Protecting Your Organization Through Policies

1. Protecting Your Organization Through Policies Jeri Towler (405) 844-2222 jeri@jeritowler.com

2. Bylaws Or Policies Report significant changes in bylaws to IRS on Form 990, Schedule O

3. Significant Changes to Bylaws • Purpose is modified • Number, composition, qualifications, authority or duties of the Board, Officers or key employees • Amend organizing document (Cert. of Inc.) • Membership benefits • Quorum, voting rights, who votes • Policies or compensation language within the organizing document or bylaws. • Dissolution or merger (See page 19 of 990 Instructions)

4. Governing through Policies • Sarbanes Oxley’s application to public charities: • Document Retention • Document Destruction • Whistleblower All of the above are questions on page 6 of Form 990

5. Governing through Policies • Financial Policies & Procedures • Form 990 • Separation of duties • Check writers not check signers • Reconciliations • Cash management • Mail • Expense Reimbursement • Loans and/or Debt • Credit Cards • Budget

6. Governing through Policies • Conflict of Interest Policy • Protect board members • Page 6 of Form 990 • Covered on Friday • Loan/Debt Policy • Authority to give loans • Authority to acquire debt • How much is to much?

7. Governing through Policies • Fundraising Policy • Grant Management • Approval of application • Oversight • Modification • Gift Acceptance Policy • Real Property • In-kind donations • Gift Acknowledgement • Resource Development • Board involvement

8. Governing through Policies Employment Policies • Employment at Will • Employee Classification (FLSA) • Employee vs Volunteer • Timekeeping (grants) • Attendance requirement • Evaluations • Benefits • Conflict Resolution • Termination KEY: Keep it simple. Required state and federal laws only. Example: FMLA applies to 50 or more employees in private sector.

9. Governing through Policies • Succession Plan • Executive Director • Cross Training of Employees • Lobbying/Advocacy • Yes to Lobbying • No to Political Candidates • Media Policy • Confidentiality • Strategic Plan

10. Additional State Requirements • Registration with State • Payment of Sales Tax (not in Texas) • New Hire Reporting • Workers’ Compensation • Unemployment • 4 or more employees (Oklahoma) • Church exception • Open Meeting Act (Sunshine Laws) • Audit • Required by grant • Required by State (Massachusetts)

11. Revocation of Tax Exempt Status • Failure to file Form 990. • Beginning in 2007 failure to file for 3 years results in immediate lose of tax exempt status. • Support of terrorist organizations. • Participation in political campaigns. • Excess Benefit Transactions (inurement). • First step is usually an audit. • Failure to comply w/ disclosure requirements. • First step is usually an audit. • Failure to meet public support test. • Governmental grants are public support!

12. Annual Filings IRS Form 990 (tax return) • Gross Receipts ≤ $50,000: 990-N • Gross Receipts < $200,000: 990-EZ or 990 • Gross Receipts ≥ $200,000: 990 Oklahoma Form 512E (tax return) • File a 512E (simple reporting form) • Charitable Registration IRS Form 990T (tax return) (UBI) $1000 or more of unrelated business income You are not required to file if you are a church or governmental unit. Form 1023, Part I, Question 10

13. Say YES to Lobbying! • Disclosure requirements on Form 990 • File form 5768 • Expenditures Test vs Substantial Parts Test • 501(h) Election • Tax year is less than 1 million • Can spend 20% of the exempt purpose expenditures if the exempt purpose expenditures are not over $500,000. • Over $500,000 there are additional rules • Additional $$ for grass roots expenditures • Asking for grants is not lobbying

14. Say NO to political campaigns! • Never allow anyone to use the organization as a platform to express political views concerning candidates. • If you invite one candidate then you must invite them all. • Candidates and elected officials may sit on your board. *Applicable to churches

15. Minutes MatterMinutes are Legal Documents Name, date, time Dissenters/Abstainers Those attending/absent Reports given Quorum Documents provided Motions and by whom Future action requested Discussion Time meeting ends Voting results Signature of Secretary and President *Consistent Detail **Will a court be able to tell what occurred from the minutes? 990 Part VI, Line 8.

