Ask the NonProfit Legal Expert, Part Two

hosted again, by DonorPerfect. Today’s session is really part two of a session that we planned for the end of last year. And what we found when DonorPerfect, put out an invitation for folks to ask various legal question is that we were really inundated Read More

hosted again, by DonorPerfect. Today’s session is really part two of a session that we planned for the end of last year. And what we found when DonorPerfect, put out an invitation for folks to ask various legal question is that we were really inundated with a lot of wonderful questions about 50% of those questions related to issues that I see as directly tied to soliciting charitable gifts, structuring them, acknowledging them and disclosing them on tax returns. So in early February, we had part one of this session, just focus on those issues. And today, we’re going to continue with another hour focused on the other half of the questions that we received. And those questions fell into really four groups. There were many questions about fiduciary duties generally, what does it mean to be a board member? How do I provide for that in my bylaws, what do I need to think about in terms of liability to protect both my directors and the organization? So we’re going to start with that group of topics, fiduciary duties, we also had a number of questions related to international grant making and other issues related to cross border philanthropy. And that’s a really important topic. So that’ll be our second topic. We also had a number of questions related to 501 C, three startups. And that’s an area where there’s been an exciting new development. So that’s my third topic. And then finally, there were a number of questions related to the relationship between nonprofits and for profits. And just generally collaborations between an among nonprofits and for profits. So that’s our fourth. And we want to cover all of this in the next hour, I have prepared a number of slides so that you’ve got a visual and a takeaway. And also some resources, you’ll see at the end of the presentation, a number of links to the extent that you want to learn more. And my hope is that we will also have time as we move through the slides, to entertain questions as well. So I will welcome you to submit those questions. And to the extent that I can answer them throughout the presentation, I will, if we run out of time, you can always contact me, my contact information is at the end of the presentation, and I look forward to continuing the dialogue. So with that, let’s get started. Arlene, if you would advance the slide. As I said, we’re going to start with fiduciary duties.

A lot of the questions about fiduciary duties come from concern about liability, which is certainly understandable, but also important to address because after all, we want to be able to recruit good, committed people to our boards. So I want to start by talking about what that liability exposure actually is how we can protect from it, and then we’ll do a deeper dive into fiduciary duties. So at the outset, I will tell you that directors and officers of charitable organizations can be personally lent liable for criminal actions, that is their own negligent and reckless actions, and also tax liabilities related to their actions as directors. So that’s important to recognize, I don’t want to overstate it. But there’s a reason why people are concerned about liability, and that’s legitimate. That said, I will tell you that there are protections built into the statutes both at the federal level and also at the state level, which are intended to shield directors and officers liability, because after all, we do want people to serve on nonprofit boards. So at the federal level, we have something called the Federal volunteer Protection Act. At the state level in Pennsylvania and every other state in the country. There are certain volunteer immunity provisions typically built into the nonprofit corporation law. Sometimes they’re standalone, Good Samaritan laws, but those liability protections protect directors and officers who are number one volunteers. And that’s important, right? You’re not being paid, you’re a volunteer. And number two directors and officers who are serving in good faith. So to the extent that you’re reckless or criminally negligent, you can be found liable. But if you are doing a good job as a volunteer, Director, officer, you’re coming to meetings, you’re asking good questions, you’re making hard decisions. In that situation. If somebody were to sue the charitable organization, you would be shielded from liability. And I think that’s really important. We encourage all of our clients to make sure that their bylaws include an indemnification provision, which says that, again, nouran state law to the extent that you’re behaving in good faith, the organization will step in and indemnify or protect you if you’re sued. We also encourage all of our clients to purchase and maintain directors and officers liability insurance, because even if there is a statutory protection

If the organization and the directors and officers get sued, you need to defend that lawsuit and have a lawyer get it dismissed on the basis of charitable immunity. And directors and officers liability insurance can actually be really important to provide the lawyer to defend that lawsuit. And I will tell you also, typically, these policies called Dino policies are not that expensive. You know, for a startup organization or for a smaller nonprofit, they would likely range between 1015 $100 a year, and they just give extra protection and security to directors and officers. So we recommend that.

So now let’s turn to fiduciary duties. And, Arlene, if you could advance that will be great. Laura, if you don’t mind, I think I’d like to find out the role that our attendees have in their organization and who were present on this call. Would that be okay, if we put a poll out there? Absolutely. That would be really helpful, because I want to make sure that I’m tailoring my comments in the most helpful way that’s relevant felt in so yeah, please do. All right. Great. So we’re now going to launch a poll.

And you’ll find everybody could identify what is your role in the organization? Let us know which of the following apply.

Thanks, everybody, for him. Okay, thank you.

