22 June 2016 Session 1A page 3
Are You Legal? - Common Legal Issues Non-Profits Face Presented by Christopher L. Wiginton, Shareholder, Maynard Cooper & Gale, P.C. I. Introduction to Non-Profits A. What is a Non-Profit 1. Non-profit is a state law concept 2. Tax-exempt entity is a federal tax law concept 3. Charitable organization encompasses both state and federal law issues 4. Public charity versus private foundation a) What is a charitable organization? b) Support test c) Effect of Classification II. Recognition A. Federal Law Requirements -Recognition 1. Application for recognition of exempt status a) Other types of Section 501(c) entities b) Form of application (1) Form 1023 EZ (a) Filing Eligibility (b) Streamlined Format (2) Form 1023 (a) Organizational Documents (b) (c) (d) (e) Financial forecast Conflict of Interest Policy Purpose Statement Other information (3) Timing of process 22 June 2016 Session 1A page 4
(a) Filing NonProfit 101 (b) Requests for additional information 2. Receipt of exemption letter what now? 3. Ongoing compliance with tax laws a) Form 990 b) Maintaining exempt status B. Recognition Questions 1. Do you have to register your name with a federal registry? Are there state law name registration requirements? 2. How important is the initial application that is filed for recognition of exempt status? 3. Do you have to continue to follow what the application says, or can you change it at a later date? 4. What is the difference between a mission statement and a purpose? 5. Can a non-profit operate outside of its stated purpose? III. Operations Questions A. Bylaws B. Board Composition C. Common Mistakes that Non-profits make and legal issues faced by Non-Profits 1. Lobbying/Political Activities 2. Failure to file returns a) Loss of Exempt Status as a Result of Failure b) Reinstatement of Exempt Status 3. Loss of exempt status for other reasons 4. Unrelated Business Taxable Income 22 June 2016 Session 1A page 5
a) Issues related to accepting donations of S Corporation stock 5. Joint ventures with for-profit entities D. Issues affecting board members 1. Does the board need to be familiar with the organizational documents and various filings with the IRS? 2. Why do you need bylaws? 3. Do you have to follow your bylaws? 4. What is the difference between bylaws and policies and procedures? 5. Does the board have an obligation to ensure that the non-profit is following the original intent as stated in the organizational documents and IRS filings? 6. What are the costs and obligations for directors if the non-profit gets sued? a) Are there any effects to the board members individually? b) Are there any costs to the board members regarding their defense? IV. List of Attachments A. Sample Bylaw Provisions Regarding Board of Directors B. Form 1023 C. Sample Conflict of Interest Policy D. Example of an Exemption Letter 22 June 2016 Session 1A page 6
Sample Directors Provision from Bylaws BOARD OF DIRECTORS A. Management of Corporation. All corporate powers shall be exercised by or under the authority of, and the business and affairs of the Corporations shall be managed under the direction of, the board of directors except as otherwise provided by law or the Articles of Incorporation of the Corporation. Number, Tenure and Qualifications. The number of directors constituting the initial board of directors is set forth in the Articles of Incorporation of the Corporation, and the members of the first board shall hold office until the adjournment of the first annual meeting of the board of directors and until their successors shall have been duly elected and qualified. Thereafter, the number of directors constituting the board of directors of the Corporation shall be no less than three (3) nor more than twelve (12). The current number of directors serving on the board of directors shall be six (6). The number of directors may be increased or decreased from time to time by resolution of the board of directors at a duly called meeting thereof or in a written consent signed by all the directors, but no decrease shall have the effect of shortening the term of any incumbent director. Directors shall hold office until the adjournment of the next succeeding annual meeting of the board of directors and until their successors shall have been duly elected and qualified or until their deaths or until they shall resign or shall have been removed from office in the manner provided in the Articles of Incorporation of the Corporation. Directors need not be residents of the State of Alabama. C. Vacancies. Any vacancy occurring in the board of directors shall be filled by majority vote of the remaining directors, notwithstanding that the number of remaining directors is less than a quorum. A director elected to fill a vacancy shall be elected to serve for the unexpired term of his or her predecessor in office, and a director elected to fill a vacancy to be filled by reason of an increase in the number of directors shall be elected to serve only until the next election of directors. D. Annual Meetings. The annual meeting of the board of directors, commencing with the year {insert year}, shall be held in {insert month} of each year on such date and at such time and place, within or without the State of Alabama, as shall be determined by resolution of the board of directors or by the President of the Corporation for the purpose of electing directors and for the transaction of such other business as may come before the meeting. At least ten (10) days prior to the date of the annual meeting, the President of the Corporation shall give notice to each member of the board of directors of such meeting in the manner hereinafter provided setting forth the date, time, and place of the meeting. If the election of directors shall not be held on the day designated for the annual meeting of the board of directors, or at any adjournment thereof, the board of directors shall cause the election to be held at a special meeting of the board of directors as soon thereafter as may be conveniently held. 22 June 2016 Session 1A page 7
