Nonprofits and Social Media: Clear Law Institute CLE

Social Media Concept. Woman using modern technology for communication

Social media is a rising trend, a declining trend, just another communication, the Wild West. Each of these statements may ring true, depending on the context. But there’s no doubt that nonprofits are using social media and many would benefit from more informed counsel and legal advice about crafting social media policies and appropriately managing risks. I recorded a continuing legal education (CLE) program on Nonprofits and Social Media for Clear Law Institute last Friday. Here is a rough outline of the major topics we covered, including some links to some resources I hope you’ll find helpful:


Nonprofit Tweets of the Week – 2/5/16


Here in our hometown of San Francisco, the past week has been building up to Sunday’s Super Bowl 50 but it was also marked by Fred Korematsu Day and another loss of a musical legend (RIP Maurice White). Have a listen to Earth, Wind & Fire’s September while perusing our curated nonprofit tweets of the week:

  • Nonprofit Quarterly: Must read: The inaugural article of the #EDISeries looks at #diversity in the nonprofit theater world.
  • Chronicle of Philanthropy: Opinion: Safeguarding charity independence
  • Nonprofit Quarterly: Confidentiality is critical for a board to create & maintain an atmosphere in which discussion can thrive
  • Venable Nonprofit Law: Feeling insecure about security? Protecting your #nonprofit’s data is not rocket science via @NatlCouncilNPs
  • Jeff Bates: 12 Reasons Why You Should Gracefully Resign from a Nonprofit Board Nonprofit Quarterly [Ed. Good to see this article, NPQ’s 3rd most popular in 2014, still finding an audience.]
  • Women’s Philanthropy: The gender gap in charitable giving via @WSJ:
  • Stanford Corp Gov: Seven Myths of Boards of Directors: Should the chairman always be independent? Do CEOs make good directors? #corpgov
  • World Economic Forum: Why aren’t business leaders getting the governance message? @lucymarcus #leadership
  • The Economist: #Corporate #Social Responsibility: Social saints or fiscal fiends? #CSR #taxes #management
  • Green Business World: The First Benefit Corporation IPO Is Coming, And That’s A Big Deal

Nonprofit Radio: Wounded Warrior Project and Overhead

Budget Concept

I’ll be on Nonprofit Radio this Friday at 10:30 am PT / 1:30 pm ET discussing the Wounded Warrior Project controversy and overhead with host Tony Martignetti. Catch us live on Talking Alternative or a few days later on iTunes.

I’ve previously expressed my views on the overhead myth here and talked with Tony about good overhead and bad overhead. But the criticism of Wounded Warrior Project goes beyond a single statistic. I look forward to my discussion with Tony to see if we can share some insights about this case and on reviewing a charity’s activities.


Wounded Warrior Project accused of wasting donation money (CBS News, 1/26)

[A]ccording to public records reported by “Charity Navigator,” the Wounded Warrior Project spends 60 percent on vets.


According to the charity’s tax forms, spending on conferences and meetings went from $1.7 million in 2010, to $26 million in 2014. That’s about the same amount the group spends on combat stress recovery — its top program.

Ex-employee: Wounded Warrior Project conduct “makes me sick” (CBS News, 1/27)

CBS News has interviewed more than three dozen former employees of the Wounded Warrior Project and nearly all of them told us they’re concerned that the organization has become more focused on raising money than on serving wounded veterans.

Charity watchdogs question Wounded Warrior’s spending on vets (CBS News, 1/27)

“I couldn’t tell the number of people that were assisted. I thought that was truly unusual. If the organization is asking for money and purportedly spending money to assist veterans, and talking about it, I would like to know,” said Owens.

Letter from Wounded Warrior Project to CBS (1/27)

Based on our most recent independently audited financial statements, 80.6% of total expenditures went to provide programs and services for wounded service members, their caregivers, and families.

Wounded Warrior Project on Charity Navigator’s watch list (CBS News, 1/30)

But CharityWatch president and founder Daniel Borochoff said his biggest concern is the group is sitting on a $248 million surplus — and that not enough of it is being spent on veterans.

Wounded Warrior Project Spends Lavishly on Itself, Insiders Say (New York Times, 1/27)

About 40 percent of the organization’s donations in 2014 were spent on its overhead, or about $124 million, according to the charity-rating group Charity Navigator.

Wounded Warrior Project Investigation: What CBS News Got Wrong (Nonprofit Pro, 1/28)

Then there’s the issue of the $26 million Wounded Warrior Project spent on conferences and meetings. That figure is almost indefensible if all of it went toward staff-only team-building events and office parties, but the charity lists $24.4 million of it as a program expense, $491,000 as a management expense and $1.2 million as a fundraising expense.


That could be a crafty way for Wounded Warrior Project to skirt the system in an attempt to inflate its program numbers, or it could be that some number of these events involved veterans. (Or, it could be both.)

