Here are some questions and answers about when and how to bring in an attorney for help.
The total cost will depend on the services you need as well as the lawyer's fee structure. Most lawyers charge in one of these ways:
You can likely begin your relationship with the attorney with a free consultation, by phone, in person, or through a service like Skype. This could last as little as 15 to 30 minutes. A paid consultation might last an hour or more, and you'll get more in-depth information.
Your nonprofit would doubtless rather spend its limited funds on its cause rather than on legal advice. However, many lawyers won’t agree to this type of arrangement. After all, you want a lawyer who specializes in nonprofits; but if no nonprofits pay them, how is the lawyer going to earn a living?
Alternatives are available, which will allow your nonprofit to gain valuable legal services without breaking the bank. Ask about:
It can be frustrating that a lawyer won’t represent your nonprofit for free, but keep in mind the amount of time a lawyer will be spending on your legal issue, and that the lawyer is also running a business.
While many tools are available to help form a nonprofit without a using lawyer's services, every nonprofit is unique. It's all too easy to go astray, for example by:
Consider asking prospective attorneys these questions to better get to know them:
Lawyers tend to specialize, but nonprofits have a variety of legal needs. Thus, if you hire just one lawyer, who works solo rather than with a firm, that might not ultimately be enough. If your solo lawyer handle mostly contracts, for instance, and your nonprofit has a trademark dispute, you will have to find another lawyer.
A good option is to find a larger law firm that covers numerous practice areas, ideally including nonprofit and general business law, contracts, intellectual property, real estate or landlord/tenant, employment law, and litigation.
The down side to larger firms is that their rates tend to be high. You might also face hurdles getting in direct touch with the attorney who's your primary contact, as larger firms usually put receptionists, assistants, and paralegals on the front lines.
]]>Nonprofits that file IRS Form 990 must allocate their annual expenses into three categories:
Together, administrative expenses and fundraising expenses make up a nonprofit’s “overhead,” or “operating expenses.”
The IRS does not require that nonprofits spend any particular portion of their income on each category. It just wants nonprofits to report how they spend their money.
There is no single formula or ratio all nonprofits use to determine how much of their total budget should go to operating expenses. But, the commonly accepted rule most of them follow is the less spent on overhead, the better a nonprofit looks to donors.
Charity rating organizations grade nonprofits partly on how much they spend on these expense categories. For example, CharityWatch.com says that it’s reasonable for most charities to spend up to 40% of their budget on operating expenses—in other words, at least 60% should go to programs, and 40% should go to everything else. However, charities that spend less than 40% get higher grades from CharityWatch, with those spending 25% or less on operating expenses receiving the highest “A” grades. Charity Navigator, which employs a sophisticated rating system, gives bonus points to nonprofits with lower operating expenses. Most nonprofits who spend more than 30% of their budget on overhead get no bonus points. The Better Business Bureau says that no more than 35% of a nonprofit’s budget should be spent on operating expenses.
Unfortunately, the desire to keep overhead costs as low as possible has had pernicious effects on many nonprofits. One study found that the lack of overhead investment has left many with insufficient office space, nonfunctioning computers, and staff members who lack the training they need to do their jobs properly. In one case, a nonprofit had furniture so old and beaten down that the movers refused to move it.
In addition, many nonprofits engage in accounting tricks or outright dishonesty to keep their reported overhead costs as low as possible—sometimes ridiculously low. This is aided by the fact that the IRS does not require nonprofits to allocate expenses in any particular way. A study of over 220,000 nonprofits found that more than a third reported no fundraising costs at all, while one in eight reported no management or general expenses. The researchers concluded that 75% to 85% of these nonprofits were improperly allocating their expenses.
Things have gotten so bad that the heads of the three leading nonprofit rating organizations--GuideStar, Charity Navigator and BBB Wise Giving Alliance—created a website called The Overhead Myth. The website includes an open letter from the heads of these organizations denouncing the “overhead ratio” as a valid indicator of nonprofit performance.
August 2013
]]>A general liability policy insures your nonprofit organization against classic slip-and-fall scenarios. (It's sometimes also called a "commercial general liability" or "CGL" policy.) Your nonprofit will be covered for damages that it's ordered to pay to someone (such as a visitor, customer, supplier, or associate) who is injured on the organization's property. These kinds of policies don't apply to the nonprofit's employees, who are covered separately by workers' compensation insurance.
Whether you own or rent the space your nonprofit occupies, consider what your organization might lose in the event of a fire, earthquake, vandalism, storm, or similar event. Then, buy property insurance that covers those risks, making sure it covers not only the building (if your organization owns it) but any:
Most basic policies will cover these items -- but at what dollar amount? Make sure the policy covers the cost to actually replace the property, instead of paying its market value as a used good immediately before the damage.
