Colorado Business and Family Lawyer Blog

The BBB Wise Giving Alliance (an affiliate of the Better Business Bureau) has released a list of the most common errors made by nonprofit organizations. According to their analysis, the greatest failures occur in the areas of lack of transparency, inadequate oversight by the organization's board of directors and insufficient assessments of staff performance and the effectiveness of the organization's programs. Transparency is a term of art that refers to the ability of the public to become familiar with the details of an organization's internal decision making and expenditures, so that donors can hold the nonprofit accountable if its actions are not consistent with its stated mission.

Other items noted in the report included the importance of publishing an Annual Report with complete program, governance and financial disclosures and making the entity's most recent IRS Form 990 available on its website.

The BBB Wise Giving Alliance produces reports on over 1,200 nationally soliciting charitable organizations. The outcomes of these evaluations are available online at www.bbb.org/charity. For smaller nonprofit organizations, the BBB Wise Giving evaluations standards serve as guideposts for excellence in nonprofit governance and operations.

Schools, charities and other nonprofit entities that offer 403(b) retirement savings plans will be required to file a complete Form 5500 for their 2009 plan year and all subsequent years. Previously, the filing requirements for 403(b) plans were limited to the first page of Form 5500 identifying only basic information such as the plan name, plan sponsor, etc. Now, a complete Form 5500 will be required, although Form 5500 SF or Form 5500 EZ may be an option for "one participant plans". Section 403(b) plans that have more than 100 participants are also required to submit to an annual, independent audit and submit supporting schedules with their Form 5500, including their audited financial statements.

A "one participant plan" is a pension benefit plan that covers only an individual (or an individual and his/her spouse) who wholly owns a trade or business whether incorporated or unincorporated or a pension benefit plan for a partnership that covers only the partners or the partners and their spouses.

Continue reading "New Filing Requirement for 403(b) Plans" »

A relatively obscure provision in the 2006 Pension Protection Act could cause as many as 400,000 nonprofit organizations to lose their tax exempt status next month. The Pension Protection Act expanded the requirement to file an annual tax return to include charitable organizations with $25,000 or less in annual gross receipts. The law authorizes the IRS to revoke the tax exempt status of any organization that fails to file tax returns for three consecutive years. As a result, on May 16, 2010, many nonprofit organizations will automatically lose their tax exempt status, resulting in unexpected tax consequences for the entities and their financial supporters.

According to an article published in last Friday's New York Times, the IRS has offered some assurances that notices of revocation are unlikely to be sent out until January 2011, giving nonprofits a small window of opportunity to come into compliance with the law. Once the organization has received notice from the IRS, its revenue will become subject to income tax and its supporters will be denied tax deductions for their donations. Small nonprofit organizations are at highest risk to be impacted by the law, since they may not invest in adequate tax advice. Even organizations that have shut down operations can be affected, if they failed to properly notify the IRS of the dissolution. Directors and managers of Colorado nonprofit organizations should ensure that they are in full compliance with the applicable tax reporting laws by contacting legal counsel or a certified public accountant.

The Center on Philantrophy at the University of Indiana recently released the results of a study that surveyed over 10,000 Americans regarding their charitable donations. One of the more interesting conclusions reached by researchers was that contributors with higher income and education levels were more likely to report that they give to charities in order "to make the world a better place" rather than "to meet basic needs". A similar trend was observed in the motivation for giving among young donors. It's hard to imagine how the world becomes a better place without also ensuring that as many individuals as possible are able to meet their basic needs. However, the take home lesson for nonprofit fundraisers and marketing professionals may be the need to better communicate how basic sustenance is tied to larger social themes (such as women's equality or environmental conservation), particularly when they are targeting young, higher income or highly educated prospective donors.

Nonprofit and for profit employers should conduct periodic evaluations of their employees. An annual evaluation process is sufficient for established staffmembers, but new hires or underperforming employees should be given more frequent performance reviews. The benefits of early, consistent feedback are reaped by both the employer and the staff. Some of these benefits include:

• Identification of performance problems early in the employment relationship;

• Opportunity for the adaptive employee to modify performance to meet standards;

• Ability to reassign a valuable employee who is badly matched to his or her current role before job dissatisfaction results in loss of this employee;

• Reducing risk for the employer in the event that termination of the employee becomes necessary;⁽¹⁾

Performance evaluations should be recorded in writing and kept in a locked file. Maintaining written records of employee evaluations will enable a firm to establish relevant facts in the event of litigation. For example, if an employee who was regularly late for work is let go and then claims that he or she was fired due to racial discrimination.

Small organizations can use the same evaluation form for all employees. The use of a consistent form helps the employer to support promotion, demotion or firing decisions by referring to performance data in particular categories. Larger companies can invest the time and resources in a tiered evaluation process, distinguishing various staff levels and upper management. Similarly, even a start up nonprofit organization could use a more detailed form to evaluate the Executive Director.

