Exam 1 Flashcards
What make nonprofit mgmt unique?
Corporations with special tax status providing a public good.
- Nonprofits can operate at a profit, but they are not allowed to distribute the profit to shareholders.
- Other than for claims of fraud or, in few cases, contract,
donors cannot sue nonprofits for mishandling, misusing,
or wasting donated funds. Only the state attorney general can do that.
- Major misconception. Every nonprofit has to pay some sort of tax every year - nonprofits pay employment tax -
if nothing else.
(They are NOT:
- prohibited from making a profit
- Free from paying all taxes
- legally accountable to donors - except for breaking promises.)
Salomon’s Definition of nonprofits (six characteristics)
Formal organizations Nonprofit distributing Private (nongovernment) Self-governing (decide their own fate) Voluntary Operating for public benefit
Dartmouth vs. Woodword
Is one of two critical changes -
Separation of Church and State and then Darthmouth vs. Woodword
Story - (Daniel Webster)
British Colonies
- Majority of NP in churches
- government control
- no fees
- tax supported
- government control
- voluntary(Yes)
- public benefit (Yes)
New Republic
- Critical changes
- separation of church and state
- Dartmouth v. Woodward (central issue - Government of nonprofit sector
- Organization = corporations
- private (arbitrary charter)
- Income source - private sponsorship
- Board self-governing
- Voluntary (Yes)
- Public benefit (Yes)
19th Century
Organization - religious resurgence Private - arbitrary charter Income source - Contributions and fees Board - Self governing Voluntary (Yes) Public benefit (Yes)
Begun by James Smithson left fortune to his nephew, if he had no children it was then given to the United States to an establishment for the increase and diffusion of knowledge among men (arts and museums)
1900-1960
Three important changes
- Tax exemption for nonprofits (1913)
- Tax deduction for donations (1917)
- Science and research
Organization - Corporations and trusts Private - broad charter Income sources - contributions and fees Board - self governing Voluntary (Yes) Public Benefit (Yes)
1960 to Present
Three important changes: - Increased federal funding - Increased fees - Explosive growth Organization – corporations private – simple charter income sources – increasingly fees Board - self-governing Voluntary – (yes) Public benefit – (yes)
Common Law
Make a law/use old law/make new law (buy cow)
- Founded in English law
- Based on Judicial Decisions
- Cumulative
- Overridden or supplemented by Statutory Law (Congress and Legislatures trump common law)
Constitutional Rights and their importance to Nonprofits
1st Amendment
Free speech
Association (inferred from right of assemble)
Free exercise
10th Amendment
Residual powers clause (if not mentions as a federal right it falls to the state
Residual powers – anything not listed as federal government right falls back to state – find best state to start your nonprofit in
For profit companies – great Nevada and Delaware (Nevada – no corp. income tax)
In the federal system these are the government entities that oversee nonprofits
Federal
Dept of Treasury (IRS)
Dept of Justice
State Attorney General Dept. of Commerce (Sec. of State) Tax Division Employment Division
Legal characteristics of persons, corporations, and trusts
Legal Entities
Persons Corporations Trusts Can they sue and be sued? Yes Yes No Can they own property? Yes Yes No Do we tax them? Yes Yes Yes Rights are Natural Statutory Statutory
The majority of nonprofits are corporations.
Standing
The legal right to pursue a claim in court.
1 - A personal claim
2- An unlawful cause
3 - A chance for “relief”
Cause of action - an event giving rise to a legal claim.
Civil law = injury
Criminal law = crime
Civil claims
Tort: wrongful act, whether intentional or accidental, from which injury, physical or otherwise, occurs to another
Contract: an agreement between parties in which there is a promise to exchange things or acts of valuable benefit (consideration)
Statutory Claim: A legal claim of damages or equity created by the express provision of legislature or other law-making body.
Jurisdiction
The authority of a government entity to enforce law.
No single government entity has absolute and complete jurisdiction.
Justiciability
- The decision makes a difference (nonadvisory).
- The plaintiff has standing
- The facts reflect a substantial controversy (ripeness) that is not already resolved (mootness).
Difference between a normal Corp and a Nonprofit corporation
Normal corp - owners/shareholders + board of directors + execs + employees
Nonprofit - board of directors + execs + employees + volunteers
Difference between a normal trust and a charitable trust
Normal uses beneficiaries that are named.
Charitable uses Beneficiary Class - indefinite group.
