Legal Issues OverviewSeptember 27, xxxx

PresenterName

Organization

The Standards for Excellence

8 Principles & 55 Standards Mission and Program Governing Body Conflict of Interest Human Resources Financial & Legal Openness Fundraising Public Policy & Public Affairs

The Standards for Excellence

A blueprint for well managed and responsibly governed nonprofit organizations

The Standards for Excellence

Educational resources to help you build a stronger, more attractive and sustainable nonprofit institution.

Legal Issues Quiz

#1: What is the most important distinction between a nonprofit corporation and a for-profit corporation?

Key Concepts

Nonprofits exist to serve a public purpose that Congress (via the IRS) has recognized as appropriate for tax-exemption.

A nonprofit may not inappropriately benefit private individuals

Nonprofit doesn’t mean you can’t make a profit, it means you can’t distribute the profit.

Legal Issues Quiz

#2: What are the governance documents that you are required to submit to the Internal Revenue Service in order to maintain your organization’s exemption under section 501(c)(3) of the Internal Revenue Code?

What are governance documents and why do they matter?

Articles of Incorporation or Corporate Charter

Bylaws The two-part test

“organized and operated exclusively for one or more exempt purposes.”

Reporting changes to the IRS Form 990, Part VI, Q4

Legal Issues Quiz

#3: What is the legal standard that is used to judge whether a nonprofit board member is fulfilling his/her fiduciary responsibilities as a board member?

Standard of Care forBoard Members A director shall perform his

duties: in good faith in a manner he

reasonably believes to be in the best interests of the corporation, and

with the care that an ordinarily prudent person in a like position would use under similar circumstances.

Reconciling state and federal requirements

Legal Issues Quiz

#4: Is it necessary for board members to have insurance to protect them from being held responsible for debts incurred or harm caused by a nonprofit corporation?

Yes, you do need insurance.But why? Corporate structure Federal Volunteer Protection

Act of 1997 State Volunteer Immunity

Laws

Corporate veil can be pierced

Immunity laws don’t cover Gross negligence Willful, reckless, flagrant,

intentional or criminal conduct

Fed VPA doesn’t cover employees

May require some insurance coverage

You may still get sued

Legal Issues Quiz

#5: Describe one situation that insurance will not cover where a board member may be held liable for debts incurred or harm caused by a nonprofit corporation?

Potential Personal Liability

State or federal income tax witholding, FICA, state sales tax

Penalties under Maryland Charitable Solicitations Act

Federal excise taxes for an “excess benefit transaction”

Legal Issues Quiz

#6: What is the most common situation where a nonprofit corporation might be accused of inappropriately benefiting a private individual?

Inappropriate Private Benefit

Excessive compensation Paying vendors more than fair

market value for goods and services

Lavish expenses, first class travel Unreported taxable employee

benefits (e.g. spousal travel, personal use of car, life insurance)

Excess Benefit Transactions

“disqualified person” “excess benefit transaction” Safe Harbor for Compensation decisions

Disinterested decisionmaker Market basis for decision Decided in advance Documented

Legal Issues Quiz

#7: Is it unlawful for a nonprofit corporation to enter into a contract to purchase goods or services from a company owned by the spouse of a board member?

Insider Transactions

State vs. Federal rules Assess the substance Clean process

Disinterested decision makers Disclosure No participation by interest party Market Basis Document in minutes

Public relations assessment

Questions to consider about Conflict of Interest

Do you have a conflict of interest policy? Who does it cover?

Do board members (or others) fill out an annual conflict of interest statement?

What happens once a conflict is identified?

Is your nonprofit transacting business with board members? With other insiders?

Legal Issues Quiz

#8: What documents and information does a nonprofit corporation need to make available to the public?

Is Your Organization Transparent?

Federal requirements Form 1023

(Pre-87 if you had it in 87) Form 990 IRS determination letter

State requirements “current financial statement” Statement of “programs and

uses for which funds are requested”

But What About…

Local, state or federal open meetings laws Do board meetings need to be

open to the public? Local, state or federal public

information laws Contractually imposed

requirements

Legal Issues Quiz

#9: What information contained on those documents is likely to be of interest to a member of the public?