16. Form 990 for three years (state 5 years) Application for recognition of exempt status with attachments – exactly as sent to the IRS. Determination letter Organizing documents: Certificate of Incorporation Bylaws Including amendments Form 4506-A See Pub 557, page 15 - 17 Public Inspection

17. More Disclosure Requirements • Solicitation of nondeductible contributions • Sales of information or services available for free from the government • Dues paid that are not deductible since used for lobbying or political activities • (c)(4) social welfare • (c)(5) labor union • (c)(6) business league • Prohibited tax shelter transactions

18. Board ProtectionRisk Management • Review key documents • Review history or amendments • Were documents properly filed • Bylaws say you are a membership organization • Articles of Inc. says up to 9 board members • Minutes recording board decisions • Required filings are up to date • Required policies are in place • Policies are being followed

19. Risk Management • Election of the Board • Governance Committee • Asset List (including in-kind donations) • Who owns what is in your personal office? • Risk Analysis/Risk Transfer • Directors & Officers Insurance • Errors and Omissions Insurance • Volunteers Policies • Required training • How to fire a volunteer

20. Minutes MatterMinutes are Legal Documents Name, date, time Dissenters/Abstainers Those attending/absent Reports given Quorum Documents provided Motions and by whom Future action requested Discussion Time meeting ends Voting results Signature of Secretary and President *Consistent Detail **Will a court be able to tell what occurred from the minutes? 990 Part VI, Line 8.

21. Signs of Embezzlement • Violating or overriding internal controls • Refusing immediate access to records • Check signing authority • Intimidates employees/volunteers • High lifestyle/recent inheritance • Skipping vacations/working overtime • Excessive drinking/gambling REPORT THE EMBEZZLER before he/she hurts another organization!

22. Legal Responsibilities of Board Members and Use of Bylaws to Strengthen Your Organization Jeri Towler (405) 844-2222 jeri@jeritowler.com

23. LEGAL RESPONSIBILITES Duty of Care: Make good faith decisions. Duty of Obedience: Be true to the purpose of the organization. Duty of Loyalty: Act in the best interest of the organization. Responsible party: The governing board of the organization.

24. Duty of Care • Acquire bids to determine FMV • Ask questions…. • Question possible conflict of interests. • Question the need for the project. • Question if project is within the budget. • Question whether the project meets the purpose of the organization. • Minutes should reflect discussion prior to a vote.

25. Duty of Obedience Require board members to be faithful to the purpose of the organization. The purpose was provided to the IRS on Form 1023 and was approved by the IRS for the organization to receive tax exempt status. Expansion of the purpose without approval from the IRS is: Mission Creep

26. Duty of Loyalty Clues the IRS Cares about the Duty of Loyalty of Board Members: Questions on Form 990: • Part I, Line 4 • Part VI, Line 1b • Part IV, Line 25a, 25b, 26, 27,28a, 28b, 28c

27. Protecting our Board of Directors through State Statutes Oklahoma : Oklahoma Corporations Act Title18, § 866- 867 Massachusetts: Massachusetts General Laws Chapter 180, § 3 Texas: Texas Business Code Chapter 22, § 152 California: California Corporations Code Part III, Chapter 2, § 7231.5 Note: Federal Volunteer Protection Act

28. Basic Legal Principles Board of Directors should not be subject to vicarious (acting on behalf of another) liability for the negligence of corporate employees or directors. Liability would have a detrimental effect of the participation of persons as directors of nonprofit corporations and the people would not be served. Directors shall not liable for the debt of the organization. Directors shall only be liable for their own actions.

29. EXCEPTIONS THAT MAKE BOARD MEMBERS LIABLE • Any breach of the director’s duty of loyalty. • Any acts or omission not in good faith or which involve intentional misconduct or a knowing violation of the law. • Any transaction from which the director derived an improper personal benefit. • Intentional torts or grossly negligent acts or omissions personal to any director. Even if you try, states will not allow you to dispose of these exceptions.

30. Organizing Documents • Articles of Incorporation • Bylaws • Organizational Minutes

31. Articles of Incorporation • Take precedence over Bylaws • File with Secretary of State • Perpetual or automatic dissolution • IRS requirements (Form 1023) • Purpose • Dissolution • PF safety net (not required) • Caution if incorporating a tax exempt association.

32. Bylaws: Governance Issues ONLY Report significant changes in bylaws to IRS on Form 990, Schedule O

33. The Bylaws Necessities • Purpose • Location • Board of Directors • Committees • Officers • Membership • Indemnification • Policies-Conflict of Interest • Amendments • Construction and Terms

34. Minutes Essentials • Adopt Bylaws • Adopt Financial Policies • Who can execute contracts (up to $50,000) • Check signers (two signatures over $5,000) • Approval of Payment of Expenses (not check writer) • Adopt Board Policies • Elect of Directors and Officers • Duties of Officers • Bank Account(s) – movement of money • Salaries/Employees/Independent Contractors • Credit Cards – EIN only

