3 Common Legal Traps Nonprofits Fall Prey To

legal, nonprofit, law

Replicating a guest post from Wild Apricot,  for their free webinar I presented on August 23, called “5 Common Legal Traps for Nonprofits and How to Avoid Them.” You can watch here.  

Most nonprofits I encounter know they have legal traps lurking within their organization. They’re just not sure what those traps are. Even more dangerous, they’re not sure how risky those traps might turn out to be. As an attorney and strategist specializing in nonprofits, I encounter these traps every day and my role requires I shine a light on each trap, walking through realistic solutions that allow the organization to remain solvent but also work toward being sustainable.

Because both of these are a priority for every organization I thought it would be helpful to share three of the most common legal traps I see nonprofits deal with. Plus, why they’re something to deal with sooner rather than later.  These traps are:

 

1) Forgetting to Keep Accurate Books and Make Them Public

Most nonprofits understand this is a no-no, but don’t fully understand the ramifications of getting it wrong.

Most states and provinces legally require nonprofits to keep accurate books and records each fiscal year. Organizations may fail to do this for a number of reasons: (i) they don’t think they make enough money for recordkeeping to be a problem and it becomes a low priority, (ii) they grow so fast that it goes by the wayside, or (iii) there are major changes within the organization that cause an oversight. Whatever the reason, organizations cannot forget that the funds it raises are public funds. And for this reason, nonprofits have a responsibility to account to the public for what’s raised and what’s spent. This is important for ethical reasons and if the organization wants to attract any sort of funding (grants, debt, capital investment, etc.). But more importantly, in some states and provinces not keeping books and records is actually a criminal offense.

 

2) Unintentionally Placing Board Members and Officers in Jeopardy

Generally, board members and officers are not legally responsible for an action or inaction the organization takes or doesn’t take. Keep in mind, though, this rule isn’t absolute. Unfortunately, nonprofits can slip slowly into bad habits that begin to poke holes into theprotective shell board members and officers have. Here are some of the bad habits I’ve seen that lead into legal trouble:

  • Making unlawful loans to board members or officers
  • Paying officers or board members unaccounted “compensation”
  • Doing favors that privately benefit board members or officers
  • Forgetting to file local or federal periodic reports
  • Not holding regular meetings and elections or allowing an executive/founder to have complete control

Some of these are more egregious than others, but I find where one exists others pervade. The more of these holes that exist, the weaker the protection board members and officers have. This means that if something happens and a claim develops, board members and officers not only risk having to defend themselves personally, but may lose indemnity protection (i.e. have to pay out of pocket), personally reimburse any damages, pay taxes on damages paid out and possibly lose insurance protection for it all.

 

3) Using Shaky Practices Around Intellectual Property Ownership and Use

The use of IP agreements within nonprofits seems so rare; ironic considering creative works are the cornerstone of so many organizations. Anytime a nonprofit has someone “create” a thing, there needs to be a metaphorical “bread trail” of rights. This is because ownership of creations typically belong to a creator; that would be the website designer, consultant, student volunteer or speech writer a nonprofit has used.

Changing this would require some type of writing to evidence the intention of everyone to transfer ownership to the organization instead. Without this writing, only the creator/owner has a legal right to use what they’ve created. They also have a right to decide who many use their creations, when, where and how. For anyone outside of the owner/creator to use the creation (e.g. a speech), the appropriate rights would have to be agreed to and put in place.

Back to our speech example, this would be a license agreement allowing an organization to use the speech for its marketing purposes or on its website as a resource. If a license isn’t in place, an organization could be asked to stop using the materials at best and could be responsible for lost profits or royalties at worst.

 

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