Why does good governance matter in a nonprofit?
The number one reason why people don’t give to a nonprofit is trust. Building trust comes down to transparency. In essence, do they know enough about your organization to give up their hard-earned money?
In today’s marketplace, donors and grantors are demanding more accountability. Gone are the days where it was difficult for potential donors to find information on nonprofit organizations. Not only can you look up anything online and have news articles on specific topics sent to your inbox, the 990 informational returns and financial statements for any entity can be found online.
Board members need to understand their roles and responsibilities in order to protect the reputation of the organization because donors are likely talking about your organization and the work you’re doing in the community. Don’t let a lack of knowledge or common board governance myths get in the way of doing your part as a board member.
Duties of Board of Directors
Being on a nonprofit board is rewarding, but it doesn’t come without some responsibilities. In fact, a common misperception about being on a nonprofit board is that, because you are volunteering your time without pay, you aren’t liable for anything. In fact, there are instances where you may have to pay out-of-pocket fees or fines for not fulfilling your duties as a board member.
Board duties can be boiled down to three categories: duty of care, duty of obedience, and duty of loyalty. Failing to act with due care in governing the organization, engaging in a conflict of interest transaction or act of disloyalty, or failing to follow the organization’s statutes are all reasons you could be held liable as a board member.
Duty of Due Care
The duty of care means you, as a board member, act on behalf of the organization to make prudent decisions as any normal person would. To make those decisions, you need to be involved and engaged, attend meetings, and ask questions.
Duty of Loyalty
The duty of loyalty means you put the organization’s interests ahead of your own.
Duty of Obedience
The duty of obedience means you are a steward of the organization and involved in its mission. Deviating from the mission of the organization has consequences. Nonprofits are given tax-exempt status because their product or service is for the general public and the good of the community. Straying from that work could result in losing your tax-exempt status.
As an individual board member, your role and responsibilities are:
- Attend board meetings
- Be prepared and informed
- Speak your mind and ask hard questions
- Go with your gut feeling (because it’s often correct)
- Be a steward of your organization’s assets
- Be a servant leader in your organization
In addition to fulfilling your duties, there are preventative measures you can take to protect yourself as a board member, but they do not replace or cover you if you are neglecting your responsibilities.
It is a best practice to keep accurate minutes at board meetings. To prove you’ve acted in good faith of the organization, you need a tracking mechanism to show what you talked about and the conclusions the board came to. Remember, if it’s not documented, it didn’t happen. Also, be sure to include any members who abstain from voting or vote against a motion in your minutes.
There’s also some federal protection through the Volunteer Protection Act of 1997, and Oregon has special protection for those who serve as directors without pay. Directors and officers (D&O) insurance can protect in many situations but should not be considered a catch-all and will not cover any board member who has not fulfilled the three duties.
Nonprofit Leadership Guide
Download our guide to effective nonprofit board governance, including how to avoid blurring the line between board governance and management as well as how to attract millennials to serve on the board.
Common Nonprofit Compliance Myths
Noncompliance is the number one reason nonprofits lose their tax status, and unfortunately, a few common myths can lead board members on the path to noncompliance. Below are eight commonly held beliefs about being on a nonprofit board and what you need to know instead:
Myth: Since a 990 is an information return and tax is not paid, filing late or not filing an extension doesn’t matter.
Fact: The fine for not filing on time is $100 a day for organizations with one million or more in revenue. If you don’t file your 990 at all, the organization’s status exempt status is automatically revoked in three years.
Myth: We don’t have any money or didn’t fundraise this year so we don’t have to file anything.
Fact: Most tax-exempt organizations other than churches and certain church-related organizations are required to file an annual information return or notice with the IRS. Gross receipts just determine which form you fill out.
Myth: You only need an IRS exemption.
Fact: Most states require a separate exempt application process and charitable organizations must register with local state jurisdiction, such as the state attorney general. For example, if you’re working with an Oregon nonprofit and want to solicit donations in another state, there’s a pretty good chance you have to file a charity registration in that state beforehand.
Myth: Any fundraising activity is acceptable so long as all profits go to charitable purposes.
Fact: Most fundraising activities are considered unrelated activities and could be subject to the unrelated business income tax (UBIT) unless specifically excluded per IRS rules. It’s important to know the different rules in different states and what the reporting requirements are.
Myth: Per IRS rules, an organization must adopt, at a minimum, those policies asked about on Form 990.
Fact: Policies and practices described in Form 990 Part IV are not required by the IRS. However, the IRS will use this information to assess noncompliance and the risk of noncompliance. It’s important to prioritize the ones that are going to keep the organization out of trouble. Even if you don’t have to have it, as a best practice, organizations should consider how not having it would be perceived and if the cost to implement the policy is worth the effort.
Myth: A conflict of interest policy is not required for smaller organizations who don’t file Form 990.
Fact: A policy governing conflicts of interest is the most important policy a nonprofit board can adopt regardless of size. Some state laws governing nonprofit corporations require nonprofits to have a conflict of interest policy.
Myth: Risk management just means buying general liability insurance and/or D&O insurance to protect the board.
Fact: Insurance is not a replacement for fulfilling your duties as a board member. Certain acts of self-dealing, actions or proceedings brought by the state attorney general and intentional reckless acts, gross negligence or actions based on fraud are excluded from any protection for those involved.
Myth: Any penalties assessed by tax authorities for noncompliance are part of operational activities and can be paid by the organization.
Fact: Most state attorney generals have issued guidance that charitable assets should not be used to pay fines and penalties assessed to an organization. Instead, these fees go to those charged with the fiduciary responsibility of the organization. In other words, board members may have to pay fines and penalties out of their own pockets.
Meet the Author
Elsa Romero, CPA
Aldrich CPAs + Advisors LLP
Elsa Romero brings nearly 20 years of experience and specializes in consulting and tax compliance services for closely-held businesses, nonprofit and government clients. Her knowledge of complex tax issues is invaluable and clients appreciate her thoughtful approach to their needs. She is a valuable resource for organizations seeking specialized attention for tax compliance, board governance…
- Tax planning
- Nonprofit organizations
- Government entities
- Privately held companies
- Board governance
- Certified Public Accountant