No-noes for nonprofits: A list of things to avoid
Here in the Grand Valley we love our nonprofit organizations. Nonetheless, those involved with nonprofits should understand how a nonprofit can get into trouble with the attorney general’s office and Internal Revenue Service. Here’s a list of common no-noes to watch out for:
Fail to adopt or follow policies and procedures. Make sure you adopt policies and, more importantly, follow those policies. Include policies on conflict of interest, whistle blowers, documents and document destruction, amounts allowed for entertainment and why and what is appropriate. Make sure you conduct regular board meetings and take minutes.
Fail to produce documents when requested by the public. As a nonprofit organization, your Form 990 is subject to public review, and there are very strict guidelines behind this. You can’t just refer people to your website or Guidestar. You have to produce a hard copy upon request. This hard copy must be provided within one day. You can charge $1 for the first page and 15 cents for the other pages, and you may only ask for their name and address, not their employer or other information. The Schedule B of contributors is the only item on the Form 990 that can and should be omitted. You may not remove or black out salary or board member information. It’s important employees, especially those working the front desk and answering phones, are aware of these rules.
Hoard money. This can be easy to do, especially given recent economic times. It’s important nonprofits maintain savings. There’s a difference, however, between being fiscally responsible and hoarding money. The purpose of a non-profit organization is to better the community. By hoarding money, the community is losing out on benefits. Fund your mission.
Frivolous expenses, perks and high-dollar board meetings. Be careful of extravagant board meetings. You need to have a legitimate purpose for the level of expense.
Letting your executive director control it all. Known as founder’s syndrome, this can be a common trap into which to fall, especially if the director started the organization. Directors should never pay themselves without board approval. They should also not elect, choose or control the board. Remember, the director is the employee, not the employer. The board should remain informed about the organization and its happenings and retain control and oversight.
Outrageous salaries and benefits. You have amazing employees that do amazing work. Why shouldn’t they be paid well, right? You’re correct, as long as your definition of being paid well is appropriate for the duties and experience of that individual. Make sure you have a basis for what you’re paying employees, especially the executive director. A market study or equivalent documentation should remain on file. Also make sure the board determines and approves the director’s compensation.
Using donated funds for unauthorized purposes. Donor restrictions on contributions must be followed. As a matter of fact, to spend contributions on something other than the purpose designated by the donee, you have to either get permission from the donor to alter the restriction or a court must rule you can use funds for other purposes. The one exception to this rule has to do with funds raised for buildings never built. This also includes using federal funds for unauthorized purposes. If you receive $500,000 or more in federal funds, find out if a single audit is required.
Lack of controls on funds and separation of duties. Make sure there’s proper separation and review procedures to protect the organization from fraud.
Convert to, merge with or enter into a joint venture with a for-profit entity. These activities could be legitimate, but likely will draw the attention of the attorney general, Make sure you have your ducks in a row and document. Prepare to answer questions.
Complicate your organizational structure with multiple subsidiary organizations and multiple salaries for the same person. This also could be legitimate, but should be considered carefully. Is there really a reason for this complication?
n Solicit funds deceptively or through others that keep most of the money or have most of the funds paid out to for-profit corporations. Really think about who’s benefiting from the transaction: the general public as stated in your mission or a for-profit corporation?
Fail to cooperate with the attorney general’s office. This one might seem obvious, but has been known to happen. Even if you don’t like what they say, cooperate.
These are simply general items that constitute no-noes for most nonprofits, but every non-profit is different. Seek out professional advice regarding specific circumstances.