Giving Tuesday: 10 Legal Tips for Nonprofits

Giving Tuesday philanthropy day message.

Here are 10 legal tips for nonprofits for Giving Tuesday:

  1. Ensure your charity’s fundraising communications (written and oral) are all accurate and truthful and do not contain any material misrepresentations.
  2. Ensure that your charity is properly registered to engage in charitable solicitations in any applicable states and jurisdictions (including any foreign countries). See The Unified Registration Statement website and The International Center for Not-for-profit Law website for resources.
  3. If operating or running fundraising events in another state or jurisdiction other than your charity’s state of formation, make sure your charity is qualified to operate there (this is separate from the charity registration requirement) and determine whether it should apply for state tax-exemption.
  4. Be intentional if soliciting funds for a specific program, project, or purpose as you may be creating restricted funds that need to be accounted for separately from your general operating funds.
  5. If using independent contractors to assist in or operate your Giving Tuesday fundraising campaign, make sure they are registered commercial fundraisers or fundraising counsel or fall outside of the definitions of those regulated positions. See definitions on the Office of the Attorney General website.
  6. Provide a proper form of donation receipt to your donors to allow them to take a charitable contribution deduction.
    • All receipts should state the name of the donor, the amount of the contribution, and the date of the contribution.
    • For a charitable contribution of $250 or more, the receipt (written acknowledgment) must include a statement that provides either (1) that the charity did not give any goods or services to the donor in return or (2) that the charity did give goods or services to the donor in return (in which case, the acknowledgment should describe the goods or services, including a good faith estimate of their value).
    • If the charity provided goods or services back to the donor in exchange for a payment of more than $75, the receipt (written disclosure) must include a good faith estimate of the value of goods or services provided to the donor and a statement that the amount of the contribution that is deductible for federal income tax purposes is limited to the excess of money (and the fair market value of property other than money) contributed by the donor over the value of goods or services provided by the charity.
  7. If using a crowdfunding platform, be aware of and prudently manage any associated risks. Make sure your charity is aware of and manages any crowdfunding campaigns raising funds on the charity’s behalf (sometimes well-intentioned and not-so-well-intentioned individuals will start campaigns claiming to benefit a charity, which may be unaware of the campaigns).
  8. Have policies regarding the acceptance of restricted gifts or noncash gifts that may not be easily marketable.
  9. Prevent donor-intent disputes and communication problems that may be associated with major gifts with restrictions or conditions. See Major Gifts – Part II: Considerations for Legal Compliance and Avoiding Lawsuits.
  10. If soliciting pledges, understand whether your charity and the donor intend the pledge to be legally enforceable. If there is a contract and the charity either (a) provides some consideration for the pledged amount (e.g., promise to do something or not do something) or (b) relies on the promised pledge to its detriment (e.g., puts a down payment on a building), the pledge may be legally enforceable. But that doesn’t necessarily mean that a charity should always sue a donor that reneges on a pledge. See Legal Issues Related to Unfilled Charitable Pledges (Perlman & Perlman).

See our legal tips for donors for Giving Tuesday here.

Additional Resources:

Top 5 Fundraising Legal Tips

6 More Fundraising Legal Tips

A Playbook To Kickstart Your Nonprofit’s #GivingTuesday Campaign (Beth Kanter)

Giving Tuesday, In Its Fourth Year, Is Now Officially a “Thing” (Nonprofit Quarterly)

Simple Donation Page Tips for Giving Tuesday (John Hayden)



Nonprofit Tweets of the Week – 11/27/15


We hope you had a wonderful Thanksgiving! Have a listen to Alanis Morissette‘s Thank U while perusing our curated nonprofit tweets of the week:

  • Fast Company: The mastermind behind the #GivingTuesday social media phenomenon:
  • Sandra Feinsmith: Exempt Organizations IRS Priorities
  • La Piana Consulting: 15 ways nonprofits collaborate to create impact – a [VIDEO] intro to the #CollaborativeMap
  • Nonprofit Quarterly: How much of the money in donor-advised funds actually gets distributed to #nonprofits?
  • Rebecca Cappy: California Compliance Update: @CA_FPPC Revises Rules for Ballot Measure Disclosure, May Impact Nonprofit Advocacy AFJ Bolder Advocacy
  • Alice Korngold: Choosing a #nonprofit board . What u need 2know . ROLE of the board
  • The SF Foundation: Must watch: This video brought down the house at @policylink #equity summit. @mayda1 #BLM #Fightfor15
  • Matt Ford: … my look at Korematsu v. United States, Syrian refugees, and the lessons for today The Atlantic
  • Forbes: Melinda Gates is the world’s most powerful advocate for women & girls
  • Community Partners: What’s preventing donors from investing in ‘big bet’ social change? New report explores @SSIReview @BridgespanGroup

