What does it mean to be a director on a nonprofit board?

Is it a simple matter of lending your name? Opening your wallet? Going to a few meetings a year? Or does it have a hidden liability that you want to avoid? Can you be sued if something goes wrong, even if it’s not your fault and you may not have even known about it? What if the organization runs into financial problems? Might the Board or others look to you for a bail out? What should you do or not do if you think the organization is going in the wrong direction? And what if a director becomes nasty or antagonistic to everyone else on the board. Finally, what if the executive director forgets there is a board…

The word “Governance” has become ubiquitous today… It is used everywhere for everything. But what really should it mean to you as a director? The rules are quite clear – in fact, they serve as guardrails to prevent bad behavior and protect the director who takes the “job” seriously.

Three fiduciary duties are demanded of a director: (1) Duty of Care; (2) Duty of Loyalty; (3) Duty of Obedience. How do those legal terms translate into real life?

  • The Duty of Care requires attention – to meetings; minutes; reports (yes, even financial reports); day to day operations of programs and initiatives.
  • The Duty of Loyalty requires that you put aside your own personal interests and be faithful to the organization you serve. Matters discussed at meetings are confidential. You may not promote your own business or financial interests instead of that of your organization.
  • The Duty of Obedience simply means that you must respect the legal rules which guide a nonprofit organization. In Pennsylvania our guide is The PA Nonprofit Corporation Law which spells everything out in detail – and two regulating bodies: The Office of Attorney General and the Internal Revenue Service. In the event you serve on a religious board, there may well be faith-specific rules to respect and if you serve on a professional board there are rules of licensure and practice.

Everything hinges on an organization having an effective and committed board. A well-run organization will make every effort to build a LEADERSHIP TEAM that looks to the future. Does a director have an obligation to investigate if he or she suspects something is amiss? Must that director become a detective? Pennsylvania has a realistic standard of good faith -a director should act in good faith – as a reasonable man would under similar circumstances. That may mean calling the Board’s attention to a problem or objecting on the record to an act the director simply cannot endorse.

Unfortunately, there are numerous instances where directors simply do not perform admirably. It may be that the organization’s environment does not empower the director or that the director blanches in the face of a hijacked board. To prevent such occurrences, many organizations have created policies to guide the board and individual directors, as well as an audit committee to carefully monitor the internal controls of an organization. An organization’s future depends on getting it right.

By Penina Lieber


Realities of Nonprofit Fundamental Change

Nonprofit organizations are particularly “people centric”. Their volunteers, members and directors carry with them intense emotional involvement and passion for the organization’s mission.  In fact, they frequently experience extreme sensitivity and even trauma when facing a fundamental change.  These changes often arise during key moments in a nonprofit’s life cycle, whether the organization is growing, restructuring, merging, acquiring or even dissolving.  Pennsylvania law is explicit about the statutory procedures to be followed during a fundamental change.  It lays out the signposts: corporate action; development of a plan; notice to stakeholders; and regulatory approvals.  But these roadmaps do not tell the whole story.

Articles of Amendment: This change can be utilized for a variety of reasons from simply a name change, to a membership change or to enlargement of a purpose.  Besides those rather simple acts, there are also opportunities for restructuring in terms of relationships and overall identity.  This is often evident when a local chapter seeks independence from its national parent. In such cases, the emotional toll can include a sense of disloyalty or even sadness at leaving its nest.

Merger: In today’s world, there are many nonprofit organizations serving similar causes.  The competition can be difficult for organizations without a strong core of support.  Although the prospect of merging with another compatible organization appears initially to be attractive, it often leads to mixed feelings when the reality hits that one partner to the merger will survive while the other will be extinguished.

Division: This change initially seems like a win-win – but ultimately, there comes an inevitable concern of additional administrative burdens, i.e. another board; another set of books; additional paperwork/meetings and even more filings.

Sale of Assets: This change can be rigorous, depending on the size of the sale and the nature of the assets being sold.   If it is a health care entity, there are special rules regarding fair market value and appraisals and approval by the attorney general; if it is a sale of real property, there are requirements for detailed due diligence in every aspect of the transaction. And if it is a charitable entity, the statute specifically provides that assets given for a charitable purpose may not be diverted from that object for which it was given. A resulting foundation may be created to hold those special assets and keep them sacrosanct for their intended purposes.