35. GovernanceBoard of Directors • Term Limits • Attendance Requirements • Giving Requirements • Committees • Number • Composition • Nomination • Election • Length of Term • Meetings/Notice Election by members: 990 Part VI, line 7a and 7b

36. Committee Recommendations • Governance Committee • Recruit and research new board members • Oversee election process • Board training • Finance Committee • Monthly financial oversight/reports (In English) • Implement financial policies • Audit Committee • Select auditor • Oversee audit and review financial policies

37. Committees • Form 990, Part 1, line 3; Part VI, line 1a asks the number of voting members of the governing body. • If the board has delegated this authority to another committee such delegation, scope of delegation and committee member names must be reported on Schedule O. • Issues with later ratification by the Board. • Open Meeting Act: Committees with board delegated authority or a quorum of the Directors is subject to the Open Meeting Act. 990 Part VI, Line 3

38. Executive Committee • Who serves and who calls meetings? • How do you to keep other Directors involved? • Limit scope of authorization • List of decisions EC may make • Any expenditure w/i the budget • Contracts under $50,000 • List of decisions EC may not make • Hire/fire ED; remove board members • Amend bylaws, Cert. of Inc., financial policies • Guide the ED between meetings of the Board and/or in case of emergency. • Dissolution of the EC by vote of the Board

39. Responsible Parties The Board of Directors are: • The responsible parties • Listed on Form 990 • Covered under D&O Insurance Do not confuse Directors with committee members, advisory council members, or employees.

40. Doing Business With Interested Persons Jeri Towler (405) 844-2222 jeri@jeritowler.com

41. In the Beginning • The structure of tax exemption was developed between 1894 and 1969 • Established a federal income tax exemption • Banned private inurement • Provided for income tax deduction for contributions • Additional regulations for private foundations between 1969 and 1984 • Proxy tax on lobbying & political expenditures in 1993 • Sanctions for excess benefit transactions in 1996

42. Recent Changes • Sarbanes-Oxley Act in 2002 • Pension Protection Act of 2006 • White Paper: Role of IRS in EO Governance Issues in 2008 • White Paper: Governance and Related Topics –501(c)(3) Organizations in 2008 • Reformation of Form 990 in 2008 • EO Audit Check List in 2009 • Schedule A – Public Charity Status and Public Support Test – 2010

43. US Government’s Cause for Concern Over 1.5 million public charities are receiving income tax exemptions and donations resulting in over Fifty Billion Dollars $50,000,000,000.00 of lost tax revenue to the US Government.

44. Duty of Loyalty Clues the IRS Cares about the Duty of Loyalty of Board Members: Questions on Form 990: • Part I, Line 4 • Part VI, Line 1b • Part IV, Line 25a, 25b, 26, 27,28a, 28b, 28c

45. Disclosure RequirementsDoing Business With… • Officers • Directors • Trustees • Family (includes resides with) • Highest compensated employees • Highest compensated independent contractors Schedule L of Form 990 Excess benefit transaction covered under intermediate sanctions

46. Schedule L: Transactions with Interested Persons • Interested Person: Current or former officers, directors, trustees, key employees, highly compensated employees, disqualified persons or family members who have a direct or indirect business relationship... • Family member may include “resides” with any person listed above. • Threshold: $10,000 for board members $100,000 for employees • 990 Part VI, Line 25a and b; 26, 27, 28a, b, and c.

47. IndependentVoting Member Independent if all of the following circumstances applied during tax year: Member was not compensated as officer or employee of EO or related organization. Compensation and other payments did not exceed $10,000 as an independent contractor other than reasonable compensation for services as a director. Neither the member, nor any family member, was involved in a transaction with the EO required to be reported on Schedule L. Nor with a related organization that would be reported on Schedule L 990 Part I, Line 4 and Part VI, Line 1b (see pg. 19 of 990 Instructions)

48. Disqualified Persons Any person in a position to exercise substantial influence over the affairs of the tax-exempt organization at any time during the 5 year period ending on the date of the transaction. Board members are disqualified persons.

49. Examples of Disqualified Persons • Members of the Governing Board or Founders • Key employee such as a ED, CFO, department head and on occasion an independent contractor. • Highly compensated employees. • Substantial contributions ($5,000 if exceed 2% limitation). • Family members of those listed above. • Any business interest in which one of the above own 35% interest. • Any of the above who has been a disqualified person five years prior to the specified transition.

50. Excess Benefit Transaction An excess benefit transaction is a transaction in which an economic benefit is provided by an EO, directly or indirectly, to or for the use of a disqualified person, and the value of the economic benefit provided by the organization exceeds the value of the consideration received by the organization.