Thanksgiving 2015

Happy Thanksgiving Greeting, Fall Leaves Background and text Happy Thanksgiving

On this Thanksgiving, I have much to be thankful for, including on a professional level, these 10 opportunities:

  1. To work with and be around truly amazing co-workers who inspire me and fill my life with positivity (thank you Erin and Michele!).
  2. To serve and work with charities, foundations, and their leaders in making this a better world for more people.
  3. To continually learn from our clients, our colleagues, and experts in diverse areas.
  4. To share our knowledge through the Nonprofit Law Blog, The Nonprofit Quarterly, Nonprofit Radio, and social media (Twitter, Facebook, LinkedIn).
  5. To present information to strengthen nonprofits at conferences and through webinars for organizations including BoardSource, Independent Sector, CalNonprofits, and the American Law Institute.
  6. To bring together national, state, and local organizations to advocate on public policy issues.
  7. To collaborate and present with highly respected colleagues from other firms and organizations.
  8. To operate with a double-bottom line where impact is our priority.
  9. To receive, for our work, kind and generous words of appreciation from clients, colleagues, friends, nonprofit leaders, the media, and the general public.
  10. To work from our great new office at WeWork – Transbay.

As we express our gratitude, we must never forget that the highest appreciation is not to utter words, but to live by them.

~John F. Kennedy


California Governor Signs Administrative Dissolution Bill Into Law

Close up view - The end - written on an old typewriter


On September 30, 2015, Governor Brown signed into law Assembly Bill No. 557, making amendments to the laws governing dissolution of California nonprofits. The amendments, which will become effective on January 1, 2016, essentially create two new sets of dissolution procedures for California nonprofits: an automatic dissolution process and a streamlined dissolution process.

Automatic Dissolution Procedures

Under the automatic dissolution procedures of AB 557, provisions are to be added to the California Corporations Code sections applicable to nonprofit public benefit, mutual benefit, and religious corporations, as well as to foreign nonprofit corporations qualified to do business in California, providing for the automatic dissolution or surrender of such corporations under certain circumstances. The bill provides that a nonprofit corporation whose powers have been suspended or forfeited by the Franchise Tax Board for 48 consecutive months or more shall be subject to administrative dissolution or surrender.

Prior to such automatic dissolution, the Franchise Tax Board will mail a notice of the impending dissolution to the nonprofit’s last known address and will also send the name of any nonprofit subject to such dissolution to the Secretary of State and the Attorney General’s Registry of Charitable Trusts. The Secretary of State is then required to provide notice of the planned dissolution of such entities on its website for at least 60 days, as well as instructions for how a nonprofit may submit a written objection to the dissolution. If no written objection is received by the Franchise Tax Board within the 60-day notice period, the nonprofit will be dissolved. If a written objection is received, the nonprofit will have an additional 90 days from the date of the objection to cure any outstanding defects with the Franchise Tax Board. The Franchise Tax Board has the authority to extend this cure period for one additional 90-day period, but no longer.

If a nonprofit is automatically dissolved pursuant to these procedures, the liabilities owed to any creditors of the nonprofit and any liabilities of its Directors will remain in place, and the dissolution will not impact the ability of the Attorney General to enforce any liabilities with respect to the corporation or its Directors as provided by law (e.g., for the diversion or misuse of charitable assets). However, the law does provide a process by which a nonprofit’s liabilities for qualified taxes, interest, and penalties owed to the Franchise Tax Board may be abated upon its automatic dissolution.

The automatic dissolution procedures are intended to assist the Franchise Tax Board in clearing its records of nonprofits that are no longer operating, but have not gone through the formal legal process of dissolving. There is some minimal risk that nonprofits not intending to dissolve may be caught up in these automatic dissolution procedures. However, given that a nonprofit must have been suspended by the Franchise Tax Board for at least 4 consecutive years for the procedures to apply, this risk is likely very low. And it is likely even lower since a California nonprofit that failed to file a required return with the Franchise Tax Board for three consecutive years will have had its California tax-exempt status automatically revoked on the date that its third missed return was due (similar to the procedures for automatic revocation of federal tax exemption).