Wounded Warrior Project: The Fundraising Factory Issue (Nonprofit Quarterly, 2/1)

This focus on expanding the fundraising base among individuals would, in fact, require capital well above what most organizations would spend, since acquiring new donors at a fast pace is an expensive endeavor, so there is a different “model” at play here—a donor acquisition and growth model or a “fundraising factory” -but the fact that it appears to be funded by current donors without an acknowledgement of that is a very big problem. We also have no sense of when and if there will be a “big enough” moment at which time we might expect a smaller fundraising cost.

What Forms 990 Can and Can’t Tell Us About Wounded Warrior Project (Guidestar, 2/3)

[T]he 990 has little to say about the allegations that have been made by CBS and by the New York Times.  But it does indicate an organization that has grown very quickly, and one that could be more transparent about its operations on its Form 990.

Wounded Warrior Project Response to False News Reports

Wounded Warrior Project provides more than 20 needs-specific, free programs and services to more than 83,000 wounded veterans, who we call Alumni, and more than 15,000 family support members. We are constantly expanding our services to better support warriors.

Wounded Warrior Project Form 990 (for fiscal year ending 9/30/14)

  • The mission of the Wounded Warrior Project is to honor and empower wounded warriors.
  • Number of voting members of the governing body: 10 (all independent)
  • Total revenues: $342,066,114
  • Total expenses: $248,005,439
  • Total expenses of the three largest program services (by expenses): $81,892,441 (33% of total expenses)
  • Total program services expenses: $189,558,100 (76% of total expenses), including $40,916,885 in joint costs from a combined educational campaign and fundraising solicitation
  • Total fundraising expenses: $43,441,173
  • Net assets: $248,285,483
  • Principal officer: Steven Nardizzi

5 Highlights from the ABA Exempt Organizations Committee Meeting 1/29/16

x-144-15 5 points

Here are 5 highlights from the American Bar Association Exempt Organizations Committee Meeting held in Los Angeles on January 29, 2016:

1. Form 1023-EZ

The IRS Tax Exempt & Governmental Entities Division (TE/GE) disagreed with the critical conclusions made by the National Taxpayer Advocate regarding the level of noncompliance by organizations filing the Form 1023-EZ Streamlined Application for Recognition of Exemption Under Section 501(c)(3). But TE/GE Commissioner Sunita B. Lough stated that the Form 1023-EZ was still in “test-and-learn” mode and more would be determined after the planned post-determination correspondent audits which are scheduled to start this month.

2. New Notice Requirement for 501(c)(4) Organizations

Social welfare organizations will soon be required to notify the IRS within 60 days after the organization is established of its intent operate, as established by section 405 of the Protecting Americans from Tax Hikes Act of 2015 (the PATH Act), which includes new Section 506 of the Internal Revenue Code. The IRS issued Notice 2016-09 on January 19, 2016 stating that the Treasury Department and the IRS intend to issue temporary regulations prescribing the manner in which social welfare organization will provide the notification (which the IRS hopes but has not promised will be electronic). Even organizations that seek IRS recognition of tax-exempt status using Form 1024 will need to provide this new notification.

3. Equivalency Determination

Equivalency determination is considered an alternative to expenditure responsibility for allowing private foundations to make grants to foreign organizations that meet the qualifying distribution requirements and do not violate the taxable expenditure rules. The general rule is that a favorable equivalency determination requires a foundation manager to make a good faith determination that a foreign organization is the equivalent of a U.S. public charity described by Section 509(a)(1), (2), or (3) of the Internal Revenue Code. Such determination may be based in part on an affidavit supplied by the foreign organization setting forth sufficient supporting facts. The special rule provides that a determination based on the written advice of a qualified tax practitioner (QTP) ordinarily will be considered as made “in good faith.” A grantee affidavit (in place of the written advice of a QTP) will not afford a private foundation with the benefit of the special rule.

Under the special rule, the written advice of the QTP must be current. Background to the final regulations promulgated in 2015 provide:

Written advice will be considered current if, as of the date of the distribution, the relevant law on which the advice was based has not changed since the date of the written advice and the factual information on which the advice was based is from the organization’s current or prior year. However, consistent with rules for determinations of public support over a five-year test period for U.S. public charities, written advice that an organization satisfied the public support requirements under section 170(b)(1)(A)(vi) or section 509(a)(2) based on support over a test period of five years will be treated as current for the two years of the grantee immediately following the end of the five-year test period.

4. Commerciality Doctrine

Under applicable case law, the IRS may deny or revoke the 501(c)(3) status of an organization that is operated in a “commercial manner” and therefore not primarily in furtherance of an exempt purpose. See our previous post on Unrelated Business Income and the Commerciality Doctrine. Interestingly, the Advisory Committee on Tax Exempt And Government Entities, in its 2014 public report, recommended a rejection of application of the commerciality doctrine.