E. Regular and Special Meetings. Meetings of the board of directors, regular or special, may be held within or without the State of Alabama. Regular meetings may be held upon such notice, if any, and at such time and place as shall be determined by resolution of the board of directors. Special meetings of the board of directors may be called by the President of the Corporation or by any two directors on ten days notice to each director, which notice either (i) may be in writing (a) delivered personally, (b) delivered by mailing to a director at his or her address as it appears in the records of the Corporation or (c) delivered by facsimile transmission or (ii) may be verbal given either in person or by telephone. The Secretary of the Corporation, at the request in writing of the President or of any two directors, shall send such written notice or give such verbal notice on behalf of the President or such directors. If mailed, such notice shall be deemed to be delivered when deposited in the United States mail, so addressed, with postage thereon prepaid. If by facsimile, such notice shall be deemed to be delivered when the sender receives confirmation that such facsimile transmission is complete. Neither the business to be transacted at, nor the purpose of, any regular or special meeting of the board of directors need be specified in the notice, if any is required, of such meeting. F. Meeting by Telephone. Members of the board of directors or any committee designated thereby may participate in a meeting of such board or committee by means of a conference telephone or similar communications equipment by means of which all persons participating in the meeting can hear each other at the same time and participation by such means shall constitute presence in person at a meeting. G. Quorum A majority of the whole number of directors then serving on the board shall constitute a quorum for the transaction of business at any meeting of the board of directors. If less than a majority is present at a meeting, a majority of the directors present may adjourn the meeting from time to time without further notice. H. Acts of the Board. Except as otherwise provided in these Bylaws or the Articles of Incorporation of the Corporation, the act of a majority of the directors present at a meeting at which there is a quorum shall be the act of the board of directors. I. Action Without a Meeting. Any action required or permitted to be taken by the board of directors or a committee thereof at a meeting may be taken without a meeting if a consent in writing, setting forth the action so taken, shall be signed by all of the directors or all of the members of the committee, as the case may be. Such consent shall have the same effect as a unanimous vote of the directors or the members of such committee. J. Committees of Directors. The board of directors, by resolution adopted by a majority of the directors in office, may designate one or more committees, each of which shall consist of two or more directors, which committees, to the extent provided in such resolution, shall have and exercise the authority of the board of directors in the management of the Corporation, except that no such committee shall have the authority of the board of directors in reference to amending, altering or repealing these bylaws; electing, appointing or removing any member of any such committee or any 22 June 2016 Session 1A page 8
director or officer of this Corporation; amending or restating the Articles of Incorporation of the Corporation, adopting a plan of merger or adopting a plan of consolidation with another nonprofit corporation; authorizing the sale, lease, exchange or mortgage of all or substantially all of the property and assets of the Corporation; authorizing the voluntary dissolution of the Corporation or revoking proceedings therefor; adopting a plan for the distribution of the assets of the Corporation; or amending, altering or repealing any action or resolution of the board of directors which by its terms provides that it shall not be amended, altered or repealed by such committee. Other committees not having and exercising the authority of the board of directors in the management of the Corporation may be designated by a resolution adopted by a majority of the directors present at a meeting at which a quorum is present. K. Compensation. The directors of the Corporation shall serve without compensation, but may receive a reasonable amount as reimbursement of expenses incurred in attending to their authorized duties, including, but not limited to, expenses incurred by the directors for transportation, lodging, meals, and other related expenses to attend the annual and any special meetings of the board of directors. To the extent deemed necessary or appropriate by the directors, however, a director may from time to time be employed by the Corporation and compensated for his or her services and reimbursed for his or her reasonable expenses other than as a director, but such employment shall be terminable at the discretion of the board of directors. L. Loans to Employees and Directors. The Corporation shall not lend money to its directors or officers. 22 June 2016 Session 1A page 9