Streamlined Dissolution Procedures

Given the complexity and expense that can be associated with the current process for dissolving a California nonprofit corporation, a streamlined dissolution process is certainly a welcome development. Unfortunately, however, the procedures set forth in AB 557 are available to only a narrow class of nonprofits and are unlikely to change the dissolution process for the vast majority of California nonprofits seeking to legally dissolve.

The streamlined dissolution procedures set forth in AB 557 provide that a nonprofit corporation that has not issued any memberships may dissolve by having a majority of its Directors sign and verify a certificate of dissolution. Once the certificate of dissolution is filed with the Secretary of State, the corporation is dissolved and it is the responsibility of the Secretary of State to notify the Attorney General’s Registry of Charitable Trusts and the Franchise Tax Board of the corporation’s dissolution.

This is certainly a much simpler dissolution process than is currently available to nonprofits. However, this streamlined process may only be used if the Directors are able to state and verify all of the following:

  • The certificate of dissolution is being filed within 24 months after the corporation’s articles of incorporation were filed;
  • The corporation does not have any outstanding debts or other liabilities, other than tax liabilities, and all existing tax liabilities will be satisfied or be assumed by another individual or entity;
  • A final franchise tax return has been or will be filed with the Franchise Tax Board;
  • The known assets of the corporation remaining after paying any known debts or liabilities have been distributed as required by law; and
  • The corporation was created in error.

These limitations on which corporations may use the streamlined dissolution procedures raise a few questions. For example, what does it mean to certify that a corporation was “created in error”? Is it sufficient that, in retrospect, the Directors feel that incorporating was a mistake, or is this requirement intended to apply only to corporations that were truly mistakenly formed (assuming it is even possible to mistakenly file articles of incorporation)? Also, if a nonprofit corporation is required to distribute all of its assets prior to taking advantage of the streamlined dissolution process, is it required to provide notice to the Attorney General in advance of such distribution of all or substantially all of its assets? If so, this largely defeats any procedural benefits of a streamlined dissolution process and, if not, will there be any oversight to ensure that any assets held by such nonprofits are appropriately distributed to be used in furtherance of permissible exempt purposes? The fact that the streamlined dissolution process is only available to corporations that were formed within the two years prior to their planned dissolution will also make it unavailable to the great majority of California nonprofits seeking to dissolve.

In short, while the automatic and streamlined dissolution procedures set forth in AB 557 are a step in the right direction in terms of dissolving inactive nonprofit corporations and easing the procedural burdens of dissolution, they unfortunately will have little impact on the voluntary dissolution procedures applicable to most California nonprofit corporations.

See the FTB Notice regarding AB 557 here.


Nonprofit Tweets of the Week – 11/20/15

honeymoon in Paris

Downtown Beirut, Lebanon

The past week was marked by terrorist attacks in Paris and Beirut and the passing of The Nonprofit Quarterly’s national correspondent and social justice advocate Rick Cohen. Have a listen to Jeff Buckley‘s Satisfied Mind while perusing our curated nonprofit tweets of the week:


2015 Western Conference on Tax-Exempt Organizations

Pershing Square in Los Angeles, USA

Loyola Law School is holding its 19th-Annual Western Conference on Tax Exempt Organizations (WCTEO) in Los Angeles on November 19 and 20. This is one of the country’s premier conferences on tax-exempt organizations and one of my must-attend events as an attorney for nonprofits. I had the honor of speaking at the WCTEO a couple of years ago and have another opportunity this Friday.

The following is a running list of highlights from the WCTEO (check back!):


Washington Update

IRS Exempt Organizations division will focus resources on five strategic issue areas:

  1. Exemption: Issues include non-exempt purpose activity and private inurement, enforced primarily through field examination;
  2. Protection of Assets: Issues include self-dealing, excess benefit transactions, and loans to disqualified persons, enforced primarily through correspondence audits and field examination;
  3. Tax Gap: Issues include employment tax and Unrelated Business Income Tax liability, enforced through compliance checks, correspondence audits, and field examination;
  4. International: Issues include oversight on funds spent outside the U.S., including funds spent on potential terrorist activities, exempt organizations operating as foreign conduits, and Report of Foreign Bank and Financial Accounts (FBAR) requirements, enforced through compliance reviews, compliance checks, correspondence audits, and field examination; and
  5. Emerging issues: Issues include non-exempt charitable trusts and IRC 501(r), enforced through compliance reviews, correspondence audits, and field examination.

