Tag Archives: fundraising

What is Unrelated Business Income?

One of the big traps that can tangle up an organization is engaging in some sort of fundraising activity that generates what the government calls “unrelated business income,” which can cause an organization to have to pay taxes or, in extreme cases, even forfeit the 501(c)(3) tax exemption altogether.

Some sources of income are automatically excluded from UBI (and I’ll give you some other exceptions near the end), like dividends and interest, some types of investment income, royalties, some types of rental income, and some capital gains.

If you do have unrelated business income of $1,000 or more, you must file Form 990-T for the tax year involved. If you expect to have more than $500 in UBI during a particular year, your organization must pay estimated tax.

What is Unrelated Business Income?

Unrelated business income is money earned by an organization that meets three requirements:

  • It’s earned from activities that constitute a “trade or business.”
  • The activity is “regularly carried on.”
  • The activity does not further the organization’s exempt purpose.

For something to count as UBI, it must meet all these requirements; if one is missing, it’s not UBI. Let’s talk about each of these requirements in more detail.

What is a “trade or business?”

Here’s how I think about this requirement: is the money-making activity something that a for-profit business would engage in to make money? If you’re exchanging a good or service for money, you’re probably engaging in a trade or business. Car washes, bake sales, and selling advertising in programs, for instance, have obvious for-profit equivalents: the commercial car wash, the local bakery, and newspapers and magazines that sell ad space do the same thing. Each of those would qualify as a trade or business.

Of course, not every activity that raises funds is a trade or business. Receiving donations is not a trade or business–there’s no exchange taking place. Likewise, applying for grants from other organizations or charitable trusts isn’t a trade or business; it’s a donation.

What does it mean to be “regularly carried on?”

Generally, an activity is “regularly carried on” if it occurs roughly as often as it would for a for-profit business engaged in the activity. If a for-profit business does the activity year-round, and you’re only doing the activity every now and then, it probably won’t be considered regularly carried on.

For example, imagine that your organization operates a sandwich stand for a couple of weeks out of a year. Most for-profit sandwich sellers operate year-round, and a couple of weeks isn’t going to be frequent enough to be regularly carried on (that example is from Treasury Regulation 1.513–1(c)(2)(i), if you want to see it for yourself). On the other hand, the regulations also say that if you were to run that same sandwich stand one day each week throughout the year, that would be sufficient for the activity to be regularly carried on. Also, if a for-profit business would operate the activity on a seasonal basis, a couple of weeks of that activity within the same season might be enough.

The closer your activity is to a comparable for-profit business in terms of how frequently you’re open for business, the more likely your activity will be “regularly carried on” for UBI purposes.

What do you mean, the activity doesn’t further an exempt purpose?

This criterion often surprises people. To be “substantially related to an exempt purpose,” the activity itself has to help achieve the exempt purpose. The classic example is tuition for an educational institution. Education is one of the 501(c)(3) exempt purposes, so students enrolling and taking classes directly furthers the school’s purpose.

Here’s what gets people: fundraising activities do not “further an exempt purpose” even if all the money you raise is going to an exempt purpose. Let’s go back to the car wash example. Washing cars is not an exempt purpose. So, if you have a car wash fundraiser, that doesn’t “further an exempt purpose” even if every cent you raise goes to fund your organization’s exempt purposes.

Again, don’t forget that for the organization’s income to count as unrelated business income, it must meet all 3 of these requirements. And even then, there are exceptions.

Exceptions to Unrelated Business Income

So, let’s say that your organization does engage in some sort of money-making activity that meets all three requirements for unrelated business income. We’re not done yet! There might be an exception available. There are four big exceptions:

  • Volunteer labor: Your activity is run entirely by unpaid volunteers
  • Convenience of members: Your activity is carried on primarily for your members, students, patients, or employees–(examples from the regulations: leasing dormitory apartments to students of a college, school or hospital cafeterias, or hospital parking lot all fall under this exception)
  • Selling donated merchandise: Your activity involves selling merchandise which was donated or gifted to your organization
  • Bingo: Bingo should probably get its own post, but the exception applies in bingo games where you complete a pre-selected pattern on a card (5 in a row is most common) to determine a winner, and wagers are made, winners are determined, and prizes are awarded simultaneously.