Alright, so your next slide is here. Okay, great. So just continuing on with this whole thought about, you know, liability protection. One last note on liability, I will tell you that, historically, charitable organizations themselves were immune from liability, you just couldn’t sue a charity. But most of those statutory protections have been abolished. In some states, they’ve been retained in a limited way. So for example, in New Jersey, you have to establish a higher threshold in order to serve charity. But that said, the protections do still exist for directors and officers. And I think that that’s really important. That’s that the best protection from liability is doing a good job, right and operating in good faith. So what does that mean? And here, you’ll see that I’ve actually given you a breakdown of fiduciary duties, because what I find in going to a lot of board meetings and talking to a lot of nonprofit staff members and directors is that people know the term fiduciary duties, and they know that it means generally, you know, doing a good job and acting in the best interest of the organization. But oftentimes people don’t understand what it means more specifically. And so one of my goals for you all today is that when you drop off the call at three o’clock, you’re really going to know what fiduciary obligations are, you’ll have a slide deck to refer back to, because when an issue comes up in a board meeting, or in the day to day operations of a dare charitable organization, involving, for example, conflict of interest, or dispute among board members, you will find, as I do that, it’s really helpful to come back to these fiduciary duties in order to really think through parse out the issue and decide how best to deal with it. So when we think about fiduciary duties, there are really three, there’s a duty of care, there’s a duty of loyalty, and there’s a duty of obedience. And I’m going to break them down further in the next few slides. But that’s what they are. And you find those fiduciary duties in the nonprofit statutes in every state in the United States. And then you also find them in case law, right. So a situation where a charity is sued, or charity goes bankrupt, and questions arise about the role of the directors and officers, these are the fiduciary obligations. And together they represent the obligations of the board whose job is to provide the vision and oversight of the governance and operations of the charity in furtherance of a mission. So very kind of big picture, broad brush, but these are the basic fiduciary obligations. And they are both positive, right? You have a duty of care, loyalty and obedience. And there are also kind of implicit negative corollaries here, right. So if you have a duty of loyalty, it means that you’re not operating away that represents your own self interest. And those duties and also the prohibitions are

kind of built in not only to state law, but also to federal laws. So in the Internal Revenue Code, there are certain excise taxes that apply to both public charities and private foundations. Here, I’ll talk more about the public charity issues because my assumption is if you’re using DonorPerfect, you’re soliciting contributions. You all are coming from a public charity point of view versus the foundation. So for public charities, section 4958 of the Internal Revenue Code imposes an excise tax on any transaction where a nonprofit is paying a disqualified person or an insider any more than fair market value and the whole

idea of these excise taxes is to prevent an individual in a position of influence from misusing a charitable organization or otherwise benefiting from the assets. So again, conflict of interest, fiduciary duties come from state law, but we do see aspects of their enforcement at the IRS and Treasury Department levels. And I will also say that, you know, the focus of this presentation is really legal questions. But I always think it’s important to also think about your ethical obligations know, even putting aside the discreet fiduciary duties. I think, and I hope that we all believe that if you’re serving a nonprofit organization, you also have duties above and beyond the strict reading of the law, to make sure that the clients of the organization are well served, and safe, that staff members are well served and safe, and that the reputation of the organization in the community is upheld. And the charitable intentions of your donors are honored as well. So these things are outside of a strict legal reading. But again, I think important, certainly to at least mentioned at the outset.

So let’s dig even deeper into fiduciary obligations are the key word advanced again,

when we think about the duties of care, loyalty and obedience, we have to think more specifically about really what it means. And again, my hope is that you come back to some of these concepts. So a duty of care is, in some ways, very much a common sense concept. You gotta serve in good faith, in a manner reasonably believed to be in the best interest of the organization with care, including reasonable inquiry, skill, and diligence as a person of ordinary prudence with us. And you can hear I’m emphasizing the word reasonable. And I think that that’s really important, because sometimes directors and officers are worried that because they’re serving on board, they’re somehow expected to be all knowledgeable, and all knowing and to have expertise that maybe they don’t have. And I think that can be really intimidating. So what I want you to understand here is that the duty of care includes implicitly kind of reasonableness standard, you know, if you serve on a board, and you happen to be, I don’t know, a stay at home parent, you’re not presumed to be, you know, a risk manager and a lawyer and an accountant. But you are presumed to sit at the table and ask reasonable questions, and exercise a reasonable degree of diligence as a person of ordinary prudence would use, again, serving in good faith. And also, and this is important, so I’ve included it here as well. You are justified in relying on reports, and Information and opinions of professionals. What does that mean? It means you should solicit that information and opinion. So if a client comes to me and says, we are considering a proposed joint venture at our next board meeting, can you share your thoughts on it, I will do that. But I would also encourage the client to take a written memo from me so that there’s something in the minutes of the board meeting. And then if a question that arises in the future, we can now refer back to the minutes and see the advice that I gave the board. So if you’re serving on a board, and again, you’re not presumed to be an expert in every area, you should be reaching out and relying on professionals as needed to get the support that you need. And then to the extent that you do, you want to show that you relied on it by including it in the documentation, so there’s a duty of care. But part of that is a justification in relying on professionals. Let’s advance.