Consequences of State of Incorporation

  • In choosing a state, consider: (1) state of founder/incorporator; (2) state of domicile; (3) states where activity will be conducted; and (4) state’s charity regulation regime (but note that a strict regime may be a good thing for protecting charitable assets)
  • California may not be the appropriate choice if a majority of the contemplated directors will be ‘interested persons’ (compensated or related to someone compensated)
  • California charity enforcement: AG focuses on fraud, mismanagement, and diversion of charitable assets
  • Internal affairs doctrine: Generally, state of incorporation controls internal affairs (structure and internal administration)
  • AG holds that part of the California Nonprofit Public Benefit Corporation Law will apply to foreign nonprofit corporations with activities in California citing Cal. Corp. Code Sec. 6910 and precedential cases including American Center for Education v. Cavnar
  • Courts are less apt to apply the internal affairs doctrine when vital statewide interests are at stake, such as protecting its citizens from harmful conduct
  • The Delaware General Corporation Law (DGCL) is a flexible enabling statute, allowing nonstock corporations and their members to craft specific internal governance regimes, but the DGCL does require nonstock corporations to have members
  • DGCL was amended in 2010 to provide more guidance regarding nonstick corporations (see New Day for Nonstock Corporations: The 2010 Amendments to Delaware’s General Corporation Law)
  • Delaware – board committees can be granted broad powers (but may be problematic if persons who are not board members are on the committee)
  • Delaware courts will tend to be protective of internal affairs doctrine for internal disputes (and statutes allow for Delaware laws to apply exclusively in such matters) but this would not apply if a foreign state charity official sues the nonstock corporation or its board members

Form 990 Issues

  • Description of mission on page 2 must be board-approved or ratified.
  • Make sure the IRS has an accurate picture of the organization – see page 2: Did the organization undertake any significant program services during the year which were not listed on the prior Form 990 or 990-EZ? Did the organization cease conducting, or make significant changes in how it conducts, any program?
  • Only answer “yes” to the following question if the board receives a complete, unrelated Form 990 (including Schedule B): Has the organization provided a complete copy of this Form 990 to all members of its governing body before filing the form?
  • Use Schedule O to include an explanation of whether new earned revenues is not unrelated business income, if that is the organization’s position
  • Schedule L definition of “interested person” now includes creators/founders and substantial contributors (and family members and related entities) in disclosures regarding loans and business transactions – need to exercise reasonable efforts to get this information (consider using negative confirmation letter) – consider whether to identify substantial contributors by name here (instead of simply by the term “substantial contributor”) because this Schedule is not designed to be redacted
  • Schedule A requires greater disclosures from supporting organizations (new Part IV)
  • Pubic disclosure issues – moves towards greater public access – e-filed 990s will be made available by the IRS in machine-readable format (MeF) – will result in great new applications (thanks to Carl Malamud and for litigating this
  • Public disclosure issues – attempts towards lower access by state regulators – but unredacted Schedule B (donor disclosure) to Form 990 must be submitted to state’s Attorney General (Center for Competitive Politics vs. Harris)

Hot Issues in Nonprofit Compensation

  • Executive compensation is a top subject of interest for government oversight
  • Bonuses – make them discretionary (reasonable and tied to affordability), performance-based, focused on retention
  • Severance pay – intended to help with attraction and retention concerns; payable if terminated without cause (possibly in part for release of cognizable claims)
  • Fringe benefits – need to have and enforce policies and know the specific rules involved – e.g., working condition fringe benefits and accountable plans not subject to excess benefit transactions, but only with full compliance
  • Incentive compensation design – be careful of private inurement concerns, different rules for fixed vs. non-fixed payments, ceiling or cap, tying to objective measure of performance, no joint venture, no incentive to reduce charitable services – process matters (approval by independent governing body, comparability data, articulation of clear relationship between incentive and accomplishment of charitable purposes)
  • Never raise compensation just before retirement if it looks like the raise was effected simply to raise the retirement benefit
  • Comparability data: might use for-profit examples but must be justified on facts and circumstances and documented contemporaneously
  • Help Hospitalized Veterans case – see Calif. AG Kamala Harris Comes Down on Questionable Veterans Charity – Nonprofit Quarterly
  • See Executive Compensation Webinar (2010) – Martin Katz, Frederic W. Cook & Co.

Pete Manzo, United Ways of California

  • Don’t discount United Way as a simply old-school model of operating a nonprofit – look what they’re doing now with 2.6 million volunteers and 9.6 million donors and a focus on education, income and health—the building blocks for a good quality of life and a strong community (see, for example, United Way’s work on the earned income tax credit and the 2-1-1 referral program).
  • United Way remains the largest privately-funded nonprofit in the world with an active public policy agenda, providing a platform for people to take meaningful action that makes a difference
  • We live in very different times – see, for example, America’s Top Companies: 1964 vs. 2011 (“In 1964, AT&T topped the list with $254 billion in market capital, and 758,611 employees. Today, Exxon Mobil is in first place—with $412 billion in market capital, and 83,600 employees.”)

