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Nonprofit Financial and Legal Compliance Basics Checklist
SE4N's A. Michael Gellman (CPA, CGMA) and Benjamin Takis (JD) jointly authored this detailed checklist to cover the essential basics of financial and legal compliance that should be part of any nonprofit organization’s sustainability planning and risk management process, including Conflicts of Interest, Internal Controls and Risk Assessment, Employment and Human Resources, Financial Reporting and Audits, Government Grants, Governance and Corporate Records, and other Key Risk Management Areas.
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Yes, a governing body of the organization must vote to accept (approve) or not accept (not approve) the final audit reports received from the auditors. This is not only a generally accepted best practice but also a compliance requirement because the audit reports and the auditing process will be considered incomplete unless the independent auditors receive formal approval notice from the governing body of the organization.
501(c)(3) nonprofit organizations rightfully focus much of their attention on complying with laws involving conflicts of interest among Board members, officers, and management. However, the “private benefit rule” is often overlooked and reaches far beyond an organization’s insiders. A basic understanding of the private benefit rule can help you navigate potential issues in a wide variety of programs and activities.
An organization’s Bylaws and applicable state nonprofit corporation laws will determine whether a Board Chair can be appointed for less than a full term, but there is usually no restriction against appointing an “interim” Board Chair who serves on a temporary basis until a longer-term successor is chosen. However, it is important to be aware that interim directors and officers are subject to the same fiduciary duties and other responsibilities as other directors and officers.
It is well-established that a nonprofit organization’s tax-exempt status cannot be revoked by the mere issuance of an executive order. Revocation generally requires an individualized examination by the IRS with a notice of determination and opportunities for organizations to appeal both within the IRS and in federal courts, subject to certain specific exceptions (such as automatic revocation for failure to file Forms 990 for 3 consecutive years).
Virtually all nonprofit organizations aspire to accumulate operating reserves to help bridge short-term disruptions and funding gaps and to provide working capital for the future. What most people do not think about is how these operating reserves could be used or spent when the need arises. Misunderstandings can be avoided by making sure your organization’s operating reserve policy has provisions for the future allowable use (spending) of operating reserves.
Internal Revenue Service (IRS) Revenue Procedure 2014-11 describes the process for reinstatement of tax-exempt status that has been automatically revoked for failure to file annual tax filings. Under this guidance, it is not entirely clear whether the Section 5 and Section 6 retroactive reinstatement processes require filing past due Forms 990-N. However, there are strong arguments that filing Forms 990-N for prior years should not be required under any of the retroactive reinstatement processes.
Nonprofit organizations often come up empty-handed and frustrated when their attempts to borrow funds or establish a line of credit from a bank hit multiple roadblocks. This can lead to delays and, at worst, being denied or outright blocked from starting the application process. Using a business-like approach to planning and having regular meetings with your bank representative is the best way to avoid these outcomes.
In theory, there are ways for a 501(c)(3) public charity to transition to operating as a taxable for-profit business entity. However, this is a difficult process with many legal pitfalls, including the excess benefit transaction, inurement, and private benefit rules under federal tax law, and state laws governing nonprofit corporations and the use of funds received for charitable purposes.
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No one questions whether it is important for nonprofit organizations to build and maintain adequate operating reserves. This is a best practice that is not only widely accepted, but also an expected goal for senior management and governance to pursue and protect. However, there often is a tendency to focus too much on the short-term reasons for building and maintaining operating reserves causing us to lose sight of the often more important long-term purpose for building operative reserves.
The Limited Liability Company (LLC) is a flexible and widely used entity structure in virtually every industry, from one-person businesses to some of the largest companies in the world. LLCs can also be useful as a subsidiary or joint venture vehicle for certain nonprofit programs or activities, but the use of single-member and multi-member LLCs in a nonprofit context is often misunderstood.
The word “budget” has almost universal recognition. Budgets have a very broad spectrum of usage and applicability beyond just nonprofit organizations, ranging from large entities (governments, Fortune 500 companies, professional sport teams) to small businesses, individual entrepreneurs, and even smaller applications such as families juggling home budgets and providing their children with early exposure to budgets through managing allowances.
I often receive inquiries from entrepreneurs who are looking to add a philanthropic component to an existing for-profit business, such as by forming a nonprofit as a charitable arm or subsidiary of their business or starting a corporate foundation. These ideas are usually well-intentioned. However, mixing business and charitable activities too closely can make IRS approval of 501(c)(3) status an uphill battle.
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This template provides a standard set of resolutions for a newly formed nonprofit organization convening its first Board of Directors meeting. This sample document includes language covering actions such as adoption of Bylaws and key policies, officer appointments, banking authorizations, authority to file the Form 1023 and other applicable tax exemption applications or registrations, and more.
This Document Retention and Destruction Policy template is intended to help your nonprofit organization ensure compliance with the Sarbanes-Oxley Act and other applicable record-keeping laws, and to avoid inadvertent destruction of important organizational records. Unlike many other document retention and destruction policies (sometimes called “record retention policies”) that specify difficult-to-track holding periods (3 years, 7 years, 10 years, etc.) for specific categories of documents, this template uses a more flexible approach that aims to minimize administrative and operational burdens while addressing key compliance issues.
This Whistleblower Policy template is intended to help your nonprofit organization establish a process for Board members, staff, and others to report potential violations internally in good faith without fear of retaliation. This sample document includes basic language addressing the mechanism for reporting and investigating whistleblower claims, the prohibition on retaliation, and other provisions to help ensure compliance with the Sarbanes-Oxley Act and demonstrate your organization’s commitment to transparency, accountability, and good governance.
This template volunteer service agreement provides basic terms and conditions that are generally recommended for nonprofit organizations when using volunteer services. This sample document covers areas such as thanking the volunteer for their service, clarifying that compensation is not owed, waiver of liability / release language, confidentiality, use of the volunteer’s name, image, and likeness, intellectual property ownership, and more.
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Ben and Mike answer questions from subscribers about what to do when a capital campaign falls short of its goal, whether a 501(c)(3) organization can have only one Board member, getting back into compliance with the organization's investment policy, and whether unpaid internships raise conflict of interest issues.
Ben and Mike discuss document retention and destruction policies, the reasons why many common basic templates are very burdensome and lead to inconsistent implementation and other problems, the different approach we use in our policy template, considerations relating to electronic storage, and more.
Ben and Mike answer questions from subscribers about preparing to serve on a nonprofit Board of Directors, the pros and cons of group exemptions, mitigating auditor concerns about pledges receivable, and whether the rationale for a Board member's dissenting vote should be included in Board meeting minutes.
Ben and Mike discuss the challenges of planning in a period of financial instability and how funding pipeline reports can help nonprofit organizations document real-time information affecting funding plans, provide a framework for assessing the reliability of future funding sources, fill in gaps not covered by financial reports, and more.