Top Legal Risks to Nonprofits: Learning How to Address Them

Now more than ever, nonprofits and their boards must guard against unwanted, negative legal exposure. This article discusses some of the top legal risks facing nonprofit boards, as well as practical tips for addressing these risks.

Exposures From Social Media, Misuse, Lack of Understanding

From blogs to employee smart phones and work-related Facebook posts, social media and online networking are integral parts of the nonprofit world today. However, utilizing these technologies carries with it new risks. For example, posting materials from presentations can lead to copyright and trademark infringement, taking advantage of available social media to ensure that present and potential employees fit within an organization’s culture may create privacy violations and discrimination claims and allowing free reign for employees to express their views on a nonprofit’s website or blog—or on social media while identifying themselves as employees of the organization—can expose the nonprofit to liability for defamation and tortious interference or otherwise reflect poorly on the organization. With proactive planning by nonprofit boards—including the development and communication of internal and external policies—risks can be managed and the rewards of social media realized.

Unhappy Staff and Volunteers

While it is impossible to keep everyone at a nonprofit happy all the time, boards should be aware that dissatisfaction and legal risk may go hand in hand. Some unhappy employees may be victims of workplace bullying—abusive or threatening conduct by bosses and co-workers. According to the Workplace Bullying Institute, 38 percent of workers report having experienced workplace bullying first hand. It is important to consider that employers can be found legally responsible in cases alleging intentional infliction of emotional distress or even assault. The board should ensure that an easy-to-use internal complaint procedure is in place and that the CEO sets the tone for appropriate workplace behavior.

IRS Form 990

Not only does tax-exempt status relieve an organization of most federal and state corporate income tax liabilities, as well as the ability to receive tax-deductible charitable contributions (for those exempt under Section 501(c)(3)), but it also offers credibility with the public. However, those benefits come with a price tag in the form of the federal tax laws, with many restrictions on a tax-exempt organization’s income, fundraising, meetings, educational programs, publications, lobbying and political activities, standard setting, certification, and other activities. Failure to comply with these restrictions can jeopardize an organization’s tax-exempt status. The IRS’ tool for monitoring compliance with the federal tax laws is the very comprehensive Form 990 information return, which must be filed annually by most exempt organizations. Thus, to protect their organization’s tax-exempt status, board members should have a basic understanding of the restrictions imposed by the tax laws and implement policies and procedures responsive to these requirements as well as the Form 990’s reporting mandates.

Copyrights and Trademarks

The risk of committing actionable violations of copyright and trademark law lurks behind the doors of every nonprofit. Too few staff members at a typical nonprofit appreciate the potential exposure associated with their enthusiastic “borrowing” of the work of others, often accomplished by mastering keyboard commands for “copy” and “paste.” The opposite risk also exists—the failure to adequately protect the nonprofit’s written and artistic expressions (copyright-protected material) and names and symbols that identify the nonprofit as the source of goods or services (trademarks). What’s the board’s role? The board should inquire about the steps taken and policies in place to both prevent the violation of others’ copyright-protected material and trademarks, as well as whether the nonprofit has taken appropriate measures to protect its own intellectual property. Registering trademarks can be costly and time-consuming (registering copyrights is fairly easy and inexpensive), but may be worth it to protect a nonprofit’s valuable assets.

Lobbying and Political Activity Compliance 

While political issues and players often have a huge impact on the mission of a nonprofit, the IRS restricts the ability of many tax-exempt nonprofits to engage in governmental affairs activities. For example, Section 501(c)(3) public charities must avoid all political campaign activities and keep lobbying within permissible limits, whereas a Section 501(c)(6) association may engage in limited political campaign activities and may lobby as its primary activity. Nonprofit board members should understand where the limitations lie—and where they can safely engage in needed advocacy.

Failure to Manage Conflicts of Interest

Nonprofits that fail to manage conflicts of interest run the risk of losing public confidence or worse, becoming the object of a media scandal. Such risks provide ample reason to avoid even the appearance of impropriety by implementing a well-drafted conflict of interest policy and a transparent disclosure process and procedure for managing conflicts. Conflict of interest policies should help nonprofit managers and volunteer leaders understand that not all conflicts involve bad actors with poor ethics. Rather, a conflict can arise any time a nonprofit manager or volunteer leader’s personal, financial or other interests could potentially conflict with the interests of the nonprofit. And recognize that not all conflicts are necessarily bad for the nonprofit; some can even be in the organization's best interests. But the key to effectively dealing with potential conflicts is for the board to undertake a routinized process for identifying, disclosing and managing them.