The next one is your duty is one of loyalty. And and I’ve touched on it a little bit already. But I want to break it down a bit further. So the duty of loyalty is to act in a way that is in furtherance of the mission and the well being of the organization. And again, that means that you can’t use your position to further conflicting interests of you or family members. And it also means that you can’t engage in self dealing, which is misuse of the charitable organization for your own benefit. And on this point, I really want to emphasize that every organization should have a conflict of interest policy. And I say that even though technically, under federal law, you’re not required to have them one unless your taxes and health care organization. But the IRS has very much encouraged organizations to have conflict of interest policies, and in fact, has included a form of conflict of interest policy in the 1023 application for recognition of exemption. So if your organization doesn’t have one, find one and adopt it, and make sure that it comports with the IRS recommended form. It’s important because you want to be able to vet conflicts of interests and have a mechanism to deal with them. It’s also important as a disclosure issue, because the 990 information return now requires in the governance section that you answer the question, Does your organization have a conflict of interest policy? As we

No on GuideStar, anybody can download a copy of your 990. And I think it’s important for your organization to demonstrate that it is committed to compliance and transparency. And having a conflict of interest in the policy and disclosure policy is very much a part of that. If anybody has a question on that point, by the way, let me know I can also directs you to the foreign policy. So that’s the duty of loyalty, again, both built into state laws governing conflicts of interest. But also we see filtering all the way up to the federal level, in as much as there are excise taxes to enforce the rules and regulations, and now disclosures on the 990. And finally, there’s a duty of obedience. And this one, again, to me is very common sense, but important, and that is directors and officers are obligated to make sure that the organization operates in a way that is in furtherance of its mission and in compliance with legal requirements. And that means federal, state, local, legislative and regulatory developments. And obviously, you know, even local regulations like real estate tax and business privilege tax, and all of the little quirky things that we have on the grassroots level wherever we are in the country.

And, you know, these duties again, care, loyalty and obedience, they may sound pretty common sense while we’re sitting here having a webinar, but I know that you will find situations where an issue comes up at a board meeting, and something doesn’t sit right, you know, it just, you know, doesn’t quite pass the smell test. And if you come back to these basic concepts, is my board really exercising a duty of care? Are they asking the right questions? Are we relying on the kinds of professionals we should be relying on? Is there a conflict here? And do we need to look more closely at it? And is my board mired in irrelevant details? Or are they really focused on the mission of the organization, these basic fiduciary duties will ground the discussion, and will provide a kind of mechanism and a way for you to work through issues. So I hope that those are helpful. Early, we can move on from here. Thanks.

So I want to segue now away from fiduciary duties. Again, I will welcome questions throughout. But I think we’ve covered the basic duties and also some liability issues. And I want to turn our attention now to international grant making.

And I know we didn’t pull this issue, and I suspect that of the hundreds of people dialed in right now. There’s a smaller subset that is engaged in international cross border philanthropy. But this topic is really important. And I will tell you, it’s one that is gaining in importance, because younger donors are interested in giving not only in their local communities and in the United States, but increasingly, they want to have a bigger footprint. And they’re out there on Kickstarter or Indiegogo or Kiva. And they want to help build wells in Africa, or help fund schools for girls in Indonesia. So even if your organization is not yet doing anything, internationally, certainly if you are working with a community foundation, or a private foundation, or a charity whose board is interested in expanding the mission, these issues will become relevant for you. So what’s the issue? Well, first, I will tell you that this whole area of the law really didn’t exist, pre 911. And on 911, one of the big, horrible realizations in the aftermath was that charitable organizations were actually being used as conduits for terrorist funding. And this was, you know, a big revelation and a shock. And President Bush acted swiftly passing something called executive order 13224, which blocks the use of property and prohibits transactions with anyone who is involved in any way in terrorism. So, you know, this was the immediate attempt to really shut down any

activity. Following that there were groups of individuals involved in the charitable sector. And I’ve been involved in this group now for years, who together worked with the Treasury Department to craft a list of best practices that charitable organizations can use if they’re engaged in international philanthropy, to make sure that they’re not inadvertently running afoul of the executive order 13224. And those are called the US Treasury Department’s anti terrorist financing guidelines. And they are voluntary best practices for US based charities. Now, if you look at the best practices, and I’ve included links to all of these core documents, you will see

I think that they also are pretty common sense. So for example, if your charitable organization decides to undertake a program in Israel, just for example, your obligation is to first really vet you know the program. To the extent that you’re partnering with an Israeli based organization, you will need to request copies of their documents, to look at their organizing documents and their tax status to make sure that there are legitimate charitable organization, you’re also required to make sure that your board is voting to approve the grant before any money use leaves us borders. There should be a grant agreement that runs between your organization and the foreign based charity, which establishes we’re funding this grant. This is the restricted purpose, you need to hold it separately in a restricted fund, you’re permitted to use it only for this purpose, not for terrorism, not for lobbying not for political purposes. The grantee should be required to report at the end of the use of the grant to confirm the use of charitable funds. And the grantee must be required to repay the funds if they do not use them for the purposes intended.

Organizations are encouraged also to do site visits, and to make sure before funding any program internationally, that they check the Treasury Department OFAC list. So the Office of Foreign control maintains a list of specially designated individuals who are designated as terrorists who are involved in terrorist organizations. And before you fund anything, you have to check the OFAC database by inputting the name of the organization and all of the directors to again, make sure that you are not inadvertently funding terrorism in any way, shape, or form.

