The IRS wants to know if your organization is practicing “good governance,” so it recently released its new Governance Check Sheet that its agents will use to gather information about the governance practices of nonprofit organizations, including churches and ministries.   The release of the Governance Check Sheet is helpful to public charities because it gives nonprofit organizations a better idea of what the IRS is thinking and what the IRS considers “good governance.”  This, in turn, will help your organization make important governance decisions and implement important policies and procedures.  Specifically, in the Governance Check Sheet the IRS examines the following issues:

1)  Governing Body and Management: 

• Does the organization have a written mission statement that articulates its exempt purpose?
• Do the bylaws of the organization include information about who has the right to vote, qualifications, etc?

2)  Compensation:

• Does an authorized independent body establish compensation procedures, in advance, for all high level employees?
• Is comparability data used to determine compensation?

3)  Organizational Control:

• Are related family members serving on the Board of Directors?
• Do any directors have business relationships with other directors, officers, or key employees?

4)  Conflicts of Interest:

• Does the organization have a written conflict-of-interest policy?
• Is the policy followed?

5)  Financial Oversight:

• What type of policies and procedures are in place to ensure assets are properly used for exempt purposes?
• How often are financial reports provided to the organization’s Board of Directors?
• Is the Form 990 (if applicable) reviewed by the entire Board of Directors prior to submission?

6)  Document Retention:

• Does the organization have (and follow) a policy for document retention and destruction?
• Does the Board of Directors contemporaneously document its meetings (i.e. minutes) and retain such documentation?

Some have wondered why the IRS is becoming involved in corporate governance issues when its role is really to ensure tax compliance.  However, it appears as though the IRS is reviewing the governance practices of charities to determine the connection between a charity’s tax compliance and corporate governance practices.  The thought is that the better governance procedures that an organization has in place, the more likely that the organization is also going to comply with all applicable tax rules and standards for exempt organizations.

Here at the Church Law Group, we strongly recommend making sure that your organization’s governance documents–including articles of incorporation, bylaws, and other basic policies and procedures–are compliant with state and federal laws, as well as with the current standards for tax-exempt organizations.  Determining the effectiveness of your organization’s governance practices will help ensure the long term success and viability of your organization.  Remember, as Benjamin Franklin stated so long ago, “an ounce of prevention is worth a pound of cure.”  Contact us today at 972-444-8777 to learn more about how the Church Law Group can help you evaluate the effectiveness of your organization’s governance procedures.

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Why is it so important for new church plants to implement proper corporate governance documents from the very beginning? 

Jesus said a wise man builds his house on a foundation of rock.  That way, when the rain falls, and the floods come, and the winds blow and beat on the house, it will not fall because it is founded on solid ground.  From a legal perspective, a church rests upon the quality of its foundation: the governance and operational documents of the organization.

Many churches adopt Articles of Incorporation and Bylaws and then put them away and forget about them.  This is a huge mistake!  These documents should be reviewed periodically, probably annually, to insure that the church is actually acting in accordance with them.  If it is not, the church needs to decide if this is due to oversight or because the documents are not realistic or that experience has shown that there is a better way.  The governing documents should not be ignored simply because they may impose rules or procedures that are viewed to be inconvenient.  The church needs to insure that the current documents are kept in a secure location and that only trusted church leaders have access to them. 

While there are many risks or liabilities a church cannot control, having good governance documents is one thing it does have control of and that can make a big difference in the continuing welfare of the church and its leaders.

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Sometimes a director is faced with the issue of objecting to a majority decision to have the organization do something that he or she feels is wrong or risky or with which he or she just strongly disagrees.  In such a case an abstention (refusal to vote) is not enough to avoid liability for the board’s action.  The dissenting director must make sure that his or her dissent appears in the written minutes of the board meeting.  If the dissent is not recorded in the written minutes of the church then the director is presumed to have assented to the action (even if he or she later resigns from the board).