One more thing about bingo: don’t forget that bingo games may be regulated by your state or local government! You may need to apply for permits or register–or you might not be able to do it at all.

In addition to those exceptions,

Unrelated business income is an easy issue to miss–every time you consider a new fundraising activity, you should always take a moment to consider if this activity will create UBI for your organization.

Is Starting a Nonprofit for You?

“This dream of theirs is just that. Most of them don’t even have anything written down that they can present to me. They don’t have even a starting point yet. But they have the passion. They have the dream.”

Jim Maltry, SCORE Cincinnati

And many times the people who have the dream do not wind up creating a nonprofit. I agree with the article–that’s not necessarily a bad thing–but it’s important to understand why that is and how you can go from dream to functional organization.

Is the nonprofit itself a good idea?

Starting and running a nonprofit organization is a lot of work, and I think it makes sense at the beginning to decide whether or not what you want to do will work. If you’re thinking about it, I recommend asking yourself these questions:

1. Do you do something unique compared to the other organizations around you?

Often, people think of non-profits as somehow separate from the world of business. I don’t see it that way. Nonprofits have to deal with many of the same issues for-profits do, and one of those issues is competition. If you duplicate something that an already-established organization does, you might be better off working with them instead. Duplicate organizations compete with each other for donors and grant dollars, and that may lead to each organization being less effective than it could be without its competitors.

2. Is this organization aimed at a recent disaster or tragedy?

Sometimes a tragic event can cause an outpouring of support and assistance. There are others who disagree with me on this, but I’m generally not a fan of creating an organization in response to a specific event. Here’s why:

  • Other relief organizations already have assets in place to assist; if the disaster spurred you to create an organization, odds are you probably don’t.
  • Putting together an organization takes time. Governance structures, legal entity creation, and tax-exemption application are all important steps, and it really can’t (and even if it can, it shouldn’t) be done overnight.
  • Organizations that appear in response to a disaster are more likely to be scammers. Obviously, not everyone falls into that category, but that perception can hinder your efforts.

Short version: when a disaster or tragedy occurs, help through reputable, established organizations.

 

3. Do you have a plan?

I think that business plans can be helpful for a new (or established) business. It’s not so much that I think you need to have this pretty report with cool charts and graphs, but rather that putting together the business plan is serious work. It forces you to think about your business, and seriously answer questions like:

  • What is my business going to do?
  • Who will my business help?
  • Who is going to buy my product?
  • How will my customers know I exist?
  • How much money does the business need to keep running?
  • Who is going to run the business?
  • What competition does my business face?

Those questions, with minor modifications, can be asked of non-profits quite easily:

  • What is my organization’s mission?
  • Who will my organization help?
  • Who will donate to support my organization’s mission?
  • How will my organization’s potential donors and potential clients know I exist?
  • How much money does the organization need to accomplish its mission?
  • Who will be responsible for leading the organization?
  • What other organizations are doing the same thing my organization is doing?

I think that even if you don’t put together a pretty report with cool charts and graphs, I recommend writing your answers out. Putting the answers in writing focuses and clarifies your answers.

Is starting a nonprofit a good idea for you?

Also, starting a nonprofit organization isn’t for everyone. If you’re going to lead the organization, here’s what you should be asking yourself:

1. What skills do you and the other people involved bring to the organization?

In the early days of an organization, the people running the organization are usually the people that are working directly on doing the work. Later on, you might have people that manage the organization, staff, and volunteers, but in my experience, it usually doesn’t start that way. However, the startup phase is where a lot of the groundwork is laid–so the skills of you and your team are very important.

What kind of skills should you be looking for?