Technology and the Nonprofit Organization

Professional Opinions and Exempt Organizations

  • Different types and reasons for opinions: comfort (e.g., exempt from UBIT), contractual condition (e.g., required for closing), escape hatch (e.g., right to terminate joint venture if counsel opines exempt status is at risk), penalty protection (e.g., reliance on a reasoned written legal opinion of counsel – IRC 4941, 4944, 4945, 4958), ASC 740 (FIN 48), proper tax reporting (e.g., 990)
  • Loren E Parks and Parks Foundation vs Commissioner 11/17/15 – shocking conclusion by court that petitioner (taxpayer) relied on “reasoned written legal opinion”
  • Reasoned written legal opinion – an opinion will be considered “reasoned” even if it reaches a conclusion which is subsequently determined to be incorrect so long as such opinion addresses itself to the facts and applicable law.
  • A foundation cannot rely on an opinion from foreign counsel to make a good faith determination of equivalency – see International Grantmaking: Equivalency Determination
  • IRC Section 6694 contains penalties for tax return preparers who are found responsible for a taxpayer’s understatement of tax liability based on taking an “unreasonable position.” This section creates a three-tier classification of support for positions – “substantial authority,” “reasonable basis,” and “more likely than not.”
  • Circular 230 – competence and reasonableness are keys
  • Form 1023-EZ: “will” level opinions – tax return preparers should be very careful about making such opinions if signing the exemption application or advising a client to sign


Current Developments

Charitable Giving

  • CA: prudent investor standard in Nonprofit Corporation Law harmonized with investor standard in UPMIFA (see Good News on the Investment Front!! California Passes AB 792, Harmonizing Investment Standards for Nonprofits in California – Nonprofit Law Matters)
  • CA: conformity on CRTs and unrelated business income – California (Finally) Conforms to Federal Treatment of UBTI in Charitable Remainder Trusts – PGDC
  • Using LLCs to facilitate gifts to private foundations PLR 201407021 – Distribution to Foundation Won’t Result in Self-Dealing or Excess Business Holdings
  • IRS Issues Final Regs on Sale of CRT Interests – Trusts & Estates
  • Enforcing pledges – see When Donors Back Out: Are Charitable Pledges Legally Enforceable – Inside Philanthropy
  • Enforcing donor intent – see How Donor Intent and External Influences Can Impact Your Nonprofit Organization (Garth Brooks case) – Nonprofit Talent

Hot Topics in State and Local Taxation

  • Private person challenging organization’s status as a property tax-exempt organization – see Princeton Loses Appeal in Bid to Dismiss Tax-Exemption Suit (discussing Fields v. Trustees of Princeton University) – Bloomberg Business; Tax Court Decision Could Impact NJ Hospitals – The Nonprofit Times
  • Unlike the church exemption, the welfare exemption requires the church to provide certain information including financial information to the BOE (such as its financial statements and information on anyone who is paid more than $78,000 annually in compensation).
  • Challenge: lack of uniformity in application of transfer tax for change in ownership of property due to a change in the composition of a nonprofit’s board of directors or a merger between two nonprofit corporations

Nonprofit Tweets of the Week – 11/13/15


This week, Aung San Suu Kyi‘s National League for Democracy party won a historic election in Myanmar. Have a listen to Neil Young‘s Old Man (Neil just turned 70!) while perusing our curated nonprofit tweets of the week:

  • Gene: Supreme Court denies petition for certiorari – CA AG has right to unredacted Sch B (donors), Form 990 SCOTUSBlog
  • For Purpose Law: “Gender Equality (and Nonprofits): California’s Bold New Law
  • New York Times Business: Paul Allen’s philanthropy mirrors his passions and business approach
  • Jacob Harold: Remarkable open letter from Darren Walker of Ford Foundation on inequality, focus, investment, overhead, and hope:
  • Lucy Bernholz: IRS Proposes New Rules for Substantiating Charitable Contribution Deductions: What Every Charity Needs to Know BNA
  • La Piana Consulting: Mythbusting nonprofit mergers #collaboration – Jo DeBolt
  • National Council of Nonprofits: The common $ense of compensation for #nonprofit employees
  • Vu Le: Why Equality is actively harmful to Equity Nonprofit with Balls
  • CalNonprofits: Take a minute to re-live last week’s CalNonprofits annual convention in tweets right here! Storify #CalCon15
  • YNPN: Insightful information on #impactinvesting Inside Philanthropy

California Social Purpose Corporation: An Overview

The social purpose corporation is one of two “hybrid” corporate forms in California that provide alternative business entity options to entrepreneurs who want to combine profitability with broader social and environmental objectives (the other is the benefit corporation). Formerly known as the flexible purpose corporation, the social purpose corporation requires directors to consider socially responsible purposes, in addition to shareholder interests, when making business decisions.

