Legal check-ups are great tool for nonprofits to measure their compliance and avoid complicated and expensive legal problems. Many organizations understand the value of a legal check-up but aren’t certain how to do it and what it involves. Read this post to learn how to give your nonprofit a legal check-up.
What is a legal check-up?
A legal-check is similar to your annual health check-up. You schedule time to examine the entire nonprofit structure – from how the directors and officers manage the nonprofit, to fundraising compliance, to tax compliance, and much more.
Basically, you break down the organization into parts and look at each part. Like the health check-up, when you uncover a possible risk or weak link in the organization, you look deeper and take action.
So let’s look at how to give your nonprofit a legal check-up.
Step 1: Review Your Organizational Documents
Find your organizational documents. They should be together in a corporate record book. Are your documents up-to-date? Do you need to revise any of these documents?
Look at these documents:
- Articles of Incorporation and any amendments
- Current Bylaws
- Names and contact information of current directors and officers
- Names and addresses of all members (if the organization has members)
- Minutes of the meetings of the board of directors and its committees
- Registered Office and Registered Agent on record with Pennsylvania
- Annual Conflict of Interest Disclosure reports by the directors, officers, and key employees
Don’t forget to review your exempt purposes. They are listed in your Articles of Incorporation, Bylaws, and IRS 1023 (or 1024) application. Has your mission drifted? If so, consider whether to return to your original purposes or submit revised purposes to Pennsylvania and the IRS.
Step 2: Review Your Financial and Tax Compliance
Nonprofit organizations are exempt from certain taxes. Notice, I didn’t say all taxes, just some taxes. Many nonprofits get into trouble when they fail to file their annual information return (aka the Form 990) or report taxable business income.
Review your filings for the past 2-3 years. Did you file? I hope so, if not, call me. Are the filings complete? Are they accurate?
Review these documents:
- IRS tax-exempt status application (Form 1023 or Form 1024)
- 501(c) tax-exempt status determination letter from the IRS
- 990 tax-exempt information return
- Annual audited or unaudited financial reports
- Unrelated business income tax compliance
- Sales Tax Exemption compliance
Finally, review your financial controls if you do not have an independent auditor
Step 3: Regulatory Compliance
In addition to governance and taxes, the next risk area for nonprofit organizations is regulatory compliance. While regulations vary based upon your industry, at a minimum review compliance with fundraising laws and employment laws.
Review your organization’s policies (what is written on paper) and processes (what your staff actually does).
- Fundraising Compliance. Do you file your annual charity registration reports with Pennsylvania (if you are not exempt from filing)? Do you have a valid Small Games of Chance License when you do raffles, 50-50, turkey parties, and other fundraisers?
- Donations. How you handle donations and donation acknowledgement letters?
- Employment Laws. Do you comply with the myriad of employment laws? Review your hiring and firing practices. Confirm you properly withhold employee taxes, unemployment insurance, and workers’ comp insurance.
- Grant Compliance. Grant money is never free, especially if it comes from the government. All grants come with strings. Are you complying with the strings attached to your grants?
- Civil Rights laws. There are a variety of laws requiring equal treatment of individuals and equal access to services. Does your organization comply with these laws? Do you have a nondiscrimination policy? Are your services accessible to individuals with disabilities?
These are just the tip of the iceberg. Depending upon your industry, you may be subject to more rigorous laws. For example, healthcare nonprofits should be concerned about medical record privacy. Schools and universities must comply with various education laws. Food service nonprofits must worry about health and safety laws. You don’t have to review everything at once, but do schedule time to review the other important laws that apply to your organization.
Step 4: Business Compliance
Lastly, if you still have the time and energy, I recommend reviewing your general business matters.
- Contracts. Do you have written agreements for your most important business matters? These would be your leases, employment agreements, licenses, software agreements, and contracts with your primary vendors.
- Intellectual Property. Do you have any registered trademarks or copyrights and are your registrations up-to-date? Do you legally use copyrighted material in your advertising?
While legal check-ups take time, they are worth it. It is much cheaper and easier to fix problems proactively and on your own terms than to wait until a government agency or litigation forces you to make a change.
Call Concerto Law for Help
If a legal check-up seems overwhelming or if you prefer an independent review, considering engaging an attorney, accountant, or consultant. Concerto Law is well-versed in nonprofit compliance. We would love to talk to you and propose a legal review that meets your needs, risks, and budget. Give us a call at (814) 706-1288.