  • Management: At the board level, you want to have someone who can make high-level management decisions. In the beginning, those same people might also need to be able to lead others, both staff and volunteers.
  • Fundraising: Almost every mission requires some money to be accomplished. Without money, an organization is bound to fail. People with connections throughout the community and the ability to raise funds are vital to almost every organization’s success.
  • Finance: That money you need to bring in needs to be tracked. Even if you need help creating financial reports, it’s important to have people that can understand them on board.
  • Legal: Organizations can run into a variety of legal issues. It’s great to have your very own expert on board, or at least someone who may be able to recommend outside lawyers.

2. Have you (or at least someone involved in your organization) done work in the area you want to serve already?

If your organization wants to complete a certain mission, it’s reasonable to expect someone in the organization to have some experience executing the mission. This will help you understand what resources you need, the logistical issues you face, and the challenges of completing that mission. If the answer to this question is “no,” maybe now isn’t the time. If you don’t have this, you might be better off volunteering for a similar organization to learn about how to better fulfill your mission.

3. How will you support yourself during the start-up phase?

When you start a for-profit business, money doesn’t just appear out of nowhere; you need customers who want to trade money for whatever you sell. It’s a similar idea for a non-profit; money won’t just appear. You’ll have to get people to donate, and to do that, they have to believe that you will handle their donation wisely. That requires trust, and that doesn’t appear overnight either. I’d suggest to you that’s even harder than starting a business, because when you accept a donation, you have nothing to give in return. Money may be hard to come by early on in the organization’s life, and if you plan to work full-time for the organization and be paid, you may find life very difficult in the early stages.

Starting a nonprofit organization is not impossible, but it does require an honest assessment of your chances of creating something successful. If you’re gone through this assessment and you are confident in your project, then you likely have a good foundation for success. If not, you may need to make some adjustments before going forward.

Note: An earlier version of this post originally appeared on my firm’s website, attorneykevinkelly.com. I have updated the post for posting here. Enjoy!

Photo credit, Tim Gouw, via Unsplash.com, licensed under CC-0

Documentation Requirements for Donors Making Donations of $250 or More

Note: An earlier version of this post originally appeared on my firm’s website, attorneykevinkelly.com. You can read the the post about $250 contributions here, and the post about $75 contributions here. I have updated and revised both posts for posting here. Enjoy!

If you run a 501(c)(3) organization, one of the important benefits your donors enjoy is the ability to deduct their contributions on their taxes. In certain cases, the IRS requires the organization receiving the donation to provide donors with written acknowledgements of the contribution. It’s not difficult, but it is critically important for your donors.

There are two situations that require written acknowledgement from charities:

  • Any contribution of $250 or more, and
  • A contribution of $75 or more when the donor receives goods or services in exchange.

Contributions of $250 or More

If a donor makes a single donation of at least $250 to your organization, the donor needs a contemporaneous written acknowledgement of the contribution. The acknowledgement must contain:

  • The name of your organization;
  • If any money was contributed, the amount of money donated;
  • If there was a non-cash contribution, a description of the contribution (but you need not provide the value);
  • If no goods or services were received by the donor, a statement saying that;
  • If goods or services were received by the donor (more on that in a moment), a description and a good faith estimate of the value of the goods or services; and
  • If only intangible religious benefits were received by the donor, a statement saying that.

What is “contemporaneous?” You don’t actually have to provide the acknowledgement immediately–it’s “contemporaneous” as long the donor receives it before the donor files his or her tax return or the due date (plus extensions) for filing the tax return. Because taxpayers may still be getting W-2s through the end of January, January 31 of the year following the year of the contribution is about as late as I’d want to wait.

As a practical matter, though, why wait that long? I think it’s probably best to issue written acknowledgements shortly after receiving the donation so you don’t forget later. If you do wait, you may wind up having a bunch to issue at once (that doesn’t sound fun) or you might miss the deadline, which will disqualify those donations from deduction (which makes for angry donors, which also doesn’t sound fun).