In addition to these domestic regulations, we have the Patriot Act. That’s also domestic restriction. And then finally, there’s something called the Financial Action Task Force, or FATF. FATF is an international body based in Paris, which brings together 34 member countries, including the United States, and other groups of countries, for example, there’s an African delegation. And together we are crafting best practices that will prevent the use of charitable funds for terrorist purposes internationally. And we’re facilitating the sharing of information. I am one of the US delegates to FATF. We have meetings in London at the beginning of this month. There are additional meetings in Brussels at the end of the month. And I’ll be at the White House tomorrow talking about these issues. Also, President Obama has convened a group of us representing the delegates to FATF, Treasury Department, State Department and other humanitarian organizations. And we are seeking to both make sure that executive order 13224 is upheld. And that charities do not permit the use of charitable funds for terrorist purposes. But also making sure that charitable organizations continue to fund good charitable work, whether that’s humanitarian aid in Syria, or in Burma, or clients like mine that are doing interesting micro NRI enterprise projects in Africa or job training programs in the Balkans. The struggle here is to reconcile these laws and regulations, and to make sure that no funds are diverted from their purpose, while also making sure that humanitarian funds can get to the people that they’re intended to serve. So it’s an interesting issue, there are domestic laws at play, there are international laws that come into play. And again, you know, our working group is attempting to synchronize a zero tolerance policy for terrorists funding with reasonable risk mitigation measures so that humanitarian organizations can deliver that aid. All of this is intended to say that if your organization is engaged in international grant making, you need to make sure that you’re fully in compliance with all of these laws and regulations. And I would be happy to talk to you more about it. But you want to make sure that your bylaws have specific grant procedures and policies related just to international grant making. You want to make sure that you have a fully compliant international grant agreement. And that you’re checking the OFAC database and making site visits. So, you know, one of the things I’ve learned from representing organizations all across the spectrum, you know, smaller volunteer grassroots organizations and very, very large private foundations with significant professional staff is that you can do cross border philanthropy well, but if your organization doesn’t have staff or has limited resources, you will need to do it differently. In addition, if you’re operating in a conflict ridden area, where you feel that you can’t identify a reputable grassroots partner

You may need to either stop funding or you may need to do the work directly. And that’s something that our clients have seen in Ethiopia and also in the Balkans. So I hope that all of these laws and regulations are not a deterrent, I realized that it can be a bit overwhelming. You know, my goal is to give you the resources, and to get comfortable so that you do continue with cross border philanthropy, but it really can be daunting. And for organizations who have been doing this for some time, right, and then I have clients who say to me, Oh, we’ve been doing international work for the last 20 years, it is critical to realize that the landscape has changed. And even if the organization has been doing it for decades, now you need to take a closer look, you want to make sure that your articles are sufficiently broad to empower you to do this activity. Your bylaws include the kinds of practices and procedures and as I said, you really have to make sure that you’ve got the international grant agreements, and you’re otherwise exercising fiduciary duty and oversight over these grants. Because when we think about duties of care, and loyalty and obedience, what we realize is that these kinds of duties are

even more important, and more expansive. When we’re doing international grant making, right because of duty of care. If I am running an after school program in my suburb, it’s going to be really different than if I am sending over millions of dollars in humanitarian aid to Lebanon. Right, so the the duties are the same, but the exercise of the duties become, say more important, but certainly more difficult. And it requires more of a focus. And I know when we solicited the questions before February, we have a few different questions. One just about, you know, generally speaking, my organization is interested in international grant making. So here, I think are some good resources that will certainly get you started and in thinking about it, but I would encourage you to reach out to me or your legal counsel, because that’s important. One of the other questions related to restricted grants, the question was, you know, what, if I get a restricted grant from a donor for an international activity, what do I do in that situation? In that situation, your obligation to the donor is to respect that restriction as it is with any other gift, right? If I’m operating, you know, an animal shelter, and somebody gives me a gift, intended to fund my clinic, right, because I want to be able to neuter animals, for low income individuals, that I am obligated to use the gift for that purpose. Likewise, if somebody gives your Community Foundation, a gift of $100,000, and says, I really want to help villages in Ethiopia, then you are obligated to, again, subject to board oversight and control, you’re obligated to use the funds for that purpose. What it means then is if you’re not comfortable engaging in international philanthropy, you need to go back to the donor and say, you know, we would love to help you with this gift. But I’m afraid our organization is just not set up to do international philanthropy. Or alternatively, we’d like to give the gift and we need to work together to identify a grassroots partner, but you need to work it through. And again, be mindful of balancing both your obligations to all of the laws and regulations, and then separately, to honoring the intention of the donor. And I think it’s important to be realistic about the capacity of your organization, because certainly, there are lots of organizations that are doing international grant making, and they’re doing it well. But if you are a small organization, you don’t have a big staff, and or your board is simply not comfortable wading into this whole environment, then I think you need to reject the gift and redirect them to an organization that can handle it. And there are many, many terrific organizations that will act as a fiscal sponsor, so that you can direct the gift to them, and they will exercise the appropriate oversight. And I can help direct you to those fiscal sponsors as well, if you’re interested.