Corporate Veil
Describes a limitation of liability to the company assets of a legal entity. Can only be lost by failing to properly maintain it.
Corp. Veil encourages people to get involved in a corporation – can only get the company’s assets and not the shareholders. (Same in nonprofits)
A judge can “pierce the Veil” if a board member miss manages the corp.
A lot of people make the mistake of using the corp check to buy groceries. – a lot of corporations are undermined this way and then the person mismanaging can be sued. – lose your house, car, everything.
Corporate Formalities
Requirements under the law that must be met to maintain corporate status. (meeting, notes of meeting, etc.)
Articles of Incorporation
Filed with state, purpose statement, Name/address/etc., limitations of director liability, Special tax statement [for a corp]
Bylaws
Not filed with the state, board operations, executive operations(roles), misc. operations
Cy Pres
When the purpose of a charitable trust is frustrated, the court can change the trust to approximate the original intent.
This is what happens when people die (judge invoke legal and choose the most reasonable choice closest to what person wanted) Judges are really conservative and don’t like to exercise Cy Pres very often.
Corporation
Most common form, most nonprofits using the term “trust” or “association” are actually corporations.
Formal entity, complicated formalities, corporate veil, both owned and unowned.
Benefit Corporation
New form based on basic corporate form, either requires or allows boards of directors to consider “public benefit” in their decisions, 26 states including Utah.
Primacy = shareholder’s first
Benefit corp doesn’t have to put shareholders first (this is kind of shaky ground – he is not an advocate of The Benefit Corp/only signaling value to being a B Corp) B corps – easy to say Trademark of B Corp (only if they say) – no tax advantage to being a B Corp
Trust
Made up of Settlor, trustee, beneficiary or beneficiary class (must be indefinite to be a charitable trust)
Needs to be a beneficiary Class or Charitable Purpose Beneficiary – no corporate veil – could be sued if you are a trustee unless the settlor sets it up to limit the damage.
Trusts are better if you want to have more control – vs. – Nonprofit has at least two other board members that can out vote you.
Very good planned giving strategies. – trusts
Most nonprofits using the term “Trust” or “Association” are actually corporations.
Trusts are very good planned giving strategies. Informal entity, complicated formalities, no veil, specially owned.
Association
Second most common, fitting for book clubs, gardening groups, etc.,
Tax exemption still possible
Informal Entity, No formalities, No Veil, unowned
Common in California
LLC
– Limited Liability company, established trend, no tax exemption
(simple entity, Simple formalities[benefits], corporate veil, owned (started in 1970’s in Wyoming – super flexible w/corp. veil)
L3C
Low-income Limited Liability Company, emerging trend, useful for program related investments, some states (Vermont, Michigan, Utah, Illinois, North Carolina, Louisiana, Maine, Rhode Island, and Oglala Sioux Tribe) Not enough benefit tax wise
Cannot be tax exempt/formal so they can own property/if you don’t fill in the formalities the law fills in the rest for terms of operation/only have to renew with the state every year – even have a single member LLC (easy way to get corp veil)
Very flexible.
Legal and other qualifications of a nonprofit director
The standing board or the general membership typically elects new directors.
Qualifications – Donor Special abilities/knowledge Availability Connectedness Commitment to mission.
How are officers Chosen, compensated, and removed in a NP
They are “super employees”, product of the bylaws, board hires, fires, and determines compensation for them, charged with implementing the board’s decisions and direction.
Great power brings great responsibility.
Don’t want officers to become the majority of the board. (small nonprofits to have 3 to 5) 9 to 12 on a good sized nonprofit. More than 20 is too many – you must be able to get them all to meetings – hard with busy schedules
Duty of loyalty
Loyalty
Prohibits self-dealing
Requires honesty and disclosure
Organization interest are put ahead of personal interests
Duty of Care/business Judgement Rule
Care
- “reasonable” care (Reasonable= shows up to meetings/measured by the reasonable judgement rule.)
- requires a director/officer to be informed
- measured by the Business Judgement Rule
Standards of good governance
Who holds them responsible?
Corporations = Shareholders
Governments = Voters
Nonprofits = Boards
- Public Disclosure
- Diligent Board of Directors
- Conflict of Interest Policy
- Rigorous financial Accounting
- Appropriate Program Expenses (3 to 1 program ratio/2 to 1 fundraising ratio)
- Ethical Fundraising
- Donor Privacy