Sample Conflict of Interest Policy CONFLICT OF INTEREST POLICY NonProfit 101 SECTION 1. PURPOSE: (the Non-Profit ) is a nonprofit, tax-exempt organization. Maintenance of its tax-exempt status is important both for its continued financial stability and for public support. Therefore, the IRS as well as state regulatory and tax officials view the operations of the Non-Profit as a public trust, which is subject to scrutiny by and accountable to such governmental authorities as well as to members of the public. Consequently, there exists between the Non-Profit and its board, officers, and management employees and the public a fiduciary duty, which carries with it a broad and unbending duty of loyalty and fidelity. The board, officers, and management employees have the responsibility of administering the affairs of the Non-Profit honestly and prudently, and of exercising their best care, skill, and judgment for the sole benefit of the Non-Profit. Those persons shall exercise the utmost good faith in all transactions involved in their duties, and they shall not use their positions with the Non-Profit or knowledge gained there from for their personal benefit. The interests of the organization must be the first priority in all decisions and actions. SECTION 2. PERSONS CONCERNED: This statement is directed not only to directors and officers, but to all employees who can influence the actions of the Non-Profit. For example, this would include all who make purchasing decisions, all persons who might be described as "management personnel," and anyone who has proprietary information concerning the Non-Profit. SECTION 3. AREAS IN WHICH CONFLICT MAY ARISE: Conflicts of interest may arise in the relations of directors, officers, and management employees with any of the following third parties: 1. Persons and firms supplying goods and services to the Non-Profit. 2. Persons and firms from whom the Non-Profit leases property and equipment. 3. Persons and firms with whom the Non-Profit is dealing or planning to deal in connection with the gift, purchase or sale of real estate, securities, or other property. 4. Competing or affinity organizations. 22 June 2016 Session 1A page 10
5. Donors and others supporting the Non-Profit. NonProfit 101 6. Agencies, organizations, and associations which affect the operations of the Non-Profit. 7. Family members, friends, and other employees. SECTION 4. NATURE OF CONFLICTING INTEREST: A conflicting interest may be defined as an interest, direct or indirect, with any persons or firms mentioned in Section 3. Such an interest might arise through: 1. Owning stock or holding debt or other proprietary interests in any third party dealing with the Non-Profit. 2. Holding office, serving on the board, participating in management, or being otherwise employed (or formerly employed) with any third party dealing with the Non-Profit. 3. Receiving remuneration for services with respect to individual transactions involving the Non-Profit. 4. Using the Non-Profit s time, personnel, equipment, supplies, or good will for other than the Non-Profit-approved activities, programs, and purposes. 5. Receiving personal gifts or loans from third parties dealing or competing with the Non- Profit. Receipt of any gift is disapproved except gifts of a value less than $50, which could not be refused without discourtesy. No personal gift of money should ever be accepted. SECTION 5. INTERPRETATION OF THIS STATEMENT OF POLICY: The areas of conflicting interest listed in Section 3, and the relations in those areas which may give rise to conflict, as listed in Section 4, are not exhaustive. Conflicts might arise in other areas or through other relations. It is assumed that the directors, officers, and management employees will recognize such areas and relation by analogy. The fact that one of the interests described in Section 4 exists does not necessarily mean that a conflict exists, or that the conflict, if it exists, is material enough to be of practical importance, or if material, that upon full disclosure of all relevant facts and circumstances it is necessarily adverse to the interests of the Non-Profit. However, it is the policy of the board that the existence of any of the interests described in Section 4 shall be disclosed before any transaction is consummated. It shall be the continuing responsibility of the 22 June 2016 Session 1A page 11
board, officers, and management employees to scrutinize their transactions and outside business interests and relationships for potential conflicts and to immediately make such disclosures. SECTION 6. DISCLOSURE POLICY AND PROCEDURE: Transactions with parties with whom a conflicting interest exists may be undertaken only if all of the following are observed: 1. The conflicting interest is fully disclosed; 2. The person with the conflict of interest is excluded from the discussion and approval of such transaction; 3. A competitive bid or comparable valuation exists; and 4. The board has determined that the transaction is in the best interest of the organization. Disclosure in the organization should be made to the chief executive officer (or if she or he is the one with the conflict, then to the board chair), who shall bring the matter to the attention of the board. Disclosure involving directors should be made to the board chair, (or if she or he is the one with the conflict, then to the board vice-chair) who shall bring these matters to the board. The board shall determine whether a conflict exists and in the case of an existing conflict, whether the contemplated transaction may be authorized as just, fair, and reasonable to the Non-Profit. The decision of the board on these matters will rest in their sole discretion, and their concern must be the welfare of the Non-Profit and the advancement of its purpose. 22 June 2016 Session 1A page 12