Above, I mentioned that if there were goods or services received by the donor, a description and good faith estimate of the value of those goods or services is required. There are a couple exceptions to that rule:

  • Low-value items. I like to think of this as the “tote bag” or “coffee mug” exception. An item qualifies for this if:
    • The fair market value of the benefit received no greater than 2% of the donation or $106 (the $106 part is adjusted each year for inflation–that’s the 2016 value), or
    • These three things are true:
      • The donation is at least $53 (again, that’s inflation-adjusted, and $53 is the value for 2016),
      • The only items provided bear the organization’s name or logo, and
      • The cost of the items is within the limit for “low-cost articles,” which is $10.60 for 2016 (and is also inflation-adjusted)
  • Membership benefits. If members get some sort of benefit for an annual payment of $75 or less, it doesn’t count as substantial. For instance, free/discounted admissions, parking, or gift shop discounts for members would qualify under this exception.

One of the great things the IRS does in Publication 1771 is to give you clear examples of acknowledgements that follow the rules:

Cash contribution, nothing in return:

“Thank you for your cash contribution of $300 that (organization’s name) received on December 12, 2015. No goods or services were provided in exchange for your contribution.”

Cash contribution, something substantial in return:

“Thank you for your cash contribution of $350 that (organization’s name) received on May 6, 2015. In exchange for your contribution, we gave you a cookbook with an estimated fair market value of $60.”

Non-cash contribution:

“Thank you for your contribution of a used oak baby crib and matching dresser that (organization’s name) received on March 15, 2015. No goods or services were provided in exchange for your contribution.”

 

Contributions of $75 or more where the donor receives goods or services in return

From the point of view of a charitable organization, this documentation requirement is different than the “$250 disclosure” in a very important way: failure to provide written documentation when a donor contributes more than $75 and receives something in return results in a penalty to the charitable organization. The penalty is $10 per undocumented contribution with a cap of $5,000 per fundraising event or mailing.

The reason the IRS is so interested in whether or not a donor receives goods or services in return for a contribution because that affects how much of the contribution is deductible. If a donor receives something in return, the value of whatever he or she received is not deductible. For example, if a donor donates $200 to a charitable organization, and gets an item in return that is valued at $50, only $150 of that contribution is deductible.

The written statement has to have two additional key pieces of information:

  • A statement informing the donor that, in the words of 26 U.S.C. 6115(a)(1), “the amount of the contribution that is deductible for Federal income tax purposes is limited to the excess of the amount of any money and the value of any property other than money contributed by the donor over the value of the goods or services provided by the organization,” and
  • A good faith estimate of the goods and/or services received.

A “good faith estimate” is exactly what it sounds like: a fair estimate of what the goods or services provided were worth.

The disclosure must be made either during the solicitation or once the contribution is received, and the disclosure has to be made in writing that would be sufficient to get the donor’s attention.

There are also a couple of exceptions to this rule. A written disclosure is not required when:

  • The “low-value item” (or as the IRS calls it, the “token” exception) or “membership benefits” exceptions that we discussed earlier apply,
  • The only benefit consists of intangible religious benefits, or
  • There’s no real donative intent involved–the classic example is a sale of an item at a gift shop, it’s not really a donation, it’s more like a retail sale.

Beyond the legal stuff: donor communication

These acknowledgments don’t have to be bland, “let’s meet those legal requirements” boring stuff. Donation acknowledgements are a great way to deepen your relationship with your donors and help them feel like they’re supporting a great cause–because they are, right?

I’m a blood donor (I know, I talk about this a lot, but stick with me here). Every time that I do a donation, the blood center sends me an e-mail, thanking me for my donation and telling me that my donation helped save lives, and they usually provide an example patient–usually a cute, smiling kid that needed blood. It’s not a legal requirement, but they want me to feel good about my donation and encourage me to keep coming back in the future. You have to communicate with the donor anyway, why not use it to meet the legal requirements and deepen your relationship with the donor?