Because commerciality is not consistently defined, and it’s unclear how much commercial activity is permitted before it will jeopardize an organization’s exemption, organizations must be careful. Parsing the regulations, attorney Matt Clausen summarized the following points applicable to a 501(c)(3) organization:

  • An unrelated business can be a substantial part of the activities if it is “in furtherance of” an exempt purpose [however, query what type of business is in furtherance of, but not related to, an exempt purpose];
  • An unrelated business cannot be a primary purpose; and
  • A related business can be a primary purpose .

Some questions remain:

  1. Does the commerciality doctrine add something to the regime that already governs commercial activities?
  2. Does it make sense to apply the doctrine ex ante?
  3. Does the doctrine discourage nonprofits from entering into traditional for-profit business areas?

5. Mission Related Investments

For private foundations, new guidance from the IRS recognizing mission-related investments (MRIs) was published in 2015. While an MRI is not currently defined by the Internal Revenue Code or Treasury Regulations, it is generally considered to be an investment for both a financial return and a social impact return (more specifically, one that advances the particular mission of the investor).

IRS Notice 2015-62 “confirms that under section 4944 of the Internal Revenue Code, private foundation managers may consider the relationship between a particular investment and the foundation’s charitable purpose when exercising ordinary business care and prudence in deciding whether to make the investment.” This conforms the investment standard under federal tax laws with the state prudent investment laws under the Uniform Prudent Management of Institutional Funds Act (UPMIFA), “which generally provide for the consideration of the charitable purposes of an organization or certain factors, including an asset’s special relationship or special value, if any, to the charitable purposes of the organization, in properly managing and investing the organization’s investment assets.”

Accordingly, whether you can take mission into account in investing is becoming more clear. How you take mission into account is still open to some speculation. And how much of a diversified portfolio of assets can be MRIs must also be considered on a case-by-case basis.

Moderator David Levitt asked the panelists how much of a trade-off you could make of profits for mission. Jeffrey Hom of Omidyar Network noted two recent studies from Cambridge Associates and Wharton Social Impact Initiative which provided early indications that at least some investments can generate market-rate returns with social and/or environmental impact. He noted, however, that there is no bright line definition of an acceptable financial return when making a tradeoff for mission.

Prompted by a question from the audience, Levitt also questioned when something was an MRI versus a programmatic expenditure requiring expenditure responsibility. See Levitt’s article Investing In The Future: Mission-Related And Program-Related Investments For Private Foundations.


Nonprofit Tweets of the Week – 1/29/16

LA is really starting to glow. This is the Mariott/Ritz in LA Live and on the left is the Nokia Theater.

I’m back in L.A. for a conference of the tax-exempt organizations committee of the American Bar Association. Have a listen to Guns N’ Roses’ Welcome to the Jungle while perusing our curated nonprofit tweets of the week:

  • New York Times: Special Report: The Wounded Warrior Project’s lavish staff spending is raising questions about its mission
  • Chronicle of Philanthropy: Experts urge Wounded Warrior to address criticism directly, and fast
  • National Council of Nonprofits: Fascinating debate of the role of a #nonprofit board in #fundraising What do you think?
  • Andy Ho: Is There a Philanthropy Establishment? And, If So, Who’s In It? via Inside Philanthropy
  • Tony Martignetti: Ways to ‘Own’ a Movement | @PNDBlog
  • Chronicle of Philanthropy: Charities urged to watch donor-anonymity legal challenges [Ed. This important article is currently behind a paywall.]
  • For Purpose Law: Get Ready for Machine Readable 990s
  • Gene: Resigning from a nonprofit board doesn’t mean you’ve escaped your responsibilities (liabilities) #TorontoGoodwill Nonprofit Quarterly
  • Nonprofit Law News: Lobbying Restrictions for 501(c)(4)s Receiving Federal Grants, Loans or… | by @Holland_Knight
  • Innov8social: “Seven Emerging Technologies That Will Change the World Forever”

Attorney/Director: Issues for Attorneys Serving on Nonprofit Boards

Attorney Director 2

Attorneys may be of great value to nonprofits when serving on nonprofit boards. They bring to the board a special set of knowledge, skills, perspectives, networks, and experiences, including an ability to spot and address particular issues and problems. For such reason, many nonprofits actively seek out attorneys to serve as directors.

But this can also cause a misunderstanding of the capacity in which the attorney is going to serve. Nonprofits may want and expect the attorney to serve as pro bono counsel while the attorney often wants to serve purely as a director.

However the relationship starts out, it’s not uncommon to see the attorney/director eventually providing legal advice to the nonprofit, whether or not in the official capacity as the organization’s lawyer. Here are a list of issues for an attorney/director to consider in such scenario:

Ethical Considerations

Role Confusion. When you offer a particular opinion to the executive or to other board members, are you communicating as a director or as a lawyer? Does the recipient of the communication know in which capacity you are providing the opinion? The concern is two fold: (1) your words offered as a director may be received with unwarranted and unspoken deference if the rest of the board considers it legal advice, and (2) your legal advice offered as a lawyer may be received without appropriate consideration if the rest of the board considers it the thoughts of a director.