Dissolution:  It is generally a sad time, whether caused by financial worries, diminution of members or lost funding. There are often wrenching decisions to be made regarding potential liability, remaining property and adequate notice to creditors.

Although the statute is clearly written with how-to processes, anyone contemplating fundamental change must factor in the human element that is sure to pose last minute complications.


Nonprofit Governance in the Zoom Age

By necessity, we have all become “experts” of sorts in Zoom meetings. We use them for all purposes: corporate meetings, classes, family gatherings, happy hours and even travelogues. The upside is that we do not have to travel long distances or give up considerable time away from home or office. The downside is that we are faced with technical glitches and impersonal relationships. Rather than sitting in a common setting, we now see little faces on a big screen.

How are organizations coping with these monumental changes?

Their strategies and outcomes vary from one to the other depending on size and structure, frequency of meetings, age of participants and technical knowhow.

Some organizations are quite skilled at convening even large conclaves; others find that their audience is not always on equal footing. This is not a frivolous concern because it deals with governance and the discharge of basic fiduciary duties. In today’s world, governance rules! And along with the principles of governance comes the urgency of compliance.

This is a serious matter since the IRS has now joined state attorneys general as key regulators of the nonprofit world. As a result, the operative documents of a nonprofit corporation must be consistent with the best practices of the sector.

  • Bylaws need to expand beyond mere conference calls to authorizing virtual meetings and possibly virtual voting.
  • Minutes may now take the form of recorded meetings or even automated transcripts.
  • Discussions may be curtailed by shortened agendas, muted “mics” and “stop video” options.
  • In some cases, less technically proficient attendees may choose to call in without even signing in.

Despite digital advances, it is important to remember that basic fiduciary duties continue to demand adherence. The Duty of Care still mandates attention and attentiveness. It is still necessary to prepare for the meeting well before it is convened.

Agendas must be circulated – and read. Financial statements must be distributed – and studied.
“Share screen technology” does not suffice in lieu of pre meeting diligence.
Hosts for the meeting need to be super organized because there is so little “downtime.”

Zoom makes everything feel like time is of the essence before fatigue sets in. The Duty of Loyalty is not obviated because of remote discussion. In fact, confidentiality is still a critical component of good governance. Nor has the Duty of Obedience been diluted by distance; in fact it is more important than ever given the targeted questions on the federal 990’s and 1023’s. Finally, today’s policies and procedures should be drafted consistent with the realities of actual demands of conflict, decision -making and process.

The digital revolution has brought with it challenges, but also new ways of thinking and communicating. Nonprofit law has always represented to me an evolving process for growth that reflects the changing needs of our world. This should be no different.

Would you like to discuss “Nonprofit Governance in the Zoom Age” more? Please add your comments or contact me directly.


What can religious organizations do and not do?

This is an interesting question. The separation of church and state in the United States values an atmosphere of “benign neutrality”, where there is no definition of “religion” and few parameters of its activity. Essentially, so long as it does not violate established public policy or commit illegal acts, religious activity is deemed acceptable. Although Section 501 (c)(3) of the Internal Revenue Code includes the “advancement of religion” as a charitable purpose, it does not define what that conduct really looks like.

We often use the term ‘religious organization’ to refer to various faith based organizations, like the Salvation Army, Catholic Charities, Jewish Federation, Lutheran Social Services and East End Community Ministry to name just a few. These faith based social service organizations so often are critical safety nets to alleviate poverty, hunger, delinquency and homelessness. Take a moment and just think of 2020 as an example where their services were incredibly important and visible as hundreds of cars snaked for hours around long lines run by Food Banks just to obtain needed food donations.

Although the term ‘religious organization’ refers as well to ‘churches’, a church is used to mean houses of worship – whether a church, synagogue, mosque or temple. These houses of worship are treated with special consideration, including automatic exempt status, respectful church audits, deductibility for charitable contributions and an overall “hands off approach” by government regulators.

Nonetheless, churches are prohibited from doing certain things: (1) they cannot intervene in political activity; (2) they cannot support or oppose a candidate for office; (3) they cannot engage in activities that are illegal or that violate public policy; and (4) they cannot engage in substantial lobbying activities. It should be noted that they can, however, engage in advocacy and education, hold public forums and debates, and publish voter guides. And, of course, individual clergy and members can speak in their own personal capacities on issues of concern.