Special Purposes

In addition to engaging in any lawful business purpose, the social purpose corporation must set out one of the following special purposes in its articles of incorporation:

  • One or more charitable or public purpose activities that a nonprofit public benefit corporation is authorized to carry out.
  • The purpose of promoting positive effects of, or minimizing adverse effects of, the social purpose corporation’s activities upon any of the following, provided that the corporation consider the purpose in addition to or together with the financial interests of the shareholders and compliance with legal obligations, and take action consistent with that purpose:
    • The social purpose corporation’s employees, suppliers, customers, and creditors.
    • The community and society.
    • The environment.

Fiduciary Duties

While directors of any corporation must fulfill their fiduciary duties of care and loyalty to the corporation, directors of the social purpose corporation must also consider and give weight to additional factors, as they deem relevant, including the overall prospects of the corporation, the best interests of the corporation and its shareholders, and the purposes of the corporation, as set forth in its articles of incorporation.


Annual Report – The board must produce and send to its shareholders an annual report, containing a management discussion and analysis (the “special purpose MD&A”), along with standard corporate financial statements. The special purpose MD&A must, among other things, identify and discuss (1) material actions taken to achieve the corporation’s special purpose throughout the fiscal year, (2) the impact of such actions, including the causal relationships between the actions and the reported outcomes, and (3) the extent to which those actions achieved the special purpose objectives for the fiscal year. It must be made publicly available on the corporation’s website.

Current Report – In addition to the annual report with the special purpose MD&A, shareholders of a social purpose corporation must receive a special purpose current report within 45 days of any (1) significant expenditure in furtherance of the corporation’s special purposes, (2) withholding of expenditures in furtherance of the corporation’s special purposes, or (3) a determination that a special purpose has been satisfied or should no longer be pursued. Such reports must also be made publicly available on the corporation’s website.

Major Changes

Amendment to Articles– Any amendment that changes the special purposes of the corporation can only be approved with an affirmative vote of at least two-thirds of the outstanding shares of each class, or a greater vote if required by the articles.

Conversion/Merger– Similar to the requirements for an amendment, any reorganization that materially alters or eliminates the corporation’s special purposes requires the vote of at least two thirds of each class of outstanding shares, or more if required by the articles. These supermajority voting rights function as substantial control for even minority shareholder groups.

Derivative Actions – Any shareholders of the social purpose corporation may maintain a derivative lawsuit to enforce the duties required of the directors of the corporation.

Why Would You Form a Social Purpose Corporation?

Instead of a Nonprofit Corporation – If you are seeking investors and equity capital and/or have a plan that is inconsistent with tax exemption under IRC Section 501(c)(3).  In order to establish and maintain tax exemption under 501(c)(3), a nonprofit corporation must be primarily operated for a  charitable or other exempt purpose. If an organization plans to engage in activities that are in direct competition with for-profits, or operate in a manner that is too commercial with respect to pricing, marketing methods, sources of revenue, staffing, and use of surpluses, then a social purpose corporation may be a better choice of form. Additionally, in contrast to a nonprofit corporation, a social purpose corporation is not subject to prohibitions on private inurement or private benefit; self-dealing rules; restrictions on lobbying or political campaign activities; or 501(c)(3)-like public disclosure requirements.

Instead of a Regular (For-profit) Corporation – If you want to market the corporation’s goods and services as a social business, attract capital from social investors (including foundations), and anchor your social mission even after you exit from the ownership. For-profit corporations traditionally are organized to pursue the interests of their shareholders above all other interests. While the business judgment rule may provide broad flexibility for board members to consider other interests, this may not be true in the event of a sale of the corporation. In such event, the Revlon Rule generally provides that the board must approve a sale to the highest bidder without consideration of other factors.