Loss of Independence. Will the dual role compromise your independence of professional judgment? Consider if your legal opinion or advice will be clouded if you are reviewing an action already taken where you participated in the vote or had a preferential viewpoint from a business perspective.

Conflicts of Interest. What is your role if the organization enters into a dispute with your firm or one of your firm’s clients or prospective clients? Will you be aware of the conflict if representing the organization? In addition to potentially harming your firm, you can harm the organization if you either fail to provide zealous representation or withdraw from representing the organization due to the conflict.

Loss of Attorney-Client Privilege. Are you communications with the rest of the board protected by the attorney-client privilege? If it’s clear that the communications are to be attorney-client communications, they should be protected by the privilege. However, such protection may be lost if it’s not clear that you are communicating only as a lawyer or if the communication is recorded in minutes to which other persons have access.

Competence. Do you have sufficient competence in the areas of law in which you have been asked to provide legal advice as an attorney to the organization? The competency issue is of course critical in avoiding malpractice, and attorney/directors must be careful when asked to provide advice in areas in which they possess some knowledge but don’t have the requisite competence.

Heightened Exposure to Liability

Standard of Care. A director’s standard of care is generally expressed as that of an ordinarily prudent person in a like position under similar circumstances. While there are cases of inside directors (who are employees) of for-profit corporations having a higher standard of care than outside directors, there does not appear to be authority that extends to directors of nonprofit corporations with specific professional knowledge, skills, and experience that might be relevant in exercising their fiduciary duties. Accordingly, directors who happen to be lawyers should not be held to a higher standard of care than other directors. But there have proposals (including in a 2004 Discussion Draft Proposal from the Staff of the Senate Finance Committee) that would require directors with special skills or expertise to use such skills or expertise in meeting their duty of care. And it’s plausible that a director also acting as an attorney to the organization on a particular matter may be held to a higher standard of care based on being comparable to an inside director.

Reliance Defense. In performing the duties of a director, a director may be entitled to rely on information, opinions, reports or statements prepared or presented by an attorney. This may serve as a defense to a claim if, for example, a director took an action that would otherwise have been considered negligent but not for the director’s reliance on the opinion of a lawyer that it was proper. An attorney/director, however, cannot of course claim reliance on her or his own opinion as a defense against a claim.

Vicarious Liability. In performing the duties of a director, an individual serves in her or his individual capacity and owes a duty of loyalty to act in the best interests of the organization. If a director is serving in such capacity as an agent and at the direction of her or his employer, the employer may be subject to vicarious liability for actions taken by the director.

Insurance. The role confusion issue may extend to whether insurance will cover acts or omissions of an attorney/director. Directors’ and officers’ (D&O) insurance generally covers certain acts or omissions of a director acting in such capacity but will not cover legal advice offered by an attorney/director. Professional liability or malpractice insurance generally covers certain acts or omissions of a lawyer acting in such capacity but will not cover such individual if acting in the capacity of a director. Because it’s often unclear in what capacity an attorney/director is serving, some professional liability insurance carriers will not provide coverage where legal advice is being given to an organization on which the insured also serves as a director. Further, where it’s not clear in what capacity an attorney/director was acting, both D&O and professional liability insurance carriers may deny coverage.


Tips for Attorney/Directors

  1. Inform management and the board about your role and the issues regarding attorney-client privilege up front.
  2. Identify in what capacity you are communicating (make sure it’s accurately reflected in the minutes).
  3. Refrain from voting on material financial transactions with your law firm.
  4. Identify potential gaps in coverage between your professional liability insurance and the nonprofit’s D&O insurance.
  5. At all times when rendering legal advice, exercise the independent professional judgment required of a lawyer (e.g., advising against illegal action even if favored by the board).
  6. Diligently perform your duties as counsel, within the limits of applicable law, once an action has been approved by the board even if you disagreed with the action as a director.

Part of a 1/13/16 presentation for the Bar Association of San Francisco: Duties and Responsibilities of Serving on a Nonprofit Board.

