1. Based on program materials from ABA Business Law Section,
Nonprofit Law Basics
Kathleen K. Law
Nyemaster Goode, P.C.
Des Moines, IA
Based on program materials from ABA Business Law Section,
Spring Meeting, 2017

2. Formation Documents for Nonprofit Corporation
Articles of Incorporation
Bylaws

3. Distinguishing Between Nonprofit and Tax-Exempt
State corporate law
No owners/no distribution to owners
“Tax-Exempt”
Federal & state tax law
Exempt from corporate income tax on certain income

4. Types of Exemptions 501(c)(3) – charity 501(c)(4) – social welfare
501(c)(6) – trade/professional association
501(c)(7) – social club

5. Classifications within 501(c)(3)s
Private foundations
Public charities
Automatic
Public support test
Supporting organization

6. Requirements for Tax-Exempt Status as a 501(c)(3)
Exempt purpose(s)
Organized exclusively for exempt purposes
Operated exclusively for exempt purposes
No private inurement
No candidate political activity
No substantial legislative lobbying

7. No Private Benefit
Organization must serve a public rather than a private interest
Organization must not be operated for the benefit of private interests
Organization may confer benefits to individuals so long as they are incidental, quantitatively and qualitatively, to the furthering of organization’s exempt purposes

8. No Private Inurement
RULE: No part of the organization’s net earnings may inure to the benefit of any “insider”
“Insiders” – founders, directors, and officers, and other persons in a position to influence decisions of the organization
Penalty: Revocation of tax exempt status

9. Charitable Purposes
BIG PICTURE – 501(c)(3)s must be Organized and Operated Exclusively for 1 or more of 8 “Charitable Purposes”
Religious, Charitable, Scientific, Testing for Public Safety, Literary, Educational, Amateur Sports, Preventing Cruelty to Children or Animals
Treasury Regulations expand on definition of “charitable” and “educational

10. Bylaws Subject Areas Members vs. Nonmembers If Members
How are they selected
How are they removed
Regular/special meetings/unanimous written consent
Communications via electronic mail
Quorum Issues
Voting Rights
If no members – Using “memberships” as fundraising device

11. Bylaws Subject Areas (cont’d) Board of Directors – ONLY ONE BOARD
Purpose of Board – Policy/Direct
Selection
“Ex Officio” Directors
Number of Directors
Tenure/Terms
Limits?
Qualifications
Removal

12. Bylaws Subject Areas (cont’d) Officers
Purpose of Officers – Implement/Report
Board vs. Staff
Subordinate Officers
Chair
President, CEO
Secretary
Treasurer

13. Bylaws Subject Areas (cont’d) Indemnification Mandatory Permissive
Advancing Expenses
D & O Insurance

14. Nonprofit Governance Traditionally Controlled by State Law
IRS now actively involved
Regulation by disclosure

15. Fiduciary Duties of Directors – Overview
Directors of nonprofit corporations are held to two primary duties:
Duty of Care
Duty of Loyalty

16. Duty of Care
The duty of care recognizes that as members of the Board and Committees of the Board directors have a decision-making function, planning function, and an oversight function

17. Duty of Care
The decision-making function relates to the a specific decision or action of the Board as a whole
The oversight function relates to the general activity of the Board overseeing the management and business operations of the organization
The planning function relates to strategic planning

18. Duty of Loyalty The duty can arise in different situations:
Conflict of Interest Transactions
Denial of Opportunity for Organization

19. Duty of Loyalty
A conflict of interest transaction is a transaction with the organization in which a director or family member has a direct or indirect financial (or other) interest in a transaction subject to the board’s approval
Example: a director is asked to vote on a contract with a company in which the director has a significant ownership interest

20. Duty of Loyalty
Many nonprofits have conflict of interest policies that require the director to self-identify any conflict and excuse himself or herself from the meeting in order to avoid the possibility of influencing the Board’s decision

21. Liability Protection for Directors
Revised Iowa Nonprofit Corporation Act provides for liability protection for volunteer directors and officers. Iowa Code section
The Federal Volunteer Protection Act provides for civil liability protection for nonprofit volunteers. 42 U.S.C. sections

22. Liability Protection for Directors
A third type of protection for directors is directors and officers (“D&O”) liability coverage
D&O coverage can cover judgments against trustees and officers as well as legal fees incurred by directors and officers in defending themselves in a lawsuit brought against them in their role as directors and officers of a nonprofit
D&O coverage also covers the organization.
May not cover lawyer on the board, or lawyer-officer, if deemed to be acting in a lawyer capacity
Other insurance

23. Keys to Well-Functioning Boards Board Qualification and Education
Be clear on Board roles – large board, small board, fiduciary obligations
Specify Board member qualifications – minimum standards, specialized areas of expertise
Board education
General – mission, history
Specific – industry, key areas, legal/industry developments