Understanding Legal Threats to Nonprofits
Certain activities that are authorized, or overlooked, by a Board of Directors, no matter how innocently, can jeopardize an organization and subject it to legal threats. The Board of Directors is ultimately responsible for the business of the nonprofit, even when troublesome activities are the result of an employee’s or a volunteer’s actions. Certain actions risk loss of reputation for the organization, loss of donors and even loss of nonprofit status. Even though Board members are covered by Errors and Omissions Insurance that provides a certain level of liability protection, the personal stigma attached a nonprofit’s failure can become attached to Board members’ reputations.
The attorneys for nonprofits at San Luis Obispo’s Toews Law Group, Inc. have prepared the following list of activities that can pose legal threats.
- Filing an inaccurate tax reports, or failing to file. Although most nonprofits are exempt from paying state and Federal income taxes, other taxes, such as sales tax on merchandise sold, must be declared and paid. All donations and other sources of income must be reported as well as expenditures. One of the principle tools for the state and the IRS to monitor an organization’s compliance with nonprofit status is the tax returns. Failure to file or filing inaccurate returns can result in investigations, sanctions and losing nonprofit status. Board members should understand the organizations finances and implement procedures and organizational policies that ensure tax filings are correct.
- Political activity for 501(c)3 public charities must avoid engaging in political activities such as (but not limited to) endorsing candidates, making financial contributions to campaigns and otherwise campaigning for candidates and limited lobbying of candidates. These restrictions don’t preclude Board members, employees and volunteers from personal political activity, but they must maintain a clear separation between their personal activity and how they represent the nonprofit.
- Copyright and trademark violations. The Board of Directors needs to be aware of the content of fundraising materials, organization literature, and other matters that may involve copyright infringements and make the nonprofit liable for legal action. Likewise, original content, branding and intellectual material initiated by the organization needs to be protected by the appropriate copyrights or trademarking.
- Conflicts of interest can be avoided to a great degree by a well written conflict of interest policy. Recent years have seen an increase in public awareness of the possibility of nonprofit abuses. Failing to manage conflicts of interest at any level of the organization results in a range of repercussions from loss of reputation to law suits to loss of nonprofit status. Conflict of interest policies need to cover the Board of Directors, employees, volunteers, independent contractors and nonprofit activities.
- Contracts, who can enter into a contract on behalf of the organization and the terms of contracts often leave nonprofits vulnerable to being sued. Even some grant awards are subject to certain compliance conditions. Complications with contractual agreements can be avoided by limiting who can negotiate contracts or write grants, and implementing a formal review and Board approval policy and procedure.
- Social media and Internet use have become a source of liability exposure as well as a necessary business tool. Implementing a policy regarding website content including blogs, email confidentiality, employee and volunteer use of social media and the Internet from the organization’s computers, and other areas of Internet exposure can help minimize liability exposure.
- Personnel problems including employees and volunteers can be largely avoided through written policies that cover work-related behavior and performance. Written job descriptions and procedures set out clear performance expectations. Clear policies about sexual harassment, racial, gender or age bias and other behaviors that create a hostile workplace help establish expectations. Clearly defining behaviors that are cause for termination helps reduce legal liability. It is the responsibility of the Board of Directors to establish the policies and procedures that contribute to a safe, productive and peaceful workplace.
Newly forming nonprofits have the benefits of a blank slate and can implement policies that help avoid legal exposure. Existing organizations want to consider reviewing their policies and procedures, as well as their bylaws.
The San Luis Obispo attorneys for nonprofits at Toews Law Group, Inc. can help both newly forming and existing nonprofits identify areas of legal exposure. The law firm can also help file Articles of Incorporation and other documents needed for forming a new nonprofit, and review and amend any documents for existing nonprofits.
If you are an officer or director of a charitable group, we can provide advice and counsel on many legal, tax and management issues, such as how to structure the Board of Directors between fundraising and program-oriented directors, how to set up an executive committee, how to acknowledge donor contributions and how to find reasonable liability insurance for Board members.