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Cynder Sinclair: New Laws for Nonprofits in 2015 You Should Know About

Nowadays, nonprofit leaders are hustling to keep abreast of their rapidly changing legal landscape. New rules and directives abound from national and state regulators. As NonprofitTimes points out, nonprofits used to be somewhat insulated against the big world of regulations because of their noble mission. But the 21st century is bringing a new way of work, compelling nonprofits to keep their finger on the pulse of the continuous updates. Today I will highlight a few of the new laws affecting nonprofits for 2015.

Non-voting ex officio board members are prohibited. CalNonprofits reports that a little-noticed change in the California Nonprofit Corporations Code has an important change for nonprofits: There can no longer be nonvoting members of the board of directors. It's not uncommon for nonprofits to provide in their bylaws for nonvoting board members, but under California law, such positions no longer exist. Board members, or directors, as they are termed in the law, each have one vote on any matter presented to the board for action. So, any person entitled to attend board meetings without a vote is not a board member at all, even if your bylaws specify so. 

The term ex officio is often misused to mean nonvoting, but it actually means “by virtue of one’s office.” For example, an executive director who is also an ex officio director is a board member for as long as she remains the executive director.

The new law explicitly states that “[a] person who does not have authority to vote as a member of the governing body of the corporation, is not a director ... regardless of title.” Therefore, if you have ex officio, nonvoting members of your board, they now have the right to vote on all matters unless you change their status. Getting this wrong may result in a costly dispute.

For those nonprofits that want to provide for the right of their executive directors to attend board meetings without the voting power of a director, Gene Takagi of the Neo Law Group suggests they use the following description: “The executive director has the right to attend and participate at all meetings of the board, except when the board enters executive session, but shall have no voting powers.” Nonprofits that have created ex officio, non-voting board members for founders, public officials or others, may consider changing their status to honorary board member, with no voting powers.

Indirect costs of nonprofits are now required to be reimbursed. This new rule on costs reimbursement of nonprofits is a major victory for people who rely on nonprofits and for those who lead them. The National Council of Nonprofits explains that governments at all levels — local, state and federal — that hire nonprofits to deliver services are now required to reimburse nonprofits for the reasonable indirect costs (sometimes called “overhead” or “administrative” costs) they incur on behalf of governments when federal dollars are part of the funding stream. This new law represents the federal government’s official recognition that all governments entering into written agreements with nonprofits to deliver services to the public have a duty to pay their fair share of the costs that those nonprofits incur.

This a symbolic win for nonprofits since it sets a precedent for the way other funding sources may come to view indirect expenses. A recent study by Charity Navigator shows that most Americans are confused about the nature and importance of nonprofit overhead expenditures. Some foundations have begun to recognize that administrative costs are essential to running a healthy nonprofit. However, this new recognition from the federal government may help all foundations, donors, and other funders view nonprofit overhead expenses in a new, more positive light.

Socially Responsible Corporations Act. This new law, SB 1301, changes the name of “flexible corporations” in the Corporate Flexibility Act to become “social purpose corporations.” While it’s beneficial for for-profit corporations to form as flexible purpose corporations, this new designation of “social purpose” has folks lining up on both sides of an emerging debate.

Many are concerned that allowing businesses to pose as charities may mislead the public into confusing such corporations with nonprofit organizations, leading them to mistakenly think that these corporations are tax-exempt nonprofits. Many new social purpose businesses are intriguing and inordinately attractive resulting in resources being redirected from charities to these efforts.

In fact, The New York Times recently recognized the issue. The newspaper invited experts to discuss the following issue in it its Room for Debate section on Dece. 30: Is it better to invest money in a socially responsible business or give to a charitable group?

Gene Takagi of the Neo Law Group warns nonprofits that billions of dollars are involved. Corporations will highlight their social programs but those programs will increasingly be funding their own or other for-profit social good efforts instead of charities (e.g., Foundations may increasingly make use of program-related investments (PRIs), opting for this still little-used vehicle in lieu of making grants. As for individuals, many donors don’t care if they are supporting nonprofits or for-profits doing good. So, charities have to recognize this new form of competition.

Those on the other side of the debate say nonprofits are best situated and structured to advance most charitable efforts. They are required to be organized exclusively for charitable purposes. They must be operated primarily for charitable purposes. They are subject to restrictions against private inurement, private benefit, excess benefit transactions, self-dealing, and violations of charitable trust laws. And they are required to publicly disclose their annual filings with the IRS.

Some nonprofits may find that collaborations and joint ventures with for-profits will be a key to staying relevant and creating greater impact. Many nonprofits may increasingly use for-profit subsidiaries to operate unrelated businesses. This may lead to more formal cooperative arrangements to increase service delivery to otherwise neglected markets. So be sure to stay tuned to these new developments.

Unclaimed property for nonprofits. AB 1712 makes it easier for nonprofit organizations in California to claim the unclaimed assets of dissolved affiliate organizations, allowing these funds to be returned to the charitable sector. This new law is good news for such organizations as Girl Scouts which can now claim leftover funds from groups that they chartered or approved that no longer exist.

Registry of Charitable Trusts Fund revision. Originally this bill, AB 2077, proposed to revoke the tax-exempt status of organizations that spend more than a certain amount on “overhead” expenses, which would be harmful to many small, volunteer-run organizations. Thankfully CalNonprofits was able to change the focus of the bill for the benefit of nonprofits. The attorney general can now use existing funds more flexibly in order to enforce already existing laws to prevent so-called “charity scams.”

— Dr. Cynder Sinclair is a consultant to nonprofits and founder and CEO of Nonprofit Kinect. She has been successfully leading nonprofits for 30 years and holds a doctorate in organizational management. To read her blog, click here. To read her previous articles, click here. She can be contacted at 805.689.2137 or .(JavaScript must be enabled to view this email address). The opinions expressed are her own.

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