The last question I had was from somebody who wanted to know whether they could conduct international grant making in Liberia, given that the country was on some sort of restricted list for US firms to do business. So I need to look into that situation more specifically. But I can’t tell you that generally speaking, international laws governing the delivery of humanitarian aid will accept out charitable activities, even in situations where there are other restrictions on banking and business activities. So let me know if you if you’d want me to look into that more specifically. And I think with that we have covered all of the International grant making issues. So

Arleen we can one

I want to ask everybody to Are there any other questions, please feel free to send them my way. And, and hopefully we’ll have a few minutes at the end as well.

Okay, so next topic. Several people asked questions about starting a new charitable organizations. And I wanted to talk about this topic, even though we only got a few questions, it’s actually a really important topic. Because historically, in order to start a charitable organization, you would incorporate under state law, and adopted bylaws and articles and corporate policies. And then you would hit the daunting task of filing the form 1023 application for recognition of exemption with the Internal Revenue Service. And you can find this form on the website. So this is the application that you submit to the IRS in order to become a charity. And historically, it came with a pretty big filing fee. So right now, it’s about $850. If you are a smaller organization, you might qualify for a $400 filing fee. But the form itself is pretty involved, which you’ll see once you look at it online, so many, many pages, and it includes a sort of a mini business plan. So you need to not only describe in detail the kinds of activities that you’re anticipating, but also provide three years of projected revenues and expenses. And perhaps most importantly, the IRS has had a tremendous backlog. And so when we submit these forms, depending on the kind of activity you’re conducting, you need to expect a wait time of anywhere between two months and one year. And that’s significant, you know, particularly if you’re trying to start a new charitable organization. So in response to a lot of frustration from the practitioner community, from lawyers, like me and accountants. And last year, in response to the big controversy about the IRS processing of 501 C, four social welfare organizations, the new director of the exempt organizations division, Sellita, Lo, and that’s that she was watching something called the form 1023. Easy. And it is, as the name suggests, an abbreviated easy form of application for new startup organizations. And it is a game changer. It’s been fantastic. It was launched last summer, so we’re about eight months in. And it’s a form that is available to organizations who predict that their revenues are going to be less than $50,000 a year for the first three years, and their assets are going to be less than $250,000. Certain organizations are ineligible, but most are eligible, it’s filed electronically, the user fee is $400. And perhaps most importantly, we are getting exemptions anywhere from six to 12 days. So if you’re starting up a new charitable organization, and it’s going to be a smaller grassroots organization, that 1023 Easy is an excellent option. It’s quicker, it’s easier, you don’t need to put as much time into it. Although I will still encourage you to work with a lawyer because in answering the various questions on the forum, there are implications for the tax status, the public charity classification and the things that you can do in the future. And the IRS has recently announced that it’s going to be doing, if not a full blown audit, then certainly a round of questions to a random sampling of organizations that use the 1023 Easy. So you need to go into the whole thing, you know, thoughtfully, even if you are using the smaller form.

So that’s it on startup. Let’s move on now. And talk about the relationships between for profits and nonprofits. And there were a number of questions in this area, which I thought was great, and very much reflective of what’s happening. I know locally in the greater Philadelphia area and also nationally, which is that nonprofits are really collaborating a lot with other nonprofit organizations, and with other for profits. So I wanted to give you a quick visual. This is something called David lock pianos partnership matrix. And David lock. Jana is an academic. He’s in California believe he works and writes and does Consulting at the Stanford University. And he’s done a series of wonderful articles. The there are several links at the end of my presentation, to

work and and kind of mapping of the nonprofit sector to see how nonprofits are working together. And as you’ll see from this, and as I’ll break down further in the next few slides, there are different degrees of collaboration among between nonprofits and for profits, and greater or lesser integration. So for example, two nonprofits could just sort of collaborate on a program

They might also decide to do joint programming. And on occasion, they may decide to form a joint venture together, or actually merge whereby one becomes the parent or subsidiary of the other. So again, it’s a continuum of collaboration, what we’re finding is that funders really like this, they see it as an effective and efficient way of achieving the mission.

And if done correctly, you can both more effectively achieve the mission and also, in some situations, cut costs and really preserve resources. So it can be a great thing. But I want to make sure that when we end at three o’clock, that you understand what the different forms of these relationships are, and in particular, in the real questions on this, when a nonprofit is collaborating with a for profit, I want you to understand how to structure that relationship because it’s particularly sensitive and, and really scrutinized by the IRS.

So wherever you if you could advance that would be great.

So if we think about the continuum of collaboration, I want to start by describing a sort of lesser degree of integration, and then we’ll kind of move along the continuum all the way to a merger.

So if we think about affiliations, at the far end, you know, these are situations where nonprofits may refer clients to each other, maybe they collaborate on some sort of management services organization to do group purchasing.

