Legal Potpourri: 6 Questions (and Answers) for Your Nonprofit
We take a moment to explore the many legal questions nonprofit organizations face on a daily basis. Just as nonprofits themselves are diverse and cover many topics, so too are the legal issues they face—employment law, tax questions and queries straight out of Business Law 101.
A working knowledge of these areas is essential to the success of any nonprofit leader. At the same time, nonprofit leaders and managers must be mindful that a little knowledge could be just enough to be dangerous. What you learn about employee rights in a one-hour managers webinar can never substitute for consulting your attorney when issues such as discrimination, unemployment or severance pay arise.
With that in mind, here’s a look at some common questions and answers nonprofit organizations often face:
1. Should the nonprofit board of directors be notified of significant changes in the business, such as
revenue decreases or remodeling?
Yes. A good board would be receiving regular financial information on its operations, at least quarterly if not monthly. The board should have ample opportunity to review what is going on and what is being done about a financial situation, if it is seriously out of line with what was projected. If the situation appears dire, it may be worthwhile to bring the information to the board’s attention before the regular financial reports. And if they don’t pay attention when they get the information in the ordinary course, your organization should press them on the issue.
2. Does the board chair have the authority to review nonprofit personnel records?
Yes. The general rule is that a board chair has a right to review the books and records of a corporation in order to perform his or her fiduciary duty to the corporation. Section 5512 of the Pennsylvania Nonprofit Corporation Law, for example, provides that a director has a right to inspect and copy corporate
books and records “to the extent reasonably related to the performance of the duties of the director,” so long as the director is not likely to use the information in a manner that would violate the duty of the director to the corporation.
3. Is a corporate donation designated for a particular purpose within the nonprofit organization deductible as a charitable gift?
No. If your donor makes a contribution on the understanding that it will be used to buy a computer that will be given to a designated person, that is effectively an earmarked gift to an individual and is not a charitable contribution. The fact that the understanding is not in writing doesn’t make any difference if that was the deal. You couldn’t legitimately give a substantiation letter saying that the donor did not receive any goods or services in return for the gift. Let the donor buy the computer and make the gift without involving your organization. It has no role in the transaction other than to give the appearance of a charitable contribution.
4. Can a donor demand a seat on a nonprofit board in exchange for a generous donation?
No. A donor can ask for representation on the board, but you don’t have to give it. It is essentially an offer for a quid pro quo contract that you can accept or reject. Venture capitalists funding start-up businesses do it all the time. It is much less prevalent in the nonprofit world.
5. Am I required to withhold taxes from my employees’ paychecks?
Yes. When it comes to payroll taxes, there is no difference between a for-profit and a nonprofit employer. If you fail to withhold these taxes, your organization may be liable for the unpaid taxes at the end of the year.
6. Can I use unpaid interns to help with the workload?
Yes and no. Unpaid interns are fine so long as they are gaining some benefit or consideration for the work they perform—for example, if the unpaid intern receives college credits. Beware of situations where an intern is working for free, or “just for the experience.”
The IRS may view this intern as an employee, and determine that the nonprofit should have paid the intern and withheld taxes accordingly.
Jamie Ray-Leonetti, Esq. is a staff attorney with the Philadelphia-based Disability Rights Pennsylvania. She is also a regular contributor to NonProfit PRO, writing the Legal Matters column.