Additional Resources

Reasons to have – and reasons not to have – an attorney on the board (Blue Avocado)

Lawyers’ Service on Nonprofit Boards (American Bar Association)

Lawyers As Nonprofit Directors – Maximizing Opportunities, Mitigating Risks (Proskauer)

The Lawyer as Director of a Client (American Bar Association)



Nonprofit Tweets of the Week – 1/22/16

Racism 2

On the week that began with Martin Luther King, Jr. Day, revelation of the Flint Water Crisis further displayed our country’s pervasive problem of racism that needs to be addressed more seriously by the nonprofit sector. Have a listen to Glenn Frey and the Eagles’ Heartache Tonight while perusing our curated nonprofit tweets of the week:


How to Start a 501(c)(4) California Nonprofit Step by Step

Business strategy plan over ladder leading to success

You’ve got an idea for making the world a better place, and you want to start a 501(c)(4) nonprofit social welfare organization as the means to do so. In contrast to a 501(c)(3) charitable organization, a 501(c)(4) organization may engage in unlimited lobbying in furtherance of its social welfare purpose and some political campaign intervention activities (e.g., endorsing political candidates) so long as it is not primarily engaged in such intervention. But, generally, a 501(c)(4) organization is not qualified to receive charitable contributions deductible to its donors.

It’s easy to start a nonprofit, but just because you can, doesn’t mean you should. Even the best intentions can lead to bad results when supported by a poor strategy. Before starting a nonprofit social welfare organization, founders should invest meaningful time and thought in determining whether they can actually create a sustainable nonprofit that will effectively and efficiently bring value to the public. This means founders should create a basic business plan that (1) describes the organization’s mission and its core activities, (2) identifies the resources required to carry out those activities, and (3) details reasonable strategies for acquiring those resources. It also requires founders to realistically assess whether they can recruit strong leaders and key supporters and undertake homework for becoming knowledgeable about the basic laws governing nonprofit and 501(c)(4) organizations, the duties and responsibilities of board members and officers, and the market in which they will operate and compete. The advice of experts can also be valuable in determining whether the plan is viable and what changes need to be made, if any.

Before you get started, you’ll also want to consider whether 501(c)(4) is the right type of exemption for your plan and whether you should (1) apply for IRS recognition of 501(c)(4) federal tax-exempt status using Form 1024 (which we generally recommend) or (2) self-declare the organization’s 501(c)(4) status and ensure that the organization complies with all the associated requirements.

11 steps for starting a California nonprofit public benefit corporation exempt under 501(c)(4):

  1. Determine the name of the corporation.  A nonprofit is typically formed as a corporation and its name can be a valuable asset. In California, a corporation name may be adopted if the name is not the same as or too similar to an existing name in the records of the California Secretary of State, or if the name is not misleading to the public. You can check the current database of existing names on the business search page of the Secretary of State website. You can also reserve a name for 60 days by mailing in a Name Reservation Request. You must also make sure the name does not infringe on another person’s trademark rights. This is not always easy to determine, but a good start includes running a trademark search on the U.S. Patent and Trademark Office database and a simple Google search. For some founders, it may also be important to confer with intellectual property counsel to help ensure they are not infringing on another’s rights and to protect their name from being used by other parties.
  1. Draft and file the articles of incorporation.  A corporation is legally created with the filing of the articles of incorporation. Articles of incorporation typically identify:
    • The organization’s name;
    • Purpose or purposes of the nonprofit;
    • Agent for service of process — that is, a person whose name and address are identified and who can receive lawsuits and other official correspondence; and
    • Any limitations on corporate powers.

The articles of incorporation are typically signed by an “incorporator,” which can be just one person but may also be signed by the initial board of directors if they are named in the articles.

There are sample articles found on the Secretary of State’s website. In our opinion, they meet minimal requirements but do not provide guidance on several important considerations. For example, the sample provides little guidance on specific purpose statements.

A word on specific purpose statements: A broad specific purpose statement provides room for the organization’s mission to evolve without requiring an amendment to the articles of incorporation. It may also make it easier to comply with charitable trust laws that require charitable funds be used consistent with the specific purpose of the organization at the time such funds were originally acquired. If, instead, you adopt a narrow purpose statement such as “to advocate for legislation and regulations to improve the environment in San Francisco County,” you can’t use funds to advocate for environmental improvements in other counties, but the statement would provide a stronger mission anchor to help ensure that your organization stays on a specific course after the founders have left.

For additional information on this issue, read Starting a Nonprofit: Articles of Incorporation and Specific Purpose Statements.

More about the agent for service of process: It is also important to understand that the agent is responsible for receiving lawsuits and possibly other important legal documents on behalf of the organization and making sure those documents reach the President or other authorized officer in a timely manner. If the agent fails to do so (e.g., fails to have his or her mail checked regularly while away for an extended period) the organization could face negative consequences such as losing a default judgment for not showing up to defend a lawsuit. An organization can identify an individual as agent or may elect to pay for a corporate agent, which may be preferred if there is no person willing to accept this responsibility or if privacy concerns are an issue (the agent’s street address will be a matter of public record).

  1. Appoint the board of directors.  If the initial directors are not named in the articles of incorporation, the incorporator can and should appoint the board through a written action. Recruiting and appointing the initial board of directors may well be the founders’ most important startup task. A new nonprofit has a significantly better chance at long-term viability and impact when the right people are at the wheel. These individuals should share your organizational vision and core values but should also bring other skills, perspectives, and networks to the table.

