Pitfall Avoidance for Nonprofits
We have recently gotten a ton of new inquiries from people looking to form nonprofits and others whose board meetings must resemble an episode of Jerry Springer. We’ve written before on setting up a nonprofit, but it’s high time we talk about the pitfalls many nonprofits experience once they’re up and running.*
If you’ve already set up your nonprofit, or you’ve read our articles (hint, hint), you know that you need to register with both the Secretary of State AND obtain tax-exempt approval from the IRS. As you might imagine, the IRS adds another layer of oversight and is, understandably, seeking to ensure you are sticking to your charitable purpose and not avoiding paying taxes on what should be for-profit activities. Blurring the lines between for-profit ventures and nonprofit charitable purposes can jeopardize your tax-exempt status. Your 1023 application – the one you submit to the IRS – includes numerous questions about how you’re raising money and what that money will be used for. If your nonprofit does business with one of its board members, that needs to be disclosed. For example, one of our nonprofits used the production company owned by one of its board members. To make that transaction legit, the board needed to vote, in accordance with its written Conflict of Interest policy, with the board member/business owner abstaining from the vote.
Many nonprofits have bylaws but don’t follow them. Sure, when first starting your nonprofit, you don’t know how you should structure your bylaws, so many people simply download a set from the interwebs, sign them, and file them away in a corporate book, not to be reviewed or revisited until something goes wrong. Let’s talk about that next.
Board Member Drama
I have never seen drama like I have among nonprofit board members, and I used to watch Mob Wives. Putting my armchair psychologist hat on, it’s understandable. Especially in their early days, nonprofits are usually comprised of passionate volunteers who have only the organization’s mission in common. They all have day jobs, families, and other demands of their time and, almost without exception, they each think they know better than the others as to how the organization should run. It’s challenging to get all these disparate people to row in the same direction, or even to board the same damn boat. Personality conflicts abound.
More established nonprofits might suffer from the opposite problem. They have attracted big names or pocketbooks as board members but those board members might not be engaged at all. I used to joke that every time someone says “time, talent, or treasure” in a board meeting, everyone has to do 10 pushups, but it’s a good saying. If you are a board member, you are expected to contribute in at least one of those ways. The trouble is that rarely are those expectations clearly communicated during the board member recruitment process, before the person even commits to serving. So you have a benchwarmer board member who just sits there and looks pretty, without contributing much in the way of those three Ts. Other board members ARE contributing and are frustrated with the benchwarmer. Before long, resentment builds. Suddenly an emergency board meeting is called to boot the benchwarmer who is flabbergasted to learn they weren’t meeting unspoken expectations.
That’s why bylaws are so important. Bylaws function as the constitution for the organization, setting the ground rules as to who makes decisions and how those decisions are made. The trouble with bylaws, even from the perspective of a lawyer who has set up a ton of nonprofits, is that you often don’t know exactly what you need in them until trouble arises. You may start off with a passionate board President whose sole focus is the success of the organization and who possesses an uncanny ability to unite and inspire all the volunteers and board members. Then that President has to step down. That uniting force is now gone and the board has to fill that gap. Too often, the gap is filled by someone with a strong personality who eventually rubs the other board members the wrong way. Then the “I know better” factor rears its head and, before you know it, you have infighting among board members and volunteers are directionless. Volunteers burn out, and the organization suffers.
Policies are also crucial. You might not outline your minimum board member contribution in the bylaws, but you should have a WRITTEN policy for Board Member Expectations – financial or in-kind contributions, attendance policies, etc.
Without strong bylaws and written policies, the organization’s governance quickly becomes a free for all, and the mission suffers the most.
Remember, “nonprofit” is a tax status, not a business plan. You might not think of nonprofits as being competitive with one another, but they very much are. Even if they don’t share the same mission, nonprofits are competing with every other nonprofit in the locale. Especially in smaller communities, there is only so much money to go around and you’d better be aware that if a particular high net worth individual is on your radar, that person is on the radar of every single other nonprofit in the community. So that’s one thing.
The other thing is that often more than one nonprofit shares the exact same mission. I talk in one article about how ridiculous this is; if your proposed nonprofit duplicates the efforts or closely resembles those of an existing one, GO HELP THE EXISTING ORGANIZATION. Offer to lead a task force, a sub-committee, or otherwise lend your expertise to that existing nonprofit. I’ve seen organizations stoop to surprising lows to take out others with their same mission. Whether it’s filing complaints with code enforcement, posting falsehoods on social media, poaching board members, or ratting each other out to trigger an IRS inquiry, these efforts to take out the competition are reminiscent of Mob Wives and it’s a real shame.
There are myriad resources out there to help with nonprofit governance that don’t even involve lawyers. BoardSource is an excellent place to start. They have sample policies and articles to educate you on emerging trends in nonprofit governance. Nonprofit Quarterly has a host of articles on research in the space. Last, but certainly not least, NonprofitAF is a great, lighthearted, snarky take on nonprofit life.
Go out and do good and be nice to others.
*In this article, I will focus on 501(c)3 organizations – those formed for charitable, religious, scientific, or educational purposes. There are a bunch of other types of organizations under the 501(c) chapter of the Internal Revenue Code, but this article will focus on your traditional charity.