Continue reading "Performance Evaluations of Colorado Employees" »

1. Recognize you are in a negotiation. When I took my first negotiation class with professor Stuart Diamond of the Wharton School of Business, he challenged us all to begin a lifetime habit of noticing the little negotiations we get into everyday. Your wife begins dropping hints about a new car. Your toddler is throwing a tantrum in the supermarket aisle. The repair shop calls to inform you that your car needs an $1,800 repair. Often we see these situations as problems, but fail to notice the opportunity. We are in negotiation all day long and we can either blindly stumble through these interactions (ignoring the wife, quieting the child, and paying the mechanic his asking price) or we can use these opportunities to practice our negotiation skills.

2. Clarify your goals. Sounds simple enough. But I can't tell you the number of times I've worked with clients who had only a vague idea of what they wanted to accomplish in a contract negotiation. Take a few moments to jot down specific short term and long term goals. Include not only what you want from this contract or venture, but how this particular agreement fits into the bigger picture.

3. Consider the value of the relationship. In their classic text "Getting to Yes", Fisher & Ury assert that positional negotiation damages relationships. What's positional negotiation? Think of the typical scene of a buyer and seller bargaining at your local flea market ("I'll give you $5.00 for this used book. " "I couldn't possibly accept less than $20.00"). Positional bargaining assumes a zero sum game in which every dollar you win is a dollar lost by the other side. You can see that stubbornness, an exaggerated opening position and use of collateral power are all successful strategies in positional bargaining, for the short term. They may work fine if you are engaged in a one time interaction, but when you are setting up a partnership that you hope will last for years, this negotiating style tends to create bitterness and hostility. Skillful negotiators broaden their viewpoint to take account of the value of loyalty, cooperation and goodwill over the long haul in a collaborative relationship.

Continue reading "Key Steps to Prepare for Negotiation" »

You've been invited to sit on the board of a Colorado nonprofit. You're honored and excited to participate. What do you need to know before you say "yes"!

What is the Role of a Director?

The board of directors' primary responsibility is to keep a nonprofit organization focused on its tax exempt purposes. The board accomplishes this by defining the organization's mission, establishing policies and plans to pursue that mission, hiring and supervising the Executive Director, fundraising and managing the organization's financial resources. Like a legislature, the board of directors votes on specific proposals and takes action by issuing a "board resolution" which directs the nonprofit on what it can or cannot do.

Before joining the board of any nonprofit, be sure you understand what its purposes are. Request and review a copy of the nonprofit's bylaws. Each and every action undertaken by the Board of Directors should promote the organization's stated nonprofit purposes. Donors depend on a diligent and independent board of directors to oversee the management and activity of the nonprofit and keep it honest.

Distinguishing Managers from Directors

A director should not be involved in the day-to-day operations and activities of the organization. Sometimes in smaller tax exempts, one or more individuals will serve as both managers and members of the board. This is acceptable as an interim arrangement, so long as individuals clearly document the capacity in which they are acting when they are performing tasks on behalf of the organization. However, the best practice is to create an independent board of directors as early as possible.

(Some confusion about roles is created by misleading job titles in the nonprofit sector. The top manager of a nonprofit is frequently called the "Executive Director". This does not refer to the manager's role, if any, on the Board of Directors. It is just another way of saying President or CEO.)

Continue reading "Whether to Join a Colorado Nonprofit Board of Directors" »

Looking at recent news stories reporting on individuals who used charitable organizations for personal gain can be misleading. After all, when Longmont, Colorado resident Mark Schifter solicited over $180,000 in supposedly charitable contributions and pocketed all but $29,500 for himself, it's fairly easy to identify the problem: it's fraud. Similarly, recent reports that Senator Jim Bunning has used the Jim Bunning Foundation to tax shelter his profits from the sale of autographed baseballs involve facts that practically scream "foul". Most of us recognize that working one hour per week does not merit a $100,000 salary.

The trouble is the "private benefit" doctrine and its sister "private inurement" rarely present themselves in such an obvious way. They are subtle concepts introduced by statute, refined by decades of caselaw and stretched to their fullest capacity by IRS regulations and letter rulings. As a result, well-intentioned and diligent nonprofit managers and board members can easily discover that their organizations are violating the private benefit and private inurement rules in unexpected ways.

Private inurement doctrine stands for the principle that none of the income or assets of the nonprofit organization should be allowed to directly or indirectly benefit any individual who has a close relationship to the organization (officer, board member or key employee) or who is in a position to significantly influence the nonprofit. Private benefit doctrine involves the same principle, but removes the limitation that the recipient of the benefit is an insider, focusing instead on whether the provision of this benefit is properly related to the nonprofit's tax exempt purpose. Private inurements or benefits can take the form of excessive compensation, a lease with unusually favorable terms, providing services at a lower cost or making recommendations of a particular product or business.

Continue reading "How Colorado Charities Can Steer Clear of Private Benefit Pitfalls" »