☛ Who owns a Nonprofit? 8-15-14
WHO OWNS A NONPROFIT?
By Rick Dennis
Aug. 15, 2014
“Who owns a nonprofit” is a frequently asked question by readers of www.allaboutcutting.com. Actually, this is an excellent question and driven primarily by the many articles circulating throughout various horse-industry publications concerning nonprofit reorganization, drugs, and horses – mine included, e.g., “Where Is The Horse Industry Headed?” “Horse Doping Segments 1 -4” and “The Mechanical Horse – A Horse Under The Influence of Drugs,” along with Wind River Company LLC educational and training articles.
So exactly who owns a nonprofit? Actually, the answer is quite simple – No One! The Culliane Law Group simply states: A major misconception about nonprofit organizations concerns ownership of a nonprofit. No one person or group of people can own a nonprofit organization.
A perfect example of such a misguided conception is illustrated in Ginger Schmersal’s e-mail to the board of directors of the National Reining Horse Association concerning a proposed rule change to the drug-testing policy of this nonprofit. In her e-mail, she specifically states, “Craig asked that I share this article with you; it will be published later this month, so we ask that you please keep it confidential amongst yourselves until it goes to print. Craig and I hope that you as a board, vote for what is best for the horses. It is time we do what is right for them and NOT CONTINUE OUR SMOKE AND MIRRORS POLICY. We have to STOP WORRYING about public opinion and stand up and OWN our organization.”
Click for Ginger Schmersal’s e-mail to NRHA directors>>
Ownership is the major difference between a for-profit business and a nonprofit organization. For-profit businesses can be privately owned and can distribute earnings to employees or shareholders. But nonprofit organizations do not have private owners and they do not issue stock or pay dividends. And while nonprofit organizations can earn a surplus, that income must be reinvested in the nonprofit organization — possibly to benefit or expand programs according to the charitable mission. But that income cannot be distributed to persons.
If there is no owner, who manages and controls a nonprofit?
Once incorporated, the newly created nonprofit organization is a separate legal entity from its incorporators, directors, officers and employees. The nonprofit corporation owns assets of the business and is entitled to receive the revenue from its operation.
Many nonprofits are managed by boards; others may be managed by voting members. When a nonprofit first begins operating, the board members, along with the founder(s), may perform many of the tasks of the organization. As the nonprofit grows, the board may begin hiring staff members to develop and lead programs as the board and/or voting members continue to oversee the organization.
But none of these individuals or groups has any ownership rights in the organization. And while they don’t own the nonprofit, they do have significant legal and ethical duties that cannot be delegated to others.
Click for nonprofit law basics>>
Another interesting question emanating from the ownership of a nonprofit involved the liability of its members, officers, employees, and directors, e.g., “As a director or officer of a nonprofit, do I have any personal liability?”
The American Bar Association answers as follows: Nonprofit organizations are big business. Because of this and because of their unparalleled growth, nonprofits are receiving attention like they never have before, both from Congress and, because of this, from the Internal Revenue Service. Another more disturbing reason is the spate of highly publicized scandals involving individuals profiting at a charity’s expense.
Under these circumstances, anyone who participates in the oversight of a nonprofit organization would be well advised to pay close attention to its operations. One standard I would recommend be used to evaluate every activity of the nonprofit is: “How will this look on the front page of the local newspaper?”
What a Director Does/Does Not Do.
Directors are responsible for planning and directing the management of the nonprofit’s business and affairs. Directors have no individual power as a director to bind the corporation. Instead, directors take action as a body and those decisions are documented by Board resolutions. Directors who are also officers may be authorized by Board resolution to act on the corporation’s behalf in their capacity as officers, but the Board acts as a unit.
Nevertheless, each director is individually accountable to the corporation’s members and, in the case of directors of charitable organizations, to the state and federal regulatory authorities (primarily the IRS, the state taxing authority and, in many states, the Attorney General) who seek to protect the public’s interests in the charity.