Instead of a Benefit Corporation – If you want more flexibility than is provided by a California benefit corporation. A benefit corporation’s directors must advance a “general public benefit,” and must also consider a number of stakeholders, including shareholders, employees, subsidiaries, suppliers, customers, and the community, as well as the local and global environment. A social purpose corporation must only take into account its shareholders and its special purposes, as stated in its articles of incorporation. Accordingly, board members of a social purpose corporation may have fewer considerations when making decisions and less risk of liability for failure to consider required factors.

Concluding Thoughts

Although the social purpose corporation may be an attractive option for entrepreneurs who want to emphasize social impact as one of the core missions of their business, the adoption rate of the social purpose corporation has been slow. According to the California Secretary of State’s Office, since its introduction in 2012, there have been only 68 flexible purpose corporations and 9 social purpose corporations formed (as of 10/16/15).



BoardSource Leadership Forum 2015

Charming New Orleans

New Orleans

The 2015 BoardSource Leadership Forum (BLF) was held in New Orleans on November 9-10 with more than 900 board members, chief executives, staff, and nonprofit professionals attending to discuss the newest thinking and best practices in nonprofit governance.

Marking the 10th anniversary of Hurricane Katrina, BLF 2015: Leading Together for the Public Good speaks to our proven ability to mobilize our energy, efforts, and voices to make a difference and even change our own trajectories when called upon to do so.

Sessions and Keynotes

The sessions were organized into three tracks: The People, The Work, and The Culture. Our senior counsel Erin Bradrick presented on Nonprofit Board Scandals and the Lessons Learned:

Nonprofit boards are in the news, but, unfortunately, it’s often not for flattering reasons.  In this session, Erin Bradrick, senior counsel with the NEO Law Group, will review some of the recent nonprofit governance scandals that have surfaced and discuss the lessons to be learned from them. She’ll also discuss how to stay out of trouble when entering into collaborations, creating earned income streams, dealing with conflicts of interest, and making compensation decisions. There will be an interactive discussion on how to spot red flags related to these and other issues, and how investing in a strong governance infrastructure can save headaches in the long term.

A number of other sessions caught my eye, including:

  • Transformational Governance: How Boards Achieve Extraordinary Change
  • One Board’s Journey toward Racial & Social Justice
  • Boosting Board Performance Where It Counts: Onboarding a New CEO
  • Ethics and Accountability: From the Mailroom to the Boardroom
  • Charity is OUT; Social Entrepreneurship is IN

The keynote speakers were James Carville (American Political Consultant and Commentator), Mary Matalin (American Political Consultant and Commentator), Kevin Washington (YMCA of the USA), and Art Taylor (BBB Wise Giving Alliance). In midst of the Presidential election campaigning, it’s interesting to see the trend of nonprofit conferences highlighting political commentators. Hopefully, the trend serves to increase voter engagement among nonprofit constituents whose voices have too often not been heard.

Twitter Highlights

  • “Save the culture first, and the rest will follow. Without the culture, it’s just another place.” – James Carville on New Orleans
  • “It matters who’s in charge!” – Carville
  • “You are the solution bringers.” – Mary Matlin to a room full of nonprofit leaders
  • Statistical research says: board relationships & engagement in strategic planning highly predictive of organizational success
  • Taking a principled approach to ethical challenges & questions w/ framework for accountability – article
  • To practice generative governance, you must be willing to ask your board questions that you don’t already have the answers to
  • Gen Next brings fresh perspectives on old problems & new networks to boards
  • Keys to a great board meeting: community building, inspiration, consent agenda, education and generative governance discussions
  • Boosting nonprofit board performance where it counts: Onboarding the CEO – article
  • Governance policies only serve their purpose if they are abided by and enforced – article
  • The sustainability of an organization is dependent on the relationship between the chief executive and board chair.
  • Not a good fact: 42% of Board Chairs identify the Internet as the primary resource for their preparation; need to equip our leaders better
  • Nonprofit risk management: What’s inside is what counts – article
  • Stand for Your Mission While Staying Within the Rules – article

National Network of Fiscal Sponsors Annual Gathering 2015

Manhattan Bridge

The National Network of Fiscal Sponsors held its Annual Gathering in Brooklyn on November 7. Approximately 100 leaders of fiscal sponsors from across the country came to learn about common issues, best practices, and new developments, and to share experiences.

Fiscal sponsorship refers to a contractual relationship that allows a person, group, or taxable entity to advance charitable or other exempt activities with the benefit of the tax-exempt status of a sponsor organization. The most common models of fiscal sponsorship are:

  • Comprehensive (Model A), in which the assets, liabilities, and exempt activities collectively referred to as the project are housed within the fiscal sponsor, and
  • Pre-approved grant relationship (Model C), in which the project is run by a separate entity funded by the fiscal sponsor.