Photo credit: Volkan Olmez, via unsplash.com, licensed under CC-0

Form 1023-EZ: Is It Working?

Short answer: it depends on what you mean by “working.”

Not a very satisfactory answer, is it? As much as I wanted a 10-word blog post, we’ll have to go a bit longer to really answer this question.

The 1023-EZ was introduced a little under 2 years ago to help deal with the tremendous backlog of tax-exemption applications facing the IRS. The idea was that small organizations didn’t really need a full review. Those organizations could fill out a shorter form and get a decision much more quickly. This would free up the IRS’s staff to scrutinize full 1023s more closely.

For what it’s worth, I’m a big fan of the IRS doing some triage here. The IRS was getting crushed by applications in the past, and it makes sense for the IRS to focus its efforts on the biggest organizations. Also, the effort needed to complete a full Form 1023 is a burden on small organizations. The IRS estimates that it takes 15.5 hours to properly prepare the full Form 1023. Form 1023 itself is 12 (fine, 11.5) pages, plus the 8 possible schedules that may also be required. Form 1023 is difficult to prepare well, and it can be tough for a small organization.

What Form 1023-EZ is doing well

Speed of review. The IRS turnaround times for both Form 1023-EZ and Form 1023 applications have dropped considerably. The IRS used to have a webpage showing the average age of its pending applications, but it has retired that, instead asking that you follow-up within 90 days for a 1023-EZ or 180 days for a full 1023. That’s much faster than the turnaround before the 1023-EZ came along. This is great for applicants and the IRS.

Client satisfaction. The Journal of Accountancy reports that overall satisfaction regarding the process was at 87% for 1023-EZ users and 72% for 1023 users. Further, 1023-EZ users reported more significantly more satisfaction with the time and ease of completing the application, the length of the process, and the ease of understanding the application than 1023 users.

What Form 1023-EZ isn’t doing well

Compliance. Organizations currently attest to numerous key things regarding compliance:

  • That the organization has the appropriate organizing document for its type of entity (articles of incorporation for a nonprofit corporation, for instance),
  • That the organization’s purposes are limited to one or more of the exempt purposes under Section 501(c)(3),
  • That the organization is not allowed to engage–except as an insubstantial part of its activities–in activities that do not further one or more of the exempt purposes under Section 501(c)(3),
  • That the organization’s organizing document requires that the organization will give its assets to another 501(c)(3) organization or the government upon dissolution,
  • That the organization won’t support or oppose candidates for office,
  • That the organization’s net earnings won’t be given to the organization’s insiders,
  • That the organization will not engage in a trade or business outside of its exempt purposes,
  • That if the organization attempts to influence legislation, it will only do so as an insubstantial part of its activities, and
  • That the organization will not provide “commercial-type insurance.”

At present, the IRS does not require the submission of organizing documents or corporate by-laws in order to review the organization’s compliance with these requirements. Additionally, some of the language here may by tough for the leadership of a small nonprofit to understand. For instance, what is “an insubstantial part” of an organization’s activities? I have clients ask that question fairly regularly, because it’s a term of art and they aren’t familiar with it.

A “gotcha” approach to compliance. The IRS has said that it will do more audits of organizations in order to check for compliance. I’d prefer the IRS check for compliance at the beginning of the process rather than auditing an organization that filed a 1023-EZ only to find out they are non-compliant. Will such an organization have a chance to become compliant? What will that process look like? What about the organization’s donors? What about back taxes, interest, and penalties for a non-compliant organization?

Uncertainty for organizations. When I work with clients that file a 1023-EZ, one question almost always pops up: what if we go over $50,000 in annual gross receipts? For many small organizations, those initial budgets are made in good faith, but sometimes those budgets are the product of educated guesses. It isn’t clear right now what happens if an organization exceeds the limit–should an organization that grows beyond its projections stifle its growth to avoid trouble with the IRS?