Because it is so essential to the organization’s tax exempt status that it abide by its stated purposes, one of the principal duties of a director is to be aware of the nature and extent of the nonprofit’s exempt purposes and to assure that those purposes are properly pursued. The purpose of every act and decision of the director should be to advance the nonprofit’s purpose. If the personal aims of the individual are not the same as the aims of the organization, then the individual should not serve as a director.
Role of Corporate Officers and Agents.
Officers and agents of a nonprofit organization normally implement the decisions and policies established by the Board of Directors. Typically, the Chief Executive Officer of a charity (often designated as its “Executive Director”) and sometimes the Chief Financial Officer (typically called the “Treasurer”) answer directly to the Board. Most other employees, agents and contractors answer to the Executive Director or other senior management duly authorized by the Board.
Although a director of a nonprofit corporation, as a director, they should not be involved in the day-to-day operations and activities of corporate management any more than a director of a business corporation, this rule is often ignored in practice. For many nonprofit organizations, particularly small entities operating with limited financial resources, the directors may be the only active participants within the organization.
It is also typical for the directors and the officers to be one and the same individuals, particularly in smaller nonprofits. Nevertheless, it is important, from a liability standpoint, for the individuals serving in dual director/management positions to carefully document in the corporate record the capacity in which they are acting.
The liability exposures of nonprofit board members
The board of directors of a nonprofit organization can be exposed to a variety of lawsuits, ranging from allegations of wrongful acts to financial mismanagement to errors in judgment and negligence. Claims against directors and officers tend to be costly and disruptive to an organization. Perhaps even worse, if found guilty of misconduct, board members could be personally liable, placing their individual assets at stake. For this reason, directors and officers liability insurance (D&O) is an essential part of any board risk management program, providing financial resources for defense costs and any possible settlement.
The primary objective of a nonprofit board of directors is to provide oversight and direction to the organization so that it can successfully fulfill its mission. Although nonprofit boards are typically not subject to the same level of scrutiny as those in the for-profit sector, they nonetheless owe fiduciary duties to the nonprofit organization and its grantees and donors.
Any perceived breach of these fiduciary responsibilities can lead to legal action. A D&O claim can be brought against a nonprofit and its directors and officers for countless reasons and practices.
Click for liability exposures in nonprofits>>
Who can sue a non-profit board>>
Therefore, It is imperative that a nonprofit Board of Directors understands the risks involved as volunteers for the organization, their responsibilities as board members and how to protect themselves from personal liability.
Each nonprofit corporation is guided by a set of bylaws. Bylaws are the written rules for conduct of a corporation, association, partnership or any organization. They should not be confused with the Articles of Incorporation, which only state the basic outline of the company, including stock structure. Bylaws generally provide for meetings, elections of a board of directors and officers, filling vacancies, notices, types and duties of officers, committees, assessments and other routine conduct. Bylaws are, in effect a contract among members, and must be formally adopted and/or amended.
Control of a nonprofit
Since no individual or group of individuals can own a nonprofit, the only way to control a nonprofit is for more than one person to be in a position of authority to influence a voting majority in their favor. Historically, reviews of various equine nonprofit’s powers-that-be revealed the same individuals remaining in power over extended time periods – including years, and in some instances decades, with particular nonprofit’s.
The only way to resolve this power grab and control is to either vote the individuals out of office or institute legitimate term limits, for a specific designated time period, without the benefit of being re-elected once this designated time period has expired. Another way to limit control is to designate representatives of the most powerful and influential committees from across the spectrum of a nonprofit, without catering to one particular group or stereotype and limiting one individual from each division.
The constant rotation of personnel will prevent those in power from becoming enthralled with the ideology that their tenure of service to the nonprofit entitles them to ownership of a nonprofit when in fact it’s just an illusion on their part and nothing more!
“Until Next Time, Keep ‘Em Between The Bridles”!
Copyright 2014, all rights reserved.
Richard E. “Rick” Dennis
Office/Mobile: (985) 630-3500
Web Site: http://www.windrivercompanyllc.com
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