What’s on the Form 990?

program, management, fundraising breakdown

joint cost allocation program service accomplishments any receivables from officers, directors,

trustees, key employees debts, generally amount of net assets compensation of officers, directors, key

employees compensation of consultants political expenditures, if any lobbying expenditures, if any transactions with insiders transactions with non-charitable exempt

organizations

What’s on the Form 990? Mission Statement Number of independent board members Policies requested:

Compensation Policy Expense Reimbursements Conflicts of Interest Auditor Independence Whistleblower Joint Ventures Solicitation and Acceptance of Gifts Document Retention and Destruction

Public Availability of financial statements, conflicts policy, and governing documents

Board’s review of the Form 990 prior to filing

What would happen if…

a reporter showed up and asked to see your: Form 990? Form 1023 IRS determination letter

Legal Issues Quiz

#10: Does the fact that your organization is exempt under 501(c)(3) entitle you to an exemption from the following state taxes?

Corporate income tax Unemployment tax Sales tax on items sold or purchased Personal property tax Real property tax

Exempt from what?

State corporate income tax, yes

Unemployment Federal – yes State - no

Sales tax Sales – no Purchases – yes

Property tax - usually Personal property Real property

Legal Issues Quiz

#11: You have just learned that your nonprofit’s corporate charter has lapsed. What is the most likely reason this happened?

Legal Issues Quiz

#12: An important bill is pending in the legislature that will affect the interest of the people your organization serves. May you send out an email alert to your clients asking them to urge their state senator to vote for the bill?

Lobbying is just fine!!

What is the difference between advocacy and lobbying? Advocacy is defined as

active support for a cause, idea or policy.

Lobbying generally consists of communications that are intended to influence specific legislation.

How much lobbying can we do?

Example: $1million expenditures

20% x $500k = $100k 15% x $500k = $ 75k

Maximum lobbying amount: $175,000

Maximum grassroots amount: $ 43,750

4 year averaging

Substantiality Test 501(h) election

Form 5768 20% of 1st $500k 15% of next $500k 10% of next $500k 5% above that, to max

of $1million grassroots is 25% of

total

Legal Issues Quiz

#13: You have been asked to buy a $250 ticket to a fundraiser for the Governor? May you do so?

Partisan political activity is not fine!

What is the difference between partisan and non-partisan activity? Partisan – supporting or

opposing a candidate for public office

Don’t allow any of your resources to be used.

Nonpartisan Voter registration Voter education, candidate

forums, surveys GOTV BE CAREFUL, GET

COMPETENT LEGAL Henry Bogdan,

hbogdan@mdnonprofit.org

Legal Issues Quiz

#14: Your organization is having a bond bill introduced for funds to build a new facility. Are you required to register as a lobbyist with the state ethics commission?

Where do I register?

Federal, State or local lobbyist registration rules

Maryland State Ethics Commission Must register if you talk to

legislative or executive branch officials, and

Receive compensation of $500 or more, or

Spend $500 or more Compare with IRS

definition

Legal Issues Quiz

#15: Your organization wishes to conduct a raffle to raise money to support your cause. May you do so? If so, what special arrangements need to be made?

A patchwork of requirements…

Never tax-deductible Statewide

House raffles

County by County Bingo Raffles tip jars Slots Casino nights

Additional information in members-only area.

Legal Issues Quiz

#16: Your administrative assistant worked 50 hours a week for the last several weeks and now wants to be paid time and a half for overtime. Do you have to pay it?

Exempt or non-exempt?

Fair Labor Standards Act New Fair Pay Regulations effective 8/23/2004

Workers making less than $23,660 per year, or $455/week, are covered by the FLSA… unless they fit under certain "exemptions"

Exemptions are for: Executive Employees Administrative Employees Professional Employees Employees in Computer Related positions Outside Sales Employees

For more informationwww.dol.gov/esa/regs/compliance/whd/fairpay.main.htm

Legal Issues Quiz

#17: Your organization needs an entry-level professional to assist with a 6 month community education project. May you pay the person as an independent contractor, without providing benefits or withholding taxes?

Employee or Independent Contractor? Employee if you can control what is done and how it is done Independent contractor where you control result of work, but not

means and methods of accomplishing it. Based on “control” and “independence” from totality of facts and

circumstances Behavioral control (when, where, training and instruction) Financial control (unreimbursed expenses, financial risk,

investment, other clients, pay formula) Type of Relationship (contract, benefits, duration)

If you incorrectly classify, you can be held liable for taxes you failed to withhold and penalties.

For more informationwww.irs.gov - search for Publication 15-A (Section 2)

Additional Resources

Standards for Excellence® Educational Resource Packets

Conflict of Interest Legal Requirements Checklist Legal Compliance and Liability Issues

Questions and Answers

Insert Name and Contact Information of Presenter