The treatment of religion and religious institutions in the United States is one of the hallmarks of our society. Where other countries had state religions and provided charitable services through the ‘Church,’ Americans saw it differently and formed associations to best express their individual beliefs. That independence of thought and action remains with us today.


Are you planning to start a nonprofit?

Are you thinking of starting your own nonprofit?  What do you hope to achieve? How will you go about starting it?  What benefits do you anticipate?  What drawbacks might you expect?  If these questions seem unnecessary, you may be in for a big surprise.

Nonprofits are an important feature of American society.  From the earliest days of our history, Americans formed “associations” to accomplish purposes about which they cared deeply.  These associations express the American spirit.  Where other countries relied on State or Church to provide critical social services, Americans chose to address pressing social issues quickly, efficiently and independently.  But anyone considering starting a nonprofit today should recognize that it may not be an easy road.  It is essential to have clear goals and to understand the rules that apply.

  1. What do you hope to accomplish? Who will help you?  Does an existing organization already do this work?
  2. Where will you get the money for start up expenses? Can you afford to self-fund or do you have a source for seed money?  How much will it cost?
  3. Do you expect to make a salary?
  4. If you form a charity, do you know what “private benefit” and “private inurement” mean?
  5. Are you aware that a charity cannot engage in political activity or support/oppose a political candidate?
  6. And finally, do you know that a charity must keep its assets in the charitable sector even after the organization dissolves?

It’s probably more complicated than you might have initially thought.  Both the State Attorney General and the Internal Revenue Service have oversight over nonprofit organizations – and they cannot solicit contributions without registering with the State.  Also, be aware that a public charity must show that much of its revenues come from public sources, not from single donors.  And – one last thing:  should you be a nonprofit corporation or an unincorporated association or possibly even a charitable trust?  All of the above can be exempt from federal income tax if they qualify, thus providing an attractive opportunity for donors to give tax deductible contributions.

But don’t be discouraged by the above.  If you have a cause about which you are passionate, go ahead with your plans.  Take the time, though, to get professional help and educate yourself about the ‘do’s and don’ts’ of starting and running a nonprofit.  Don’t be discouraged.  If you really believe in your cause and are willing to do some hard work, proceed.  This can be a great adventure for an educated start-up entrepreneur.  It just takes careful planning and realistic goals.    


Where have all the social clubs gone?

When you think of social clubs, you ordinarily think of fraternities and sororities, golf clubs, swimming clubs, tennis clubs and so many more. But the category of social clubs extends to all kinds of organizations that reflect many different interests: hobby clubs, bridge clubs, dog clubs, campground associations, car clubs and flying clubs. The list can go on indefinitely. What binds them together, however, is that they are tax-exempt nonprofit organizations under Section 501 (c)(7) of the Internal Revenue Code. Being a (c)(7) social club is both a blessing and a curse. The good news is that its exemption enables the club to escape paying federal income tax; the downside is its restriction on allowable outside revenue, which for many clubs would otherwise constitute its lifeblood. In other words, the clubs cannot indiscriminately open their doors to nonmembers or the general public without jeopardizing their status. 

Given that restriction and the costs of doing business today, many social clubs have found it too difficult to continue. Think about the need to maintain expensive facilities, cope with shrinking membership, compete against commercial enterprises – and you can see why so many clubs are struggling. In addition, cultural changes have driven the demise of numerous social clubs. Our society today is more diverse – less gender focused or religiously segregated. People are both more and less connected because of technology and more families now depend on two incomes, thereby lessening the amount of discretionary free time. And I would be remiss if I did not mention the dramatic effect of the Pandemic on the social club. Whereas, these clubs traditionally offered opportunities for gathering, fellowship and camaraderie, today’s necessities mandate social distancing and limited gatherings.

So, what is a club to do? Some have declared bankruptcy, others have sole their assets and still others have shifted gears from being “clubs” to shared workspace venues. Still others are holding fast to emptying buildings and “houses” without students. The social club often represented longstanding institutions in their communities; and their demise is not only a loss to their membership but also to their larger communities. It will be interesting to see what new forms of “social clubs” evolve post-Pandemic. I would expect that they will have more flexible formats, more realistic acceptance of current norms and less dependence on bricks and mortar. As always, the nonprofit sector mirrors our society – its values and its problems- as a whole.