Potential for misuse. The 1023-EZ process involves fairly light oversight, so I’m sure some organizations are tempted to claim 1023-EZ eligibility to take an easier path to exemption. By tightening the oversight of the 1023-EZ process a little bit, the potential for misuse could be reduced.

How could the process be better for Form 1023-EZ users?

My suggestions would probably add some complexity and some additional turnaround time to the Form 1023-EZ process. I’m not sure I’d improve IRS user satisfaction by making these changes! By making the process “better,” I’m suggesting that a process that is still easy for small organizations to manage while allowing the IRS to find compliance problems, letting the organizations correct the problems, and getting the organization started on the right track.

So, what do I have in mind?

Require submission of organizational documents. Rather than requiring attestation to the organization’s purposes and dissolution clauses, require the organization to submit them. The organization already has to create the documents, so there’s no extra time spent for the organization. It is relatively easy to get documents into a PDF format, and reviewing them shouldn’t take that much extra time for the IRS.

Require the submission of a 3-year budget. Again, organizations have to say they don’t expect annual gross receipts of over $50,000 those first 3 years. With that in mind, do their budgets make sense? For instance, an organization that plans to hire a staff member probably can’t have a year with less than $50,000 in gross revenue and hope to survive. The IRS could follow-up on an unrealistic budget and find out if a full 1023 would be more appropriate.

Issue guidance for organizations that exceed the $50,000 limit. I suspect that the IRS is watching 990-EZ filings to see if organizations that applied with Form 1023-EZ exceeded the $50,000 limit. The IRS should do that. But what if an organization exceeds the limit? It’s not clear what would happen. Would the IRS revoke the tax-exempt status of those organizations? Maybe, although I think that’s excessive. I would expect the IRS to require a full 1023 (and the full user fee), but that’s a guess. Until the IRS has guidance, we won’t know for sure.

Form 1023-EZ has unquestionably made application for tax-exempt status more convenient, even for organizations that don’t qualify for it. Still, if we’re willing to sacrifice some of the convenience, we could achieve a more effective review process.

Photo credit: Helloquence, via unsplash.com, licensed under CC0

Questions to Ask Prospective Board Members

Last time, we talked about what you should be asking an organization if you’re thinking of serving on their board. Today, we’re going to do the same thing for the other side. As this Forbes article says, you’re looking for 1) the ability to handle the job, 2) their interest in doing the job, and 3) whether they’ll fit in. So, with that in mind, what should you be asking prospective board members?

1. Are you excited about our mission?

An excited, engaged board is a valuable thing to have. I don’t mean to dismiss the value of skill and experience, but an enthusiastic board member can gain skills and experience, but a skilled, experienced board member that isn’t energized may not be contributing what they do have. Ideally, you can have all of those things, but if someone isn’t really that excited about the mission of the organization, you’re probably doing both prospective board members and the organization a favor by not putting him or her on the board.

2. What skills do you bring to the organization?

Ideally, you’ll want to have a variety of skills on the board: fundraising, planning, management, and governance, for instance. It’s probably too much to expect one person–or even a few people–to contribute all the skills you need. If you know you’re missing a particular skill, obviously you’ll want to bring someone on with the skills you need, if possible.

3. What have your previous board experiences been like?

You want to get a sense of not just the technical abilities of the candidate, but also a sense of how he or she works as part of a board. Do they generally work together with other board members? Do they handle conflict well? How’s their communication style? Are they willing to present a dissenting opinion, even if that opinion is theirs alone? Can they handle being on the “losing end” of an argument? You’ll want to consider whether the personality fit is right.

If you have prospective board members who have never served on a board before (which is fine–every board member who ever served had a first time), how do they work in other teams, maybe in their work or in some other organization?