The Church Law Group has released a Guide to Board Training (with forms) that includes the above tip among many others and that is now available for purchase.  Email churchlawgroup@amlawteam.com or call 972-444-8777 if you have any questions about your church’s board of directors or are interested in the Church Law Group Guide to Board Training.

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There is considerable disagreement on how boards of directors should function.  For a religious nonprofit organization, the board of directors is (or should be) the critical body that determines the entity’s programs and investments and provides management guidance.  The role of the officers and employees is important, but the board of directors has the responsibility to frame the organization’s overall policy directions and objectives.  The governing board has the ultimate responsibility for the organization’s activities—and can be a prime target when matters of liability arise.

One of the main responsibilities of board members is to maintain financial accountability and effective oversight of the organization they serve.  Board members act as trustees of the organization’s assets and must exercise due diligence to see that the organization is well managed and that its financial situation remains sound.  Fiduciary duty requires board members to stay objective, unselfish, responsible, honest, trustworthy, and efficient.  Board members, as stewards of public trust, must always act for the good of the organization, rather than for their personal benefit.  They need to exercise reasonable care in all decision making, without placing the organization under unnecessary risk.

It is important to remember, however, that individual board members have responsibilities but not personal authority over the organization.  Since members have no individual authority to make organizational decisions, the board collectively is responsible for:

1) Developing and maintaining the organization’s mission;

2) Maintaining the organization’s tax-exempt status and (if applicable) its ability to attract charitable contributions;

3) Protecting the organization’s resources and approving the budget;

4) Hiring and evaluating the chief executive, and generally overseeing the organization’s management; and

5) Supporting any fundraising that the organization undertakes.

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One factor which can contribute to the long-term success of a nonprofit organization is the presence of an able board of directors who can complement the vision and resources of the organization.  However, unlike large for-profit corporations who elect their directors based on the individual’s business and legal savvy, most nonprofit organizations elect their board of directors based upon the individual’s loyalty and dedication to the organization.  As a result, many persons serving on their nonprofit organization’s board may not have a clear understanding of their rights, responsibilities and, most importantly, their potential personal liability.  In an effort to fill this gap, the Church Law Group is focusing this month on training for board members.  Our goal is to to set-out the basic rules which all directors should follow and to discuss a few ways in which nonprofit organizations can limit the potential exposure faced by its board members. 

Let’s start with the traditional duties of individual board members:

The duties of the board of directors of a nonprofit organization can be encapsulated in the three D’s: duty of care, duty of loyalty, and duty of obedience.  Defined by case law, these are legal standards against which all actions taken by directors are held.  They are collective duties adhering to the entire board and require the active participation of all board members.  Accountability can be demonstrated by showing the effective discharge of these duties.

1. Duty of Care.  The duty of care requires that directors of a nonprofit organization be reasonably informed about the organization’s activities, participate in decisions, and do so in good faith and with the care of an ordinarily prudent person in similar circumstances.  The duty of care could be carried out by attendance at meetings of the board and appropriate committees, advance preparation for board meetings, obtaining information before voting to make good decisions, use of independent judgment, periodic examination of the credentials and performance of those who serve the organization, and frequent review of the organization’s finances and financial policies.

2. Duty of Loyalty.  The duty of loyalty requires board members to exercise their power in the interest of the organization and not in their own interest or the interest of another entity, particularly one in which they have a formal relationship.  When acting on behalf of the organization, board members must put the interests of the organization before their personal and professional interests.  In practice, the duty of loyalty is carried out by disclosure of any conflicts of interest, adherence to the organization’s conflict-of-interest policy, avoidance of the use of corporate opportunities for the individual’s personal gain or benefit, and nondisclosure of confidential information about the organization

3. Duty of Obedience.  The duty of obedience requires that directors of a nonprofit organization comply with applicable federal, state, and local laws, adhere to the organization’s bylaws and existing policies, and remain the guardians of the mission.

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