Under California law, a nonprofit board may be composed of as few as one director, but it is generally recommended to have at least 3. California law also requires that not more than 49% of the current directors be “interested persons” as defined in Corporations Code section 5227, which includes any person receiving compensation from the nonprofit for services rendered within in the past 12 months and anyone related to the compensated person.

These directors should understand their duties and responsibilities to act with reasonable care and in the best interests of the organization while providing direction and oversight over the organization’s activities, finances, officers, and legal compliance. BoardSource offers valuable resources on nonprofit corporate governance, including these Ten Basic Responsibilities of Nonprofit Boards.

  1. Draft the bylaws and conflict of interest policy.  A corporation’s bylaws typically address, at a minimum, fundamental provisions related to the management of the activities and affairs of the corporation. Bylaws should provide guidance to the board and reassurance of sound governance practices to government authorities, funders, and other interested stakeholders.

Bylaws typically contain specific provisions detailing:

    • The purpose or mission of the nonprofit;
    • How directors are elected or otherwise selected (e.g., by majority vote of directors at the annual board meeting);
    • How the board may take an action (e.g., by majority vote of directors);
    • How board meetings are called and noticed (e.g., six times per year with 14 days advance notice by email);
    • How board meetings are conducted (e.g., the chair of the board presides);
    • The officers of the corporation (a president or chair of the board, secretary, and treasurer or chief financial officer are required by California law);
    • The duties and responsibilities of each officer;
    • The authorization of board and non-board committees (e.g., committees tasked to act with the authority of the board versus committees that can only make recommendations);
    • The level of indemnification provided by the corporation to protect its directors, officers and other agents; and
    • The reports due to directors (e.g., financial reports).

If the nonprofit has voting members, the bylaws will also need to contain additional provisions regarding member rights and processes. Nonprofits considering a voting membership structure may want to first discuss such structure with a lawyer, particularly if they do not expect their members to actively participate in meetings and regularly exercise their voting rights. Public Counsel provides an Annotated Form of Bylaws for a California Nonprofit Public Benefit Corporation on its website.

  1. Take the initial board actions at a board meeting or by unanimous written consent of the directors.  The board should take the following actions:
    • Adopt the bylaws and conflict of interest policy;
    • Elect officers;
    • Adopt a fiscal year (such as a year ending December 31 or June 30);
    • Approve establishing a bank account;
    • Approve applying for federal and state tax-exempt status;
    • Approve reimbursement of startup expenses (if applicable); and
    • Approve the compensation of the executive director (CEO) or the treasurer (CFO) (if applicable).
  1. Obtain an employer identification number (EIN).  An officer or authorized third party designee may apply for and obtain an EIN online.
  1. Notify the Internal Revenue Service (IRS) of intent to operate as a social welfare organization.  Social welfare organizations will soon be required to notify the IRS within 60 days after the organization is established of its intent operate, as established by section 405 of the Protecting Americans from Tax Hikes Act of 2015 (the PATH Act). The IRS issued Notice 2016-09 on January 19, 2016 stating that he Treasury Department and the IRS intend to issue temporary regulations prescribing the manner in which social welfare organization will provide the notification (which the IRS hopes but has not promised will be electronic). Even organizations that seek IRS recognition of tax-exempt status using Form 1024 will need to provide this new notification.
  1. File the initial registration form (Form CT-1) with the California Attorney General’s Registry of Charitable Trusts.  This annual registration is required for the majority of nonprofit public benefit corporations and must be filed within 30 days after receipt of assets. The Form and Instructions are available online. The corporation’s articles of incorporation and bylaws should be included in the initial filing. The Form 1024 application and federal determination letter (Step 9) should be submitted upon receipt of the determination letter to complete the filing.
  1. File the Statement of Information (Form SI-100) with the Secretary of State.
    The Statement must initially be filed within 90 days of the date of incorporation. This biennial filing requirement, which identifies the organization’s address, principal officers, and agent for service of process, can be filed online or by mail.
  1. Make the decision whether to apply for federal tax exemption with the IRS and receive a determination letter from the IRS.  Organizations that believe they are properly classified as a 501(c)(4) organization may self-declare their tax exempt status and begin filing Form 990s, without submitting a Form 1024 to the IRS. However, it is generally recommended to complete the Form 1024 application for exempt status under Internal Revenue Code (IRC) Section 501(c)(4), in order to have some assurance that your plan is consistent with the requirements of 501(c)(4). Form 1024 requires a comprehensive reporting of all activities carried on by the organization. A critical section for careful completion is Part II, Activities and Operational Information, which asks:

For each past, present, or planned activity, include information such as:

    • A detailed description of each activity including its purpose and how each activity furthers your exempt purpose;
    • When the activity was or will be initiated; and
    • Where and by whom the activity will be conducted.