As we move across the continuum, we think about joint ventures where two or more nonprofits or nonprofit in the for profit, make together contribute to a joint venture, right, we’re going to launch a new activity or program together. And then ultimately, if you really think about integration and close work together, you might think about a merger. And there are different forms of merger, which I’ll break down or lean, if you could advance that would be great.

So affiliations, are the least level of commitment. And you’ll see here I have a picture which is meant to evoke dating. And you’ll hear also that I use this kind of relationship metaphor, as we will talk about between people when we also talk about nonprofits. And that’s because

a lot of the same considerations, and pros and cons apply. So for example, and affiliation is a little bit like dating in that two organizations are able to sort of get to know each other. By collaborating at a very low level, right, we’re not making a huge commitment, we’re probably going to sign a contract, maybe your belly company and my

I don’t know,

Symphony are going to collaborate and put on a joint arts festival, we have a wonderful Philadelphia International Festival for the Arts, where many, many nonprofits collaborate together, but you know, you’re gonna stay as your nonprofit, and I’m gonna save my nonprofit, and we’re just going to work together on this terrific event, we’re not changing our corporate structure, or you’re not controlling me, I’m not controlling you, we’re just going to put on this festival together.

This typically is documented with a contract, sometimes, you know, nonprofits like Memorandum of Understanding MOU us, but it’s like dating in that it’s a low degree of reputational risk, particularly if your contract has a good termination clause. So you and I agree, we’re going to collaborate, you know, you’ll do your dance stuff, and I’ll, you know, contribute my Symphony time. And together, we’re going to contribute to this festival, but that agreements gonna have a termination clause. So for example, if you fail to live up to your end of the contract, I can terminate the contract. Likewise, if there’s some horrible controversy that comes to light, such that I don’t want to be affiliated with your organization, I’m going to make sure as your lawyer that the termination clause includes a reasonable notice, but also includes the ability for me to terminate immediately, if something you do jeopardizes the reputation of my charity. So we’re going to document with a contract, we’re gonna make sure there’s a good termination clause. The Pro is, you know, you don’t have a lot of startup expenses and time in order to document this. But there are going to be some time and resources taken just to negotiate it. And the one thing I will say about affiliations is that if the goal is to save money, right and preserve resources, sometimes an affiliation is not going to accomplish that sometimes you need to look at a more serious kind of integration. Also, there are still some legal pitfalls, even with this low level of collaboration. So for example, if your joint activity is going to result in the generation of income back to your organization, you need to make sure that the activity the income is related to your mission, because you don’t want to pay something of unrelated business income tax. Also, you really

Want to make sure that whatever this activity is, is in furtherance of your charitable mission. And again, this goes all the way back to the duty of obedience. But I will tell you, and I suspect that you’ve all seen this, right? I mean, I remember the poll, right? Your executive directors, your CFO, it’s your development directors, we’ve all been in board meetings where somebody proposes the next new shiny idea. And sometimes the board sort of contorts itself because it doesn’t want to miss out on opportunity, or maybe the grant funding from a particular private foundation. But I think it’s important for you all as staff members, and certainly as board members, to bring the conversation back to the mission. Because no collaboration, whether it’s with a for profit or nonprofit is going to be worthwhile or productive, unless it’s in furtherance of the mission. And when organizations really contort themselves, outside the mission, we have something called mission creep. Okay, so those are affiliations, that can be really terrific. And I will also tell you that a lot of times when a charity constantly and says, you know, we’re thinking of a merger, I will tell them to sort of back up, because rather than, you know, getting married, which is really the sort of equivalent of a merger, it’s better to kind of get to know each other first, and to enter into an affiliation for some period of time, even if in the affiliation agreement or the letter of intent. You say, specifically, you know, your organization and my organization are gonna affiliate for this particular program, with the goal of entering into a merger agreement in one year, always better to start by getting to know each other. And I can tell you that the most successful mergers and joint ventures

arise when the two organizations have already affiliated, right because they know each other, they’ve identified cultural issues. There are no skeletons in the closet that come out and surprise people. So affiliation is always a good idea, even if it is an end in and of itself. And also, it is step one toward the next step of greater integration,

or leave, we can advance.

So if two organizations have affiliated going back to my arts example, we put on our festival for the arts, and it’s really been successful. And we discovered that maybe we really want to collaborate more, maybe we want to share our back office functions. In that situation, we make one something called joint venture. And we see these a lot in healthcare settings most typically be referred to as ancillary joint ventures, versus a whole hospital venture where it’s kind of a merger scenario, where two hospitals are merging into a third entity. And ancillary joint venture is where your organization and my organization decide, we’re going to collaborate in some kind of ongoing activity. And we’re going to each contribute resources. So perhaps, you’re going to contribute your space, right, you have a big warehouse, you rent a food pantry, and you have about 5000 square feet of space that’s available. So you’re going to contribute your space. And I’m going to contribute staff time and volunteers. And together, we’re going to open, you know, a grocery store available to low income individuals. That will be a joint venture where two organizations are each contributing capital or resources of some kind. And we’ll we are going to share in both the risks and the benefits of the activity.