Fiscal sponsors must consider in their plans and operations: technology, demographic changes, globalization, social and racial justice movements, and the sharing economy. These major forces provide both opportunities and threats. Among some of the other trends we discussed at the Gathering:

Social Enterprises & Impact Investing

The rise of for-profit social enterprises and broader social good movement are particularly noteworthy. Social enterprises (including hybrid organizations like the benefit corporation and L3C) may be promising collaborative partners, commercial co-venturers, supporters, and donors. Social entrepreneurs may also look at a fiscally sponsored project as an alternative to starting a nonprofit affiliated with their social enterprise. Further, hybrids can be used as vehicles for cross-sector joint ventures. However, they also represent competition to nonprofits for talent and dollars.

Impact investing and the new rules recognizing mission-related investments (MRIs) provide opportunities for fiscal sponsors to attract contributions intended to make MRIs in social enterprises. Fiscal sponsors would be wise to understand how to utilize MRIs and avoid conferring upon any person or entity a prohibited private benefit.


Crowdfunding is an increasingly attractive fundraising vehicle, but fiscal sponsors must understand the rules and risks along with the potential benefits. They should ensure authorized, truthful, and accurate communications; use of properly registered or exempt crowdfunding platforms; registration in states, as required (see Charleston Principles); and proper donation receipts, including when something of value is provided to a contributor in return for the gift.

Fiscal sponsors must also recognize the competition provided by individuals or groups using crowdfunding for charitable purposes without a 501(c)(3) organization. Contributors to such campaigns will generally not be entitled to a charitable contribution deduction and may be angry at the nonprofit represented as the beneficiary of the campaign. Nevertheless, many people will continue to support crowdfunding campaigns regardless of the tax-status of the beneficiary or the deductibility of the contribution.

IRS Form 1023-EZ

IRS Form 1023-EZ was released in July 2014 as an alternative short form for small organizations applying for exemption under 501(c)(3). The Form, which has been widely criticized by state charity officials and exempt organization professionals (including this one), is credited with reducing the 60,000+ application backlog that had caused common delays of determinations lasting one year and longer. The number of approvals of 501(c)(3) status in fiscal year 2014 (94,365) more than doubled the two previous years combined, and only 67 applications were disapproved. The principal reason for the criticism is that the application appears more like a self-certification than a true application to be vetted by the IRS. It’s not surprising that the processing time of Forms 1023-EZ has reportedly been as short as 2-4 weeks (though the IRS states to expect up to 90 days). But the lack of vetting has resulted in even for-profit corporations receiving favorable 501(c)(3) determinations because they checked the right boxes regardless of whether they actually qualified.

The lower barrier to obtaining 501(c)(3) status and shortened processing time may make it easier to start a nonprofit than get fiscally sponsored. Accordingly, what was once an advantage for fiscal sponsorship may now be a disadvantage in many cases. Yet, it can be pointed out to project founders and steering committees that a determination letter in response to a Form 1023-EZ can be distinguished from a determination letter in response to the full Form 1023. And funders may begin to give weight to this factor, particularly when problems associated with the Form 1023-EZ begin to surface.

Compliance / Scandals

Best practices (such as the guidelines published by NNFS for comprehensive and pre-approved grant relationship) are helping strengthen the reputation of fiscal sponsorship. Stories of fiscal sponsorship done right are similar helpful, but the media tends to favor the bad stories like this one. The “scandals” lead to drafting of legislation and/or regulations to help prevent fiscal sponsors from serving as mere conduits for monies to flow from donors and grantmakers to for-profits. Fiscal sponsors need to better educate the media, the general public, and funders about the valuable public benefit created by fiscal sponsorship. Fiscal sponsors may also want to consider listing their largest comprehensive fiscally sponsored projects on the Form 990 to evidence transparency and counter the argument that fiscal sponsors are used to “hide” bad projects.

Lobbying and Political Activities

501(c)(3) fiscal sponsors with comprehensive projects that lobby must be careful about complying with state and federal political registration and reporting requirements in addition to federal tax law limitations. They should also be aware of their potentially generous lobbying limits under 501(h) (assuming they made the very easy and generally highly recommended election) and not be overly conservative in limiting lobbying activities of their projects so long as they have the capacity to comply with the registration and reporting requirements. Similarly, fiscal sponsors should understand the political activities permissible to a public charity and not discourage their projects from such activities (e.g., voter education, issue advocacy, voter registration, get-out-the-vote drives). See Rules of the Game.