Ask your agent or broker to carefully explain your deductible (how much your organization will be out of pocket before the insurance kicks in) and what types of losses or property damage will not be covered under the policy. For example, flood insurance is usually sold separately. And your organization may have to pay extra to have theft coverage included.
If your staff or volunteers use any vehicles (including their own) for your nonprofit's activities, auto liability insurance is a must. In fact, your state may require you to purchase a minimum amount of coverage. The insurance will pay for injuries a driver causes to other people or property while carrying out your organization's business. Your state's law may also require additional auto insurance, including personal injury protection (PIP) and uninsured/underinsured motorist (UM/UIM) coverage.
If your nonprofit sells products to the public -- for example, you raise funds by selling baked goods, or your artist-clients create and sell sculptures out of recycled products -- consider buying product liability insurance. It will protect your organization from lawsuits by customers claiming they were hurt by an unsafe or defective product you provided. For example, if a customer breaks a tooth on a walnut shell baked into your cookie or slices a hand on a sharp-edged sculpture, this insurance will cover the legal defense and a sizable portion of the damages.
Your nonprofit's board of directors and officers (many of whom are volunteers) could be personally named in a lawsuit against your nonprofit alleging fraud or financial mismanagement. For example, if a board member invests the nonprofit's assets unwisely and loses everything, a creditor might sue the nonprofit as well as its directors and officers. In such a case, you'd want directors and officers (D&O) insurance to cover the cost of defending the directors and officers and pay any resulting money damages.
As with any insurance coverage, it's important to understand what kind of claims are and aren't covered by a D&O policy. Typical exclusions include damages arising from criminal or fraudulent behavior and claims brought by one director against another. But make sure your policy doesn't exclude employment-related claims, which are the most common ones filed against directors and officers.
Similar to D&O coverage, professional liability coverage (also sometimes called "errors and omissions" or "malpractice" insurance) protect against liabilities resulting from mismanagement of the organization, as well as workplace-related claims such as discrimination or sexual harassment. It covers not only directors and officers but also staff, volunteers, and the nonprofit organization itself.
For more information on evaluating your nonprofit's insurance needs and finding the right policies for your organization, see Starting & Building a Nonprofit; A Practical Guide, by Peri H. Pakroo, J.D. (Nolo).
]]>So let's look at some of the best ways to protect your organization from the most common types of lawsuits: contract disputes, employment law claims, and personal injury lawsuits.
Many of the everyday transactions your nonprofit engages in -- such as hiring a contractor to fix up your facility, buying equipment, and renting space for your office or for a special event -- require more than just an oral agreement. To prevent misunderstandings and disputes, your organization should establish exactly what's being agreed to, and put it in writing. That way, if a dispute arises -- or the other party doesn't do what was promised in the contract -- you'll have written evidence to present in court.
The agreement doesn't have to be written in tortuous legal language. What's important is that both sides understand it. If you're presented with a standard form agreement, don't feel you have to live with it as-is. You can always cross out sections or add to them by writing directly on the document (accompanying the changes with both sides' initials), or add an addendum (an additional page) to the contract.
Consider all the details carefully before signing. For example, if you were hiring a company to design a website for your organization, you'd want to make sure the contract included:
The best rule of thumb to follow may be this: Think about what could possibly go wrong, and make sure you address it in the contract.
Employment-related claims -- such as sexual harassment, wrongful termination, discrimination, and wage-and-hour disputes -- make up a significant portion of lawsuits against nonprofits (and for-profit businesses, too).
Unfortunately, the very fact that nonprofits are financially strapped often leads them to impose on their employees in ways that are quite illegal. Failing to pay someone overtime or improperly handling their vacation time might be laughed off by a happy employee, but when that person becomes disgruntled or gets laid off, those kinds of employment practices can lead to a lawsuit.
Both federal and state laws govern employment matters, so you'll need to gain some understanding of both. Start out by visiting the HR and Employment Law section of Nolo's website.
Personal injury or "tort" lawsuits are the least likely ones your nonprofit will face. But if one arises, it can be financially devastating. (There's a reason people keep advocating "tort reform.")
Tort claims can stem from a physical injury, property damage, emotional distress, or damage to a person's reputation. In general, whoever (or whatever organization) causes an injury will be financially liable for the damages suffered by the victim, even if the wrongdoer didn't mean any harm; both intentional injuries and those caused by carelessness can result in liability.