Form 1024 also requires information regarding (a) annual compensation of any officers, directors, or trustees; (b) membership qualifications, classes, and voting rights, if any; and (c) actual and/or projected statement of revenues and expenses (which should be consistent with any identified activities).

Form 8718, User Fee for Exempt Organization Determination Letter Request, must be attached to Form 1024 for filing. Currently, the user fee for a new organization that anticipates gross receipts averaging more than $10,000 during its first 4 years is $850. Smaller organizations may be eligible for the $400 user fee.

The IRS may typically take 4-6 months to process a Form 1024 application for exempt status. However, the waiting period may be much longer if the application contains errors, omissions, or other information that require additional development by a special IRS department. The IRS application process is further explained on the IRS’s Where Is My Exemption Application webpage.

  1. Apply for California tax exemption with the California Franchise Tax Board (FTB) and receive an affirmation of exemption letter from the FTB.  Organizations with a 501(c)(4) federal determination letter can request California affirmation of tax exemption under California Revenue & Taxation Code section 23701f from the FTB by filing Form 3500A along with a copy of the IRS determination letter. The FTB will recognize the organization’s exemption from state income taxes as of the federal effective date. You can find a downloadable form here.

If the organization chose to self-declare its federal tax exempt status, it will need to file the long Form 3500 to apply for state income tax exemption in California.

Should You Start a Nonprofit?

Now that you know how to start a California nonprofit, you should thoughtfully consider whether this is the right choice for your ideas and for the public benefit. There may be other ways to carry out your dreams, including working within or supporting an existing nonprofit. See Alternatives to Forming a Charitable Nonprofit published by the American Bar Association. One often overlooked alternative is fiscal sponsorship, a relationship that may allow a group to house a charitable project within an existing nonprofit with the ability to spin it off at a later date. Note, however, that finding a 501(c)(4) fiscal sponsor may be much more difficult than finding a 501(c)(3) fiscal sponsor. For more information on fiscal sponsorship, see Fiscal Sponsorship: A Balanced Overview published by The Nonprofit Quarterly.


Nonprofit Tweets of the Week – 1/15/16

Astronaut wearing pressure suit against a space background.

This past week, President Obama delivered his State of the Union address and we reflected on the passing of a great musical artist. Have a listen to David Bowie‘s Blackstar while perusing our curated nonprofit tweets of the week:

  • Chronicle of Philanthropy: Opinion: Philanthropy is on a collision course with presidential campaign politics
  • Megan O’Neil: #Nonprofit and religious leaders -> How to stay within the law with election-year advocacy #2016 [Ed. Election Checklist for 501(c)(3) Public Charities – from AFJ Bolder Advocacy]
  • Nonprofit Quarterly: In a new age of governance in the context of an empowered network of stakeholders, how should board behave?
  • Nonprofit Law News: Court Reaffirms CA Attorney General’s Demand for Donor List | by @seyfarthshawllp …
  • Exponent Philanthropy: New Report Details How Foundations Create Change #data #benchmarks
  • Foundation Center NY: Through a Glass a Little Less Darkly: 2015 Philanthropic Transparency Highlights – @Glasspockets
  • Rob Reich: Dangers of Impact Investing. Excellent @felixsalmon on the @chrishughes denouement at the @NewRepublic Fusion
  • Philanthropy: Charity Navigator’s controversial evaluation effort put on hold
  • The Atlantic: Will more newspapers follow the Philadelphia Inquirer and go nonprofit?
  • Lucy Bernholz: Trends Show Crowdfunding To Surpass VC In 2016 – Forbes (question the research, but interesting point)
  • World Economic Forum: What are the biggest risks the world faces? Our new report: #risks2016 #risk

Commercial Fundraiser – A Revised Definition

Commercial Fundraiser

Beginning on January 1, 2016, a “commercial fundraiser” in California is defined as any individual, corporation, unincorporated association, or other legal entity who for compensation does any of the following:

  1. Solicits funds, assets, or property in this state for charitable purposes.
  2. As a result of a solicitation of funds, assets, or property in this state for charitable purposes, receives or controls the funds, assets, or property solicited for charitable purposes.
  3. Employs, procures, or engages any compensated person to solicit, receive, or control funds, assets, or property for charitable purposes.
  4. Plans, manages, advises, counsels, consults, or prepares material for, or with respect to, the solicitation in this state of funds, assets, or property for charitable purposes, but is disqualified as a fundraising counsel for charitable purposes pursuant to subdivision (a) of Section 12599.1.

