Stan Hutton - Nonprofit Kit For Dummies

Here’s a story about a nonprofit visionary who did not prioritize building a board of directors upfront. Jeffery decided to create a nonprofit organization — to help women who are single, pregnant, and homeless get off the streets, learn better parenting skills, and enter the workforce by the time their child is old enough to start kindergarten. Working alone, he wrote his mission and vision statements. He also drafted a strategic plan for the new nonprofit. By the time he started trying to recruit board members, he had set the mission, vision, and organizing documents in stone without input from any board members.

What’s wrong with this picture? Well, no board member wanted to buy into Jeffrey’s dream without having the ability to work as a team to create the mission, vision, and strategic planning documents. Jeffrey forgot that board members are vested stakeholders who should be recruited, trained, and included from day one of a new nonprofit start-up process. He failed to make forming his board of directors, upfront, a priority. Now he faces dealing with a lack of trust and a high degree of animosity between him and his new board, all of which could have been prevented if the board members had been onboard first and involved in the year-one strategic plan for the new organization.

Having a founder experience tunnel vision by doing all the upfront strategizing alone isn’t the route to take for anyone dreaming of starting a new nonprofit organization to benefit the greater good. Though board members may be in disagreement with the founder, everyone needs to plan together and be objective in the development of critical start-up documents that will shape the trajectory of the organization. So, take the time upfront to build a good board, and work with its members to achieve your collectively written mission, vision, and strategic plan.

Check out File 3-1 at www.wiley.com/go/nonprofitkitfd6e for a list of web resources related to the topics we cover in this chapter.

A board of directors (which we refer to simply as a board or governing board ) is a group of people who agree to accept responsibility for a nonprofit organization. The board — which is responsible for ensuring that the nonprofit is fulfilling its mission — makes decisions about the organization, sets policy for the staff or volunteers to implement, and oversees the nonprofit’s activities. Raising money for the nonprofit is another important responsibility that many, but not all, boards assume. Board members almost always serve without compensation; they’re volunteers who have no financial interest in the nonprofit’s business. However, they do bear responsibility for financial oversight and are held accountable for the accounting and financial reporting of the organization.

Though paid staff members generally may serve as board members, and often do serve in start-up and small nonprofit organizations, check the laws in your state to determine any restrictions on paid staff members. However, if they’re being compensated, they’re being paid as employees, not as board members. Skip to the later section “ Putting Staff Members on Your Board” for details on why it’s not recommended to have your staff serve on the board.

In addition, according to the Internal Revenue Service (IRS), a nonprofit generally should not compensate persons for service on the board of directors except to reimburse direct expenses of such service. Nonprofits may pay reasonable compensation for services provided by officers and staff. In determining reasonable compensation, a nonprofit may want to rely on the rebuttable presumption test of Section 4958 of the Internal Revenue Code and Treasury Regulation section of 53.4958-6.

A nonprofit organization has no owners, like a for-profit business does, but a governing board guides and oversees the organization like an owner might. No one owns city, state, or federal governments either, so citizens hand over the responsibility of running the government to elected officials. In turn, they expect those officials to govern the affairs of their city, state, or nation. The job of a nonprofit governing board is similar — in fact, it’s referred to as nonprofit governance. If you want more information on this type of governance than you find here, grab a copy of Nonprofit Law and Governance For Dummies by Jill Gilbert Welytok and Daniel S. Welytok (Wiley).

A board’s primary governance responsibility is fiduciary — to uphold the public trust. Laws in the United States give special rights and privileges to nonprofits recognized by the IRS as public charities. Primarily, these nonprofits earn the right to exemption from corporate income tax and the right to receive contributions that are tax-deductible for the donor. The government gives nonprofits this special status because they provide a public benefit. A board’s leadership and oversight keep the organization’s focus on that public benefit and make sure it doesn’t abuse these rights and privileges.

Suppose that a nonprofit begins with a mission to rescue horses that have been neglected or abused. People who support this idea make contributions to the nonprofit with the belief that their money is being spent on programs to help the plight of horses in need of intensive care. But unknown to the donors, the nonprofit begins to spend its money on programs to charter schools. Supporting charter schools is a worthy goal, but it’s a long way from the original purpose of helping neglected or abused horses. So, in this example, even though the nonprofit is using its contributions for a good cause, it isn’t using them as the donors intended or to fulfill the organization’s original purpose. Most importantly, the nonprofit is forgetting its mission, vision, and strategic plan. Either the founder or the governing board appears to have a case of amnesia for heading down an unapproved service road for quite a different target population.

A nonprofit that collected funds to help neglected and abused horses but instead used the funds for the personal benefit of the board members and staff would be even worse. This dishonest act is serious and possibly a crime. Aside from potential felony fraud charges, such an activity violates IRS rules and can result in the revocation of the nonprofit’s tax-exempt status.

In a for-profit business, the managers can share the net earnings (in other words, profit) at the end of the year among the company’s owners or stockholders. If nonprofit board members decide to divide surplus funds among themselves, it’s called inurement, a big word that basically means personal enrichment, which isn’t allowed in the nonprofit world. Board members and staff can’t personally benefit from nonprofit funds except for compensation for services provided or for reimbursement of expenses. A board must not only ensure that the nonprofit is doing what it set out to do but also make sure that it spends its funds properly. If a board does nothing else, it must make sure the organization adheres to these standards.