It’s different than an affiliation agreement, where we’re just contracting for services. And it’s definitely something less than a merger. Because again, our organizations are still saying separate, but we’re probably going to form a third organization to undertake this activity. So there are definitely some pros, right, I’m not taking all the business risk on for this little grocery store. And you’re not either. And it requires more of a commitment for this than an affiliation. But I’m not committing all of my resources, right. So it’s a little bit like an engagement, we’re definitely entering into a greater level of commitment, but we’re not really committing everything. So those are the pros. And our lead, if you can advance. We’ll also talk about the cons briefly. So the cons are, you’re sharing the risk, the trust is sharing the benefits, right? So to the extent that the supermarket is wildly successful,

I’m going to split the profit with you, right, so I’m not going to benefit wholly, I’m going to benefit in part. Also, and this is where I really want to talk about the for profit nonprofit issues that a couple of people asked about when 501 C three is work with other fun ones to use on charitable things, whether it’s a affiliation or joint venture or even a merger. The IRS is not as concerned right. I mean, we want to know the charitable assets are being used for charitable things. But the IRS is not as concerned as when a nonprofit works with a for profit. When a nonprofit works for the for profit, all of a sudden the IRS gets very nervous that the for profit is coming out going to take advantage of the nonprofit. So there are specific IRS

cuz

I don’t want to say laws. It’s really IRS guidance like revenue rulings and procedures, and other rules that apply to relationships between Bible teachers and for profits. And again, if people are interested in more information, I can forward that to you. But you’ll see it’s pretty technical tax stuff. And it all requires that when a 501 C three works for the for profit in a joint venture, the 501 C three must control the venture. So that means if we’re forming a corporation, the 501 C three owns 51%. If we are together collaborating in an LLC, or some other kind of entity, it means I’m appointing a majority of the board members. And that also means in the operating document, whatever their management agreement there is, we have to all agree, and sometimes this is hard for for profits as well. But we have to all agree that the venture is going to be operating for charitable purposes. So for example, I work a lot with health systems, if a health system decides to contract with a for profit management company to manage its nursing homes, which is often the case, right I, my entity owns the nursing homes and you operate a management company, I can do that we can even entered into a joint venture. But the management agreement has to specify, first of all that the full profit partner is not getting paid any more than they should, right fair market value, but also that I have control over the operations in the nursing home to assure that they’re being used for charitable purposes. And this whole area is subject to disclosure. So on the form 990, which was somewhat recently revised, one of the areas that really got expanded is the areas of joint ventures. So if your nonprofit is ever entering into a joint venture, you will need to disclose that on the 90. And if your nonprofit is engaged in a joint venture with a for profit, you should assume and expect that there’s going to be more scrutiny of that relationship, and that your organization will have a greater risk of an audit, not a bad thing. Joint ventures can be great. But again, you want to go into it with good tax advice. And with the understanding that while there may be significant benefits, you are committing more fully than you are in an affiliation. And just as you’re committing assets, it’s going to be more difficult to unwind that joint venture than it is to merely terminate a contract. Here again, you need to look at unrelated business income tax issues. And you want to make sure that the whole thing is structured in a way that is not going to put your exempt status at risk. And again, this goes back to some of the IRS rules and regulations. Or lien, we can move on.

Oh, I think one of my slides got cut, I apologize. Can you go back one more?

You know what, we’re missing a slide. So I’m going to just talk you through it. And then I can send you a revised deck. So if we complete the continuum, right, on the left hand side, we’re thinking about affiliations. And then we’re thinking about joint ventures and shared management services organization. But let’s say two nonprofits decide, they really do work well together. And the boards decide for a variety of reasons whether your CEO is retiring, or we’re facing funding cuts that we really should merge, we really should combine. In that situation, we need to talk about a merger. And what I want to convey here is that nonprofit mergers are different than for profit mergers. And a for profit, it’s usually pretty straightforward. One organization just merges into another and you’ve got one survivor, or sometimes one organization will buy the assets of the other organization. But in nonprofit, you know, we have different issues. We have donor restrictions, right? I may have endowment funds or other restricted funds. And nonprofits are really heavily regulated at the state level by the Attorney General’s office, and typically by the courts. So a lot of times if two nonprofits want to merge, they don’t actually merge in the way that a for profit would merge one into the other. Instead, one nonprofit actually comes in kind of over the other as the parent. So let’s say you’re a ballet company is struggling financially. And if you’re collaborating with my symphony, we decide we really should just create a larger arts organization to include different you know, performance and visual arts. So in that situation, rather than merging your belay company into my symphony, for branding and reputational issues, and certainly if they’re restricted assets, it may make more sense for my organization to come in and become your sole corporate member. You know, nonprofit organizations can be formed as either membership corporations or non membership corporations under state law. So let’s say you’re a non membership organization, you just have a self perpetuating board, but we’re in discussions about a potential merger and that situation, we would change your articles of incorporation. We would make you a membership Corp.

raishin and we will specifically say in your articles and bylaws that my organization is your sole corporate member. And by doing so, my organization in effect is taking over your organization, and your organization becomes the subsidiary of mine.