It’s the fourth activity (described in red font above) that newly creates another category of commercial fundraiser. Planning, managing, advising, counseling, consulting or preparing materials for, or with respect to, charitable solicitations, in and of themselves, are activities that are generally associated with another regulated fundraising position known as fundraising counsel. But such activities can lead a professional fundraiser to fall within the definition of a commercial fundraiser if:

  • the professional fundraiser is compensated as a percentage of the funds, assets, or property received as a result of a solicitation campaign rather than as a flat fee; or
  • the professional fundraiser receives or controls the funds, assets, or property received as a result of a solicitation campaign, including indirectly by:
    • the right to approve or veto any payment from an escrow account to which such funds are subject;
    • maintenance of an interest in an account into which solicited funds are deposited;
    • the right to access such funds, assets, or property held by a caging company (a business that receives contributions, processes donor mail, and deposits all contributions to an account under the sole control of the charitable organization);
    • any ownership or management interest in any other entity that receives or controls the funds, assets, or property solicited for charitable purposes, including, but not limited to, an escrow agent or caging company, but not including any federally insured financial institution; and
    • receipt of any financial benefit, directly or indirectly, from any other individual or entity that receives or controls the funds, assets, or property solicited for charitable purposes, other than the trustee or charitable corporation soliciting the funds, assets, or property for charitable purposes.

The purpose behind this change in the definition (as part of AB 556) is to close a loophole that some professional fundraisers used to avoid the more rigorous disclosure requirements to which commercial fundraisers are subject:

  1. Commercial fundraisers must disclose to donors that the solicitation is being conducted by a commercial fundraiser and must identify themselves by the name under which they are registered with the Attorney General.
  2. Commercial fundraisers must disclose the percentage of total fundraising expenses of the fundraiser (the ratio of the total expenses of the fundraiser to the total revenue received by the fundraiser for the charitable purpose for which funds are being solicited) upon receiving a written or oral request from a person solicited.

Principal Registration and Reporting Requirements

Commercial fundraisers in California are also subject to several registration and reporting requirements, including:

Form CT-1CF (Annual Registration Form)
For use by commercial fundraisers prior to soliciting any funds in California for charitable purposes.

Form CT-2CF (Annual Financial Report – Commercial Fundraisers)
Disclosure reporting form for use by every commercial fundraiser to report funds or assets received as a result of a solicitation for charitable purposes.

Form CT-10CF Form (Notice of Intent To Solicit For Charitable Purposes – Commercial Fundraiser)
For use by commercial fundraisers for charitable purposes to provide 10 working days’ notice prior to the commencement of each solicitation campaign, event, or service, in accordance with Govt. Code sec. 12599(h).

See Office of the Attorney General site for Forms and Instructions.

Not Commercial Fundraisers

The following persons or entities are explicitly not commercial fundraisers:

  • any trustee holding property in trust pursuant to any charitable trust, or any of such trustee’s employees;
  • any charitable nonprofit corporation or any employee of such nonprofit corporation;
  • any employee of a commercial fundraiser;
  • any federally insured financial institution that holds, as a depository, funds received as a result of a solicitation for charitable purposes; or
  • any escrow agent or caging company that receives or controls funds received as a result of a solicitation for charitable purposes.

Characterization by the Office of the Attorney General

Presumably, in large part due to the efforts of some commercial fundraisers to hide or misrepresent the amounts they raise that ultimately go to the targeted charities, the Office of the Attorney General has included some cautionary statements on its webpage describing commercial fundraisers:

Historically, use of a commercial fundraiser has meant higher costs for a charity. Most of the charities registered with the Registry of Charitable Trusts do not employ commercial fundraisers to solicit donations on their behalf. Historical figures show that a campaign conducted by a commercial fundraiser returns to charity, on average, less than 50 percent of the contributions it raises on a charity’s behalf. The remainder is retained by the commercial fundraiser as a fundraising fee and for reimbursement of expenses.

Legal Compliance

With the heightened scrutiny of commercial fundraising practices, it is more important then ever for commercial fundraisers to operate in full compliance with applicable laws. Here are a few tips for commercial fundraisers beyond the registration and reporting requirements:

  • It must enter into a written contract with a charity for each solicitation campaign, event, or service. Such contract must be available for inspection by the Attorney General and contain all of the provisions required under Gov. Code Sec. 12599(i).
  • It must provide to the charity the right to cancel the contract without cost, penalty, or liability for a period  of 10 days following the date on which the contract is executed, and the right to terminate the contract at any time with or without cause upon 30 days’ written notice.
  • It must only contract with a charity that is actively registered with the Attorney General’s Registry of Charitable Trusts or agrees to register prior to the commencement of any solicitation.
  • It must provide to the Registry of Charitable Trusts with each application for registration and registration renewal a cash deposit or bond in the amount of $25,000 for the benefit of any person damaged as a result of malfeasance or misfeasance in the conduct of the commercial fundraiser regulated activities.
  • It shall not misrepresent (including through the failure to disclose a material fact) the purpose of the charity or the nature or purpose or beneficiary of a solicitation.
  • It shall ensure that charity knows that the charity must establish and exercise control over its fundraising activities conducted for its benefit, including approval of all written contracts and agreements, and must ensure that fundraising activities are conducted without coercion.