[NAME OF NON-PROFIT] CONFLICT OF INTEREST DISCLOSURE STATEMENT Preliminary note: In order to be more comprehensive, this statement of disclosure/questionnaire also requires you to provide information with respect to certain parties that are related to you. These persons are termed affiliated persons and include the following: a. your spouse, domestic partner, child, mother, father, brother or sister; b. any corporation or organization of which you are a board member, an officer, a partner, participate in management or are employed by, or are, directly or indirectly, a debt holder or the beneficial owner of any class of equity securities; and c. any trust or other estate in which you have a substantial beneficial interest or as to which you serve as a trustee or in a similar capacity. 1. NAME OF EMPLOYEE OR BOARD MEMBER: (Please print) 2. CAPACITY: board of directors executive committee officer committee member staff (position): 3. Have you or any of your affiliated persons provided services or property to in the past year? YES NO If yes, please describe the nature of the services or property and if an affiliated person is involved, the identity of the affiliated person and your relationship with that person: 22 June 2016 Session 1A page 13
4. Have you or any of your affiliated persons purchased services or property from in the past year? YES NO If yes, please describe the purchased services or property and if an affiliated person is involved, the identity of the affiliated person and your relationship with that person: 5. Please indicate whether you or any of your affiliated persons had any direct or indirect interest in any business transaction(s) in the past year to which [Name of Non-Profit] was or is a party? YES NO If yes, describe the transaction(s) and if an affiliated person is involved, the identity of the affiliated person and your relationship with that person: 6. Were you or any of your affiliated persons indebted to pay money to [Name of Non-Profit] at any time in the past year (other than travel advances or the like)? YES NO 22 June 2016 Session 1A page 14
If yes, please describe the indebtedness and if an affiliated person is involved, the identity of the affiliated person and your relationship with that person: 7. In the past year, did you or any of your affiliated persons receive, or become entitled to receive, directly or indirectly, any personal benefits from [Name of Non-Profit] or as a result of your relationship with [Name of Non-Profit], that in the aggregate could be valued in excess of $1,000, that were not or will not be compensation directly related to your duties to [Name of Non-Profit]? YES NO If yes, please describe the benefit(s) and if an affiliated person is involved, the identity of the affiliated person and your relationship with that person: 8. Are you or any of your affiliated persons a party to or have an interest in any pending legal proceedings involving [Name of Non-Profit]? YES NO If yes, please describe the proceeding(s) and if an affiliated person is involved, the identity of the affiliated person and your relationship with that person: 22 June 2016 Session 1A page 15
9. Are you aware of any other events, transactions, arrangements or other situations that have occurred or may occur in the future that you believe should be examined by [Name of Non-Profit] board in accordance with the terms and intent of [Name of Non-Profit] conflict of interest policy? YES NO If yes, please describe the situation(s) and if an affiliated person is involved, the identity of the affiliated person and your relationship with that person: _ I HEREBY CONFIRM that I have read and understand [Name of Non-Profit] s conflict of interest policy and that my responses to the above questions are complete and correct to the best of my information and belief. I agree that if I become aware of any information that might indicate that this disclosure is inaccurate or that I have not complied with this policy, I will notify immediately. Signature Date 22 June 2016 Session 1A page 16
[NAME OF NON-PROFIT] NonProfit 101 GIFT POLICY AND DISCLOSURE FORM As part of its conflict of interest policy, [Name of Non-Profit] (the Non-Profit ) requires that directors, officers and employees decline to accept certain gifts, consideration or remuneration from individuals or companies that seek to do business with the Non-Profit or are a competitor of it. This policy and disclosure form is intended to implement that prohibition on gifts. Section 1. Section 2. Section 3. Section 4. Responsible Person is any person serving as an officer, employee or a member of the board of directors of the Non-Profit. Family Member is a spouse, domestic partner, parent, child or spouse of a child, or a brother, sister, or spouse of a brother or sister, of a Responsible Person. Contract or Transaction is any agreement or relationship involving the sale or purchase of goods, services or rights of any kind, receipt of a loan or grant, or the establishment of any other pecuniary relationship. The making of a gift to the Non-Profit is not a contract or transaction. Prohibited gifts, gratuities and entertainment. Except as approved by the Chairman of the Board or his designee or for gifts of a value less than $50 which could not be refused without discourtesy, no Responsible Person or Family Member shall accept gifts, entertainment or other favors from any person or entity which: 1. Does or seeks to do business with the Non-Profit or, 2. Does or seeks to compete with the Non-Profit or, 3. Has received, is receiving, or is seeking to receive a Contract or Transaction with the Non-Profit. GIFT STATEMENT I certify that I have read the above policy concerning gifts, and I agree that I will not accept gifts, entertainment or other favors from any individual or entity, which would be prohibited by the above policy. Following my initial statement, I agree to provide a signed statement at the end of each calendar year certifying that I have not received any such gifts, entertainment or other favors during the preceding year. Signature Date 22 June 2016 Session 1A page 17
Exemption Letter Sample NonProfit 101 22 June 2016 Session 1A page 18