The Care and Feeding of Nonprofits
Nonprofit business attorneys give their legal adviceBy Taylor Kuether | Last updated on August 4, 2022
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A nonprofit is only as good as its foundation, attorneys agree.
“Where is the money going to come from, what’s the reasonable budget going to look like, how will the organization go about doing its business of doing good?” asks Cynthia R. Rowland, who practices nonprofit law at Farella Braun + Martel in San Francisco. “Think of it in terms of having a business plan.”
Even nonprofits have to make ends meet, she points out, so it is essential to understand realistic sources of funds and to know the other providers offering similar services in your community. “We see a lot of startups that are founded with absolutely golden impulses,” she says, “without thinking through the really tough realities of fundraising, operating a business, operating with employees or volunteers, and that it just takes a lot of work and effort to make it viable for the long run.”
Another crucial step? Finding the right people for a board of directors.
“The chance of success can be really small without a strong initial board,” says Gene Takagi, who focuses on nonprofit law at NEO Law Group in San Francisco. “Getting a group of like-valued people who share a common vision for what this organization might do is really important, and it ensures that the purpose of the organization is truly charitable.”
Structuring everything properly can avoid headaches later. “To use a construction analogy,” says Takagi, “it’s like building a really solid foundation that is compliant and that you can build upon, versus not being so sure about that foundation; and, as you put more and more programs and activities and employees on top of it, with a shaky foundation it could be like a house of cards and all collapse on you.”
State Laws and the California Attorney General
When you start a nonprofit in California, there are a few items to keep in mind—chief among them being the importance of the role played by the attorney general’s office.
“The charities operating in California that have activities here, or are fundraising here, are accountable to the attorney general, who supervises the charity community through the Registry of Charitable Trusts,” Rowland explains. “So, in addition to the IRS tax-exempt status that’s a fundamental part of forming a nonprofit, organizations that are in California need to pay attention to the California state reporting requirements.”
Another California-specific law, says Takagi, applies to the boards of nonprofit organizations: “A majority of your board members must not be compensated, or related to anyone compensated, by your organization.”
There’s also a dollar figure relevant to California nonprofits, he adds: “If you’ve had gross revenues of $2 million, you generally trigger the audit requirement under California law.”
Alternatives to a Nonprofit Organization
Before starting a nonprofit, Erik D. Dryburgh, who practices nonprofit law at Adler & Colvin in San Francisco, recommends exploring a few alternatives. A donor-advised fund, for example, allows you to fund an existing charity and make grants to charitable causes by putting in your money and taking an immediate tax deduction—without having to launch your own organization.
“If you want to create a private foundation, you should at least explore doing a donor-advised fund, because you’re not creating a whole brand-new entity,” Dryburgh says. “There are substantially less transaction costs, and it’s a much cheaper and easier, albeit somewhat more limited, alternative.”
If you’re interested in conducting charitable activities as opposed to grantmaking, you might want to consider whether there is an existing charity with whom you could partner or volunteer, Dryburgh suggests. “I try to get people to realize that they are creating, essentially, a version of a business, it’s just philanthropic. There are transaction costs to set it up, there are transaction costs every year, you’ve got to file tax returns with all these agencies, you’ve got to pay the CPA, and you’ve got to be able and willing to maintain the business. It takes some care and feeding.”
In your nonprofit’s articles of incorporation, Takagi says, “Make sure that your purpose statement isn’t so narrowly construed that you evolve outside of that. If they have a very specific purpose statement, they might soon be operating outside of that statement, which is outside of their corporate authority. That can get organizations into trouble.”
It’s important to take a step back, Rowland says. “The philanthropists that I know that are most impactful think of it in an ecosystem relationship, not just ecological but civic-minded: what it means to live in a community and treat each other well and make sure that we all have enough opportunity and reward for our hard work,” she says. “It’s all a balancing act. Simply grantmaking and giving money away, that alone doesn’t solve problems, but big-picture-thinking goes a lot further.”
All three attorneys mentioned a trend in the California nonprofit sector in recent years: for-profit corporations creating nonprofit entities as part of their operations.
“We’re seeing more of a blur between the nonprofit and for-profit sectors,” Takagi says. “For-profits are trying to become more socially minded. Part of that may be for marketing reasons, because the public is starting to put the power of the purse behind organizations that reflect more of their values than not, but also because some corporations feel that they want to be good corporate citizens. It used to be, if you’re a big enough corporation, you can form a foundation and that foundation can engage in grantmaking. I think for-profits now think, ‘Well, we actually want to do more than just give grants to other organizations; we actually want to do good things.’”
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