Experienced lawyers make ideal members on nonprofit boards, but defending them can result in a conflict of interest.
Nonprofit organizations deserve to carry out their charitable work with peace of mind. However, starting a well-intentioned nonprofit and ensuring it is accountable is more complicated than most people think. Incorporating funding plans, keeping proper financial records, getting IRS tax-exemption status, and putting together an effective board is part of the process.
Dedicated nonprofit lawyers have the experience required to assist these organizations at every level. These are seven things lawyers need to know before taking on nonprofits as clients.
1. Conflict of Interests
Lawyers know that they cannot represent a nonprofit in litigation if they are on their board of directors. Even though their legal backgrounds and experience can be invaluable in advising on board decisions, that is as far as they can help. Additionally, the legal counsel representing a nonprofit can only describe the organization, not its officers or individual directors.
It is essential to offer written legal advice to the charitable organization. This helps ensure effective communication with the board and other decision-makers.
2. Laying a Proper Foundation
From the start, nonprofits require a proper foundation if they are to flourish. Lawyers with nonprofit experience can assist with the necessary research to ensure the organization is viable. Legal counsel must discuss every aspect of the organization’s creation and all the beneficial alternatives. These alternatives may include the option of working with fiscal sponsorship, existing organizations, or donor-advised funds.
3. Importance of the Purpose Statement
The purpose statement is an essential document for the nonprofit. But care is needed to ensure it doesn’t create problems later for the organization. This can happen if it is peculiar and restrictive. These restrictions are not too difficult to amend, but risks are involved if a charity forgets to amend articles as decisions are made.
An attorney’s advice can help the organization carefully consider the advantages and disadvantages of the purpose statement and accommodate future changes to its mission. Also, board members must be aware of the need to amend governing documents and the restrictions they face in asset usage should any changes occur.
A broad purpose statement can help avoid overly restrictive constraints on the mission, activities, assets, and article amendments over time.
4. Compliant Bylaws
The bylaws of every nonprofit are their main governing document and must be established from the outset. They are meant to supplement the laws defined by the state (and sometimes city) where the nonprofit is based.
These legal documents are created to ensure the protection of the organization. They outline the authority levels, rights, and expectations. Non-voting directors cannot be included in the bylaws of the organization. Each director has a right to vote on all matters of the board, except in minimal situations.
Lawyers review these governing documents to ensure that it complies with the state laws if there is a written consent provision. This is vital since unanimous written consent is required in most states, not just from a few directors.
5. Value of Lobbying Election
Charities need the correct advice when it comes to utilizing tools allowing them to advance their missions. Lobbying is one of these tools but can often not be used by nonprofits. This is because they haven’t made the 501(h) election when filing the Form 1023 exemption application with the IRS. This exemption allows the organization to spend money on lobbying within the defined general limits allowed, and these are pretty generous. Good legal advice can make them aware of the need to keep a clear record of these.
6. Directors and Other Classifications
A good lawyer offers their client recommendations on how directors should be elected and on their roles. The board of directors must share the vision of the organization and provide fiduciary duties. Making organizations aware of the importance of orientation processes for new directors is also one of the duties a lawyer can offer their nonprofit clients.
Understand the difference between independent contractors, volunteers, and employees is vital, and lawyers can help ensure these classifications aren’t mismanaged.
7. Financial advice
The ability to give financial advice is invaluable for nonprofit clients. This advice includes:
- Recommendations on how clients must invest prudently for overhead expenses, organizational policy creation, risk management, and technology.
- Tax advise about certain circumstances where directors may be held personally liable. Directors are also responsible for failing to act against excess benefit transactions, unpaid payroll taxes, etc.
- Good financial advice includes encouraging the nonprofit to obtain insurance protection for its directors and officers.
Nonprofit organizations are on the rise. They benefit from the proper legal representation and advice, ensuring their day-to-day tasks are not putting their charity goals at stake. Lawyers experienced in representing these organizations understand the expectations of legislation and ensure they comply.