| Occasionally, you have to protect people from | | | | motive to scratch the others' backs. Inurement can |
| themselves. Even those with the best of intentions can | | | | take many other forms, from using an organization's |
| mess things up so badly that it can jeopardize what | | | | vehicle for personal use to buying lunches on the |
| they are trying to accomplish. In the nonprofit world, | | | | company credit card. |
| there are best practices, good practices and | | | | 3. Private benefit. Private benefit is the kid brother of |
| acceptable practices...and, really, really bad practices | | | | inurement. It is best understood as any activity that |
| that will cause your organization, its board, donors and | | | | benefits an individual (or company) who is not one of |
| beneficiaries headaches galore. In this article, we are | | | | the organization's charitable beneficiaries. This can be |
| going to explore the Dirty (Half) Dozen Nonprofit | | | | overt, such giving vendor contracts to an insider's |
| No-Nos, in no particular order. Note: We will limit our | | | | business. It can also be subtle, such as endorsing any |
| discussion to 501(c)(3) nonprofits. | | | | for-profit company in exchange for financial support. |
| 1. Dictatorships. If you want to be your own boss and | | | | 4. Political activity. 501(c)(3) organizations are expressly |
| run the show as a benevolent dictator, then by all | | | | prohibited from intervening in a campaign for public |
| means, go start a business. Just don't start a nonprofit | | | | office. They cannot endorse or oppose any |
| organization. What many people fail to understand | | | | candidates. They can, under limited and |
| before they establish a 501(c)(3) organization is that | | | | tightly-controlled circumstances, lobby for legislative |
| nonprofits do not have shareholders, i.e., owners...only | | | | purposes. If your organization's goals require any |
| stakeholders. Stakeholders can be defined as an | | | | substantial political activity, it should consider another |
| organization's board of directors, its members and its | | | | tax exempt status, such as 501(c)(4) social welfare. |
| beneficiaries. No one can legally assume ultimate | | | | 5. Improper record keeping. This one is a biggie. Your |
| control. In fact, the IRS requires tax-exempt | | | | organization simply must keep accurate records. |
| organizations to be structured such that control rests | | | | Whether it is the books, contributor records, or board |
| within a group of individuals. This protects everyone | | | | meeting minutes, you cannot cut corners. The IRS will |
| involved. Many times we've seen placeholder boards | | | | hold your organization and its leaders responsible for |
| who basically rubber-stamp every decision made by a | | | | complete and accurate records. The last thing you |
| dictatorially-inclined president or executive director. That | | | | want is your board members personally penalized for |
| does everyone a disservice. Even worse, the IRS will | | | | a lack due diligence. |
| hold all the leaders accountable for the governance | | | | 6. Failure to file required reports. The IRS requires all |
| and management of the organization, not just the | | | | tax-exempt organizations, including 501(c)(3)s, to file |
| dictator. | | | | annual Form 990. For those 501(c)(3) public charities |
| 2. Inurement. Inurement is a fancy IRS word for insiders | | | | with more than $25,000 in average annual gross |
| unfairly benefitting from the assets, resources or | | | | revenue (and all private foundations), penalties for late |
| activities of the nonprofit they serve. Sometimes this is | | | | filing add up at a rate of $20 per day up to a |
| overt misappropriation by the leaders of the | | | | maximum of $10,000 or 5% of the gross receipts, |
| organization. These are the charity leaders you see | | | | whichever is less. Failure to file for three consecutive |
| fined, indicted or dragged before Congress. More | | | | years will result in the automatic revocation of the |
| often, though, inurement is a product of not | | | | organization's tax-exempt status. Most states require |
| understanding the limits of conflict of interest. For | | | | annual reports, as well. Whether corporate annual |
| example, suppose a 501(c)(3) has 5 members on its | | | | reports, or charitable solicitations reporting, you must |
| board of directors and 3 of those board members are | | | | stay current. It is a lot to keep up with, but it is a lot |
| paid employees of the organization. Not only is there a | | | | better than being fined, or worse, shut down. |
| conflict of interest, this situation rises to the level of | | | | This list is by no means exhaustive. We could easily |
| inurement because the board cannot form a quorum | | | | make it the dirty three dozen. Knowing what your |
| of members who are not paid. Therefore, it is | | | | organization is responsible for and making sure it stays |
| impossible to establish compensation at arm's-length. | | | | compliant helps to ensure that it will be around to serve |
| Even if the salaries are reasonable, the situation is | | | | your community in the years to come. |
| indefensible because each paid board member has a | | | | |