4. Can you make the commitment we ask of our board members?

When I’ve worked with organizations, occasionally I have needed to find out what the expected time commitment for a board member is. I’ve found that sometimes the organization really doesn’t know! I suppose Question 3.5, then, is what sort of time commitment is necessary? Think about all the things a board member does:

  • Attending board meetings
  • Preparing for board meetings (and yes, board members should be preparing for board meetings)
  • Attending committee meetings
  • Preparing for committee meetings
  • Attending organization fundraisers and other events
  • Asking for contributions
  • In some cases, doing the work of the organization

And by all means, be upfront about the time involved! If you tell a prospective board member that it’s a 5 hour per month commitment, and it’s really 10, you haven’t done the candidate nor the organization any favors.

5. Can you handle the fundraising commitment?

Likewise, be upfront about the fundraising or contribution expectations. Some potential board members may not be as good at raising funds–are you willing to live with that in exchange for other abilities that person might have? Is it a skill that can be built?

6. What do you expect of the organization?

This is another opportunity to gauge how well the candidate will fit into your organization. There aren’t any right answers here–but what does this person expect match up with what the experience is likely to be? Also, I’d be a little leery of someone who doesn’t have any expectations. If you get that answer, I’d press a little before moving on–after all, we want to assess fit, and that’s good for the candidate and the organization both.

7. What do you think makes for an effective board member?

I start from the assumption that everyone wants to do a good job (and in my experience, this is usually, but not always, the case). Assuming that’s the case, the answer to this question can give you a look into the standards that the candidate holds himself or herself to. Additionally, it can provide you with some insight into the standards the prospective board member will hold his or her fellow board members to, which can help you assess fit.

8. Why are you interested in board service?

There are a bunch of other ways to get involved in the community: you could join a service organization, you could do other types of volunteer work, or you could simply donate to various causes. What is it about board service specifically that’s interesting to them? This can help you determine what motivates them and how they see their skills.

9. Is it important to you to interact socially with your fellow board members?

This is not a question that had occurred to me; however, I noticed it in some other possible lists of questions (see here and here for examples, as well as some suggested questions I didn’t cover). For some people, joining a board is a social experience, and they expect to interact socially with their fellow board members. At the other end of the spectrum are people who don’t see board service as a social outlet (this is where I’m at, not that I mind social interaction). Again, this is an issue of fit: someone who wants social interaction might not enjoy a “do the work and go home” kind of board–and the opposite is probably true as well.

10. What questions do you have for the organization?

A potential board member ought to have some questions (maybe even some of the ones we talked about last time) for the organization. If prospective board members have no questions, and they haven’t already been doing something in the organization, I’d suspect that they weren’t interested or weren’t taking the commitment very seriously.

Ultimately, you want to figure out if prospective board members can bring the skills or connections you need, the enthusiasm for doing the board’s work, and a personality that will fit into your board. If someone isn’t a good fit, there’s no need to force it; trying to make someone fit will probably be bad for that person and your organization.

Photo credit: Bench Accounting, via unsplash.com, licensed under CC0

Questions to Ask Before Joining a Board

If you’re active in the community–or you’d like to be–one of the things you might have considered is the possibility of joining the board of a nonprofit organization. Joining a board can be a tremendous opportunity: you can develop leadership and management skills, serve a cause you care about, and build your professional network.

That said, board service is not for everyone. Even if board service is for you, not every organization and every potential board member are going to be a good fit. And if it isn’t a good fit, it’s a lot better not to join that board in the first place.

What do you need to know? Let’s start here:

1. Why do you want to join this board?

Board service has a lot of personal benefits. Board members can meet people and expand their professional and social networks, add valuable experience to their resumes, and develop skills. But if you’re primarily joining for personal benefit, you probably aren’t going to be that great a board member–you’ve got to care about the cause or about helping whomever the organization is helping, or you probably won’t be effective.

2. Are you interested in this cause?

There are a ton of great causes out there, but not everyone cares about everything equally. You might agree that literacy and protecting animals and sheltering homeless people are all worthy things to be doing, but you probably care more about some things than others. That’s okay! Different people will have different priorities. If you’re not particularly interested in the cause of a particular organization, do them and yourself a favor and don’t join. Instead, wait for an opportunity with a organization that does something you are really interested in.

