, among other things, the director should pay attention to fiscal matters, conscientiously decide matters that come before them, create and enforce internal information systems, and serve as a check or veto on management. Some helpful suggestions include, but are not limited to, the following: (more…)

Aug
04
2010

Say Thank You… But For How Much?

Last week, my husband and I attended an event for one of our favorite charities. For a $160 donation, the two of us enjoyed a nice steak and lobster dinner and an open bar. This was a great deal for the charity - since all of the food and drinks had been donated. At the silent auction, I successfully bid on a dinner party for 4, hosted by a famous local chef who donated the item. And I got a great deal on that dinner – it normally goes for $300, and all I paid was $150! My husband won the raffle – for five dollars, he entered for the chance to win all of the money in the pot, and scored a whopping $510! Of course, being the charitable person that he is (and with a bit of urging), he donated the entire amount back to the charity. Finally, after watching the gut-wrenching stories about all of the children who benefit from the charity’s work, we donated an additional $250. If you haven’t figured it out yet, I REALLY like this charity. BUT: for tax purposes, how much did I really donate? The answer isn’t that simple…let’s go one by one: (more…)

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