And this can be a really, really good result. It is many times cheaper and easier than doing a full blown merger, it achieves the same result because you can achieve certain efficiencies. And our organizations are then consolidated for tax and accounting purposes. And it enables two organizations to really further their mission. So I know it sounds a bit counterintuitive at times, you know, the idea that

the best decision for a nonprofit maybe to merge, but really, sometimes it really is the best thing. And sometimes by working with your board and having honest but difficult discussions about how best to further the mission, you may discover that the best answer is actually to merge. So Arlene, if you would flip to the next two slides, I’ll show you that we’ve got a whole bunch of terrific resources on different collaborations and merger activities, and articles, including one by David love piano. Also, there are some really interesting organizations that have sprung up around the country specifically to foster collaboration and tides is doing a really nice job. So I would encourage you to check out that and also the Nonprofit Finance Fund. And then again, it would continue further.

I’ve also included some other resources that relate more to the beginning of the presentation about fiduciary duties and kind of best practices. So just to the extent that your board is interested in learning more, the panel in the nonprofit sector is terrific as an independent sector. And I’ve included a bunch of other articles. The last link here Lemington. Home for the Aged, is an interesting case, it’s an egregious example of a nursing home that went bankrupt and the directors and officers got sued. And I certainly don’t mean to scare anybody. But if you want to learn more about fiduciary duties, and the ways that courts look at the duties of care, loyalty and obedience, particularly in a struggling organization, and an organization that’s having financial issues, that case is really, really interesting. So it is 256. And I’ve managed to get through all of the slides and our lien, I will, I promise provides you that extra one, I want to invite questions again. And also just note that you’ve got my email or website. And if you’re interested in connecting on LinkedIn, I do a lot of presentations. And I share resources for nonprofits generally around the country. And I post those on LinkedIn. So if you’d like to connect with me on LinkedIn, that’s probably the best way that you can get notice of those other opportunities.

And Arlene, and Deb, thank you so much for hosting me. Do we have any other questions?

Yes, Laura, we do. We do have quite a few questions. I don’t know that we have very much time. But I think we could probably address a couple. We have one question from Amy, who says with regard to registering in different states that we solicit donations from we receive well over 20,000 per year from one state our home state. But the other states that we receive donations from are well under that, do we still need to register with those states? Yeah, that’s a great question. The short answer is yes. You know, 39 states in the District of Columbia regulate solicitation. And while some states do have an exemption for organizations that weighs less than $25,000 a year, that exception typically applies only if all of your revenue nationwide falls under that exception. And if you’re entirely a volunteer run organization, so if you’re raising more than 25,000, nationwide, and certainly if you have any paid staff, you are required to register in every state where you are soliciting.

Okay. Mary Jane is asking if sending an invitation out of state to an event work tickets are sold considered out of state solicitation

is I mean, technically, it’s probably only a solicitation if you’re asking somebody to pay more than the cost for the event, right? Because if I invite you to buy a ticket for an event, and I tell you that ticket price is $100, but it cost me $50. To put on the event, really, your deductible contribution is only $50. Right? But presumably, if you’re having a special event, you are asking for money in excess of your expenses, because after all, that’s why we have special events. So the short answer to that is yes, you are soliciting.

Alrighty, Rich is asking a question. How do the laws impact providing funds and services to veterans or soldiers in foreign countries? Wow, that’s a really interesting question.

So I think it depends how you’re doing it. You know, first of all, if you’re sending funds outside of US borders, even if you’re sending that money to US military personnel, you’re still engaging in cross border philanthropy. So I would direct you, you know, back to that slide with all of those resources. That said, you know, I think you need to consider more carefully how you’re delivering that aid. Are you sending money over to a grassroots organization over there to distribute? Are you giving the money to the US government? You know, or are you sending goods directly to those individual soldiers, and each one of those situations, your oversight of the grant is going to be a little bit different. But all of the International grant making requirements really apply to that situation.

All right. And I think probably the last one here.

The last one here is just up from Emil. And she’s saying that she couldn’t find you in a quick LinkedIn search. So she’s wondering if you could share a link, how you’re how you’re

listed on LinkedIn. Oh, that’s really funny. I think if you just search Laura Solomon, I’ll put up in Ardmore, Pennsylvania.

I’m definitely definitely on there. But you can email me if there’s some other issue. I’m sure we could figure that out, too.

All right. Thank you so much. You’re very welcome. It was a pleasure to do the presentation. And I really hope that the folks dialed in found it to be helpful, and donor. Perfect. Thank you again for inviting me to present. Thank you so very much, Laura was a pleasure working with you again. And I want to thank everyone who attended us on this session. We look forward to seeing you in a future webcast, we now have a landing page where our upcoming webcasts will be listed. We hope to see you in next week’s session on monthly giving. And feel free to send your comments etc to any one of these channels. And we will be posting the video and slides that Laura mentioned of this presentation. They will be available in our nonprofit newsroom as well as our knowledge base. So thanks so much. Have a great trip in Washington tomorrow, Laura, and thank you everyone. Have a great afternoon.

Thank you. Take care bye bye bye bye