3. Have you read the organization’s key documents?

I know that an organization’s bylaws and financial reports are not usually very exciting reading. However, before you commit to the organization, you should make sure that you understand what’s going on in that organization. At a minimum, you should read the organization’s articles and bylaws (would you play a game without learning the rules first?) and the organization’s latest financial statement; you can find a good list of materials (and some other good questions) here.

4. What is expected of you?

Different organizations require different commitments from their board members. Can you make most (if not all) of the meetings? Are the board members expected to do additional fundraising activities or other work beyond the board meetings? Are there committees that you’ll be serving on as well? If you don’t have the time, it’s better to know that before you join.

5. Is the organization ethical and compliant?

This may be harder to determine from the outside, but does the organization follow the rules? Those rules include federal and state law as well as the organization’s own by-laws (yet another reason you should read them). If an organization isn’t compliant with federal and state law, or if they can’t seem to follow their own rules as set forth in the by-laws, run. Now.

6. How are the relationships in the organization?

You certainly don’t need everyone in the organization to be the best of friends, but the board, volunteers, and staff should be treating each other respectfully and professionally. If the board and the staff are stepping on each other’s toes or are unable to deal with each other appropriately, this may not be the organization for you. I’d also suggest looking out for a lot of turnover in board and staff, difficulty keeping volunteers, and donor attrition as well.

7. Does the organization carry directors and officers (“D&O”) insurance?

It is possible that directors and officers of an organization may make mistakes running the organization. In some cases, this might lead to lawsuits. Organizations can take out D&O insurance in order to indemnify their directors and officers against defending those lawsuits and paying judgments. Generally, these insurance policies will cover errors, but not intentional wrongdoing. If an organization is leaving its directors and officers uncovered, I’d probably stay away.

8. Are the organization’s finances in good shape?

Remember the financial statement you looked at up in Question 3? Well, how does the organization’s financial health look? Here are some of the issues I’d look for:

  • Is the organization following appropriate accounting procedures, and does the organization get independent audits?
  • Does the organization carry adequate cash reserves?
  • How well does the organization meet its budget? If there are major differences, what happened?
  • Is the organization susceptible to cash flow troubles? Is there a way to resolve those problems?
  • Is the organization carrying debt? If so, is the debt load manageable?
  • Does the organization depend heavily on a few donors or major grants, or does it receive broad-based support?

If an organization’s finances aren’t perfect, that might not be a deal breaker. However, the organization should be aware of any problems and committed to resolving those issues.

9. What’s expected of you?

You’ve probably already considered the time commitment needed for board meetings, but the organization may have additional expectations. In addition to board meetings, an organization may have additional committees that you may be assigned to, and in some cases, board members also do some of the work of the organization (often known as a “working board”).

Also, board members are often expected to make some sort of financial impact on the organization. Sometimes, this is a direct donation. Other times, it might be a commitment to raise a particular amount of money from others. Can you afford the amount involved, or do you have the skills and drive to raise it?

10. What is the organization’s strategic plan?

Nonprofit organizations often engage in strategic planning, which is how the organization identifies its strengths, weaknesses, opportunities, and threats (the “SWOT analysis”), it’s mission, and all of the parts needed to achieve that mission. Strategic planning is more of a process than a task; organizations often make the mistake of doing the strategic plan–and then sticking it in a file cabinet somewhere. Not only should the organization be involved in strategic planning, but that planning should be regularly reviewed, and should actually be used to guide the organization.

If you’re interested in joining a board, don’t go in blind; make sure you know what you’re getting into and what you can expect from the experience. And beware the organization that isn’t interested in answering your questions–board membership is a serious commitment, and an organization should be happy to make sure that you understand that commitment.

Photo credit: Negative Space, via unsplash.com, licensed under CC0