Fundamentals - Nonprofit Governance (Part 1)

Charity Advisor Resource Newsletter - Volume 3.1 (2012)

BY JONATHAN D. ACKERMAN, ESQUIRE

There are at least 5 important constituencies that care about good nonprofit governance:

Congress - Though the nonprofit community has actively moved to self-regulation since at least 1918, Congress has, over the years, altered the federal tax exemption qualification for certain nonprofits, and has, through the enactment of a series of excise taxes and penalties, affected the way in which nonprofits operate and report.

IRS – The IRS has become increasingly active in insuring that nonprofits exercise good governance - at the time of granting of tax exemption, when they file the annual information return - Form 990, and at the time of audit. The IRS has also adopted its own set of good governance practices for nonprofits in order to improve tax compliance, to safeguard charitable assets and to assure that charitable interests are served.

States - State Attorney Generals are becoming more active in regulating and overseeing charities for failing to comply with applicable laws, failing to exercise proper oversight and breaches of their fiduciary duties.

Donors (and their heirs) - more multi-count lawsuits are being brought by disgruntled donors and their heirs personally, and jointly and severally, against these fiduciaries for a breach of their fiduciary duties under state law, including excess spending from endowed funds, excessive compensation and loans to key executives, conflicts of interest, and failing to keep adequate records, to adopt reasonable standards of investment and invasion, and to exercise proper oversight.

Potential Donors - Donors have a right to expect that nonprofits: (i) comply with all laws, (ii) are transparent and accountable in their operations, (iii) have effective governance, which includes having policies in place to enable the fiduciaries to meet their duties, (iii) exercise strong financial oversight, and (iv) engage in responsible fundraising.

Publicized abuses of nonprofit mismanagement and a lack of oversight erodes the single most important component of the vibrancy and continued viability of the entire nonprofit sector — the public trust.

Go to www.GetGoodGovernance.com and watch the video "Why Nonprofits Need Good Governance" to learn more about good governance and the important constituencies that care about good nonprofit governance.

For nonprofit organizations located in Maryland, go to www.MDCharityLaw.com

For nonprofit organizations located in the District of Columbia, go to www.DCCharityLaw.com