For example, if your group is located in an old building with too few electrical outlets and a visitor trips over one of many extension cords and breaks an ankle, that person might file a personal injury claim against your nonprofit, seeking compensation for medical bills plus pain and suffering.
Or, if your nonprofit posts false and damaging information about someone on its website -- say you write an article about the local art scene, accuse a gallery owner of fraudulent activity, and it turns out to be untrue -- the gallery owner could file a personal injury claim against your nonprofit based on damage to reputation.
Evaluate your most likely areas of risk -- for example, an office space that's open to the public, volunteers driving delivery vans of food to housebound people, regular camping or other trips with children, active advocacy work, or special events involving large amounts of money -- and then plan specific ways to minimize those risks and limit your exposure to legal trouble. Good management and supervision can go a long way.
For more information on personal injury law, see the Personal Injury and Accidents section of Nolo's website.
All the precautions and planning in the world won't keep your nonprofit immune from a lawsuit, so insurance may be your nonprofit's best option. To learn more, see Nolo's article, What Types of Insurance Should a Nonprofit Buy?
A more extensive discussion of nonprofit risk management can be found in Starting & Building a Nonprofit; A Practical Guide, by Peri H. Pakroo, J.D. (Nolo).
]]>While adoption of these policies is strongly encouraged by the IRS, it is not required. Indeed, the IRS lacks the authority to impose such a requirement since governance matters are largely the province of state nonprofit corporation law, not the federal tax law administered by the IRS. Nevertheless, IRS officials have indicated that nonprofits that fail to adopt certain policies have a greater chance of being audited than those who do—the rationale being that nonprofits with such policies are more likely to be in compliance with the tax law.
IRS Form 990, the annual information return field by larger nonprofits, contains a series of questions asking whether certain policies have been adopted by your nonprofit. A series of “no” answers in this section of the Form just doesn’t look good to members of the public who read the return.
That said, you don’t necessarily have to adopt all the suggested polices. The Form 990 instructions provide: “Whether a particular policy, procedure, or practice should be adopted by an organization may depend on the organization’s size, type, and culture. Accordingly, it is important that each organization consider the governance policies and practices that are most appropriate for that organization in assuring sound operations and compliance.”
Hold a board meeting to review key policies already in place at your nonprofit and discuss whether you should adopt or revise any of the following policies.
Conflict of interest policy. A conflict of interest policy is used to help all those associated with your nonprofit to identify, disclose, and deal with situations where there is a financial or other conflict. This is one policy all nonprofits, no matter how small, should have.
Expense reimbursement policy. Reimbursement or payment of expenses for nonprofit officers, directors, trustees, and key employees (ODTKEs) is a hot-button item for the IRS and the public. Form 990 contains a separate Schedule J dealing largely with this issue. The schedule specifically asks whether your nonprofit reimburses or pays ODTKEs for first-class or charter travel, companion travel, tax gross-up payments (payment of any taxes due on taxable perks such as travel), discretionary spending, housing, health or social club dues, and personal services such as use of a chauffeur. If your nonprofit reimbursed or paid an ODTKE for any of these things, you must disclose whether you have a written policy in place for such reimbursement or payment. If not, you must explain why not.
Whistleblower protection policy. A whistleblower policy encourages employees to report financial and other improprieties by establishing procedures to keep whistleblowers’ identities confidential and to protect them from retaliation. A small nonprofit without employees probably doesn’t need this.
Document retention and destruction policy. This policy provides guidance on how long records must be kept by your nonprofit before they are destroyed. This is a good policy for all nonprofits to have.
Joint venture policy. This policy requires a nonprofit to identify, disclose, and properly manage joint ventures—that is, relationships with for-profit businesses. Smaller nonprofits ordinarily are not involved in such ventures.
Gift acceptance policy. A gift acceptance policy establishes procedures for reviewing, accepting, and substantiating non-standard contributions. These are contributions of items that are difficult to sell and/or value—for example, vacation time-shares or stock in a privately owned company. If your nonprofit accepts such non-standard contributions, you should adopt such a policy.
Chapter, branch, and affiliate policies. You would need such a policy only if your nonprofit has local chapters, branches, or affiliates.
If you need to adopt one or more of the suggested governance policies, you’ll need to draft a policy and have it approved by your board of directors. There is no single way to draft any of these policies. They can be quite simple or complex. The smaller your nonprofit, the simpler they can be.
There are many places where you can find sample policies. The organization, Board Source, has numerous sample policies that can be downloaded from its website for a small fee. Other websites that have downloadable sample policies include:
For more on compying with the IRS, see Nolo's book, Every Nonprofit's Tax Guide.
May 2013