Musings on practical solutions for Arts Management
NewsRoom Contact Us

Gene Takagi

Info You Can Use: Fiscal Sponsorship As Apprenticeship Program For Non-Profits

by

Non-Profit Law blogger Gene Tagaki recently tweeted a link to an article he wrote for the American Bar Association about 5 years ago urging lawyers to consider alternatives to forming non-profits organizations for their clients.

I should note that this article was written before the first Benefit Corporations were legal in the U.S. so that also remains an option to forming a non-profit.

One of the biggest considerations for not forming a non-profit is the fact that there are so many, with more being formed every day, but an ever shrinking supply of funding to support their efforts.

“Ron Mattocks, author of Zone of Insolvency: How Nonprofits Avoid Hidden Liabilities and Build Financial Strength, asserts that as many as one-third of the nation’s 1.4 million registered nonprofits operate in the zone of insolvency.
[…]
If a nonprofit is insufficiently prepared to compete and operate in such an environment, the end product may be gross inefficiencies, frustrated founders, disillusioned donors, and fewer resources ultimately reaching its intended beneficiaries.”
 

There is also the issue of whether the founders have a realistic business plan that is viable amid the economic conditions present. Takagi also spends some time cautioning against founder’s assumptions of the amount of control they can legally exert over the organization.

Among the alternatives to forming a non-profit Tagaki suggests is actually working with an existing non-profit. I often wondered, if people are able to muster the resources to create an entirely new non-profit that overlaps or competes with an existing one, why not first approach the existing non-profit first proposing to enhance their efforts with an ancillary or complementary program.

That is pretty much what Tagaki suggests:

When appropriate, lawyers should make their clients aware of the following benefits of working with an existing nonprofit:

-Avoidance of start-up costs and administrative burdens of a new nonprofit.
-Increased efficiency in furthering the charitable mission by using an established infrastructure.
-Opportunity to gain experience and expertise in running a nonprofit.
-Development of connections in the nonprofit community.

Collaborating with an existing nonprofit is an alternative that may be considered even where the contemplated charitable idea is not currently being implemented by an existing nonprofit. A nonprofit with a compatible mission may be receptive to implementing and operating a new program, particularly if a volunteer is willing to bring resources to the table. Alternatively, the nonprofit may have institutional knowledge relating to the charitable idea and its implementation. Moreover, the nonprofit may open doors and leverage assets that might not be otherwise readily available, such as

-Existing resources, including staff, volunteers, infrastructure, and systems.
-In-house experience and expertise, which may allow the contemplated program to be launched and operated efficiently and in compliance with the law.
-Donor and business relationships, including with institutional funders, nonprofit leaders, allied organizations, and the media.
-Goodwill, which may provide the program with name recognition and built-in public trust.

The other alternative he suggests is a Fiscal Sponsorship where a project is housed within the auspices of an existing non-profit. It allows the project to take advantage of the non-profit’s status without needing to create a separate entity. If the sponsorship agreement is written correctly, the project has the freedom to move to another non-profit or perhaps spin off as a separate non-profit once they have experienced sufficient growth. Fiscal sponsorship arrangements have been used to host short term projects or as an incubator for fledgling non-profits.

The Sponsor usually retains a portion of the gifts as a fee (5-10 percent is common) and allocates the rest to the Project. The Project Initiators may serve as employees or volunteers of the Sponsor delegated with the responsibility of operating the Project. They also may retain the right to move the Project to another Sponsor or to a new exempt organization created to permanently house the Project. Any such rights should be precisely spelled out in the fiscal sponsorship agreement.

Fiscal sponsorship may provide a Project with immediate tax-exempt status, advantageous treatment as a public charity (i.e., nonprivate foundation) without independently passing a public support test, some degree of administrative support, and a governing body that has a duty to ensure that the Project is operating in compliance with applicable laws. The Project Initiators must weigh such benefits against a lack of autonomy; their limited control over the Project, which remains under the ultimate control of the Sponsor; and the sponsorship fees.

The trade-off aside, if a fiscal sponsorship agreement is written well it can be an extremely helpful process of essentially testing the viability of a concept and learning how to run a non-profit organization without incurring the start up costs.

I was not aware that this option really existed. It might almost be better if aspiring non-profits pursued this option more regularly. Even if it didn’t result in new organizations spinning off all that often, it could potentially create more robust non-profit organizations. (Perhaps even resulting in more nimble sponsored programs growing to subsume their nominal sponsoring parent.)

Since the fiscal sponsorship option is relatively unknown as an option, perhaps the biggest hurdle will be getting both parties prepared and willing to engage in such an arrangement.

It is well known that non-profits start new programs in order to garner funding to support their main goals. It would be easy for a sponsoring organization to starve the program it agreed to house of the resources it needs to succeed. From the other side, as Tagaki mentioned, once you bring your program under the auspices of a fiscal sponsor, their priorities need to become your priorities to a large degree.

Info You Can Use: Legal Tips

by

A couple weeks ago, Gene Takagi of the Non-Profit Law Blog made a post cautioning lawyers about issues to consider when representing a nonprofit.

As you might imagine, every one of his tips were important for members of a non-profit board and leadership to know as well. Some of his traps and tips are frequent points of conversation in the non-profit arts community: don’t write a mission statement that is too restrictive; be sure you have a viable business plan and don’t assume non-profit status is your only option; boards members should be aware they have a very real governance role; non-profit doesn’t mean tax-exempt or no-profit; all overhead is not bad; get board and directors insurance.

There were also some topics that are less frequently discussed:

Traps
1. Failing to inform the client at the outset of representation that you represent the organization and not any individual directors or officers.

4. Including “non-voting directors” in the organization’s bylaws (under most states’ laws, there is no such thing as a “non-voting director” and, subject to very limited exceptions, each director has the right to vote on all matters before the board).

5. Providing in the bylaws that the board of directors may combine in-person votes at a meeting with email votes to take board actions.

6. Reinforcing the myth that nonprofits should always minimize overhead expenses (even at the expense of building an appropriate foundation on which to build the organization’s operations).

7. Failing to inform the client about the differences among volunteers, independent contractors, and employees, and the risks of misapplying these classifications.

10. Failing to discuss with the client the benefits of having organizational policies that address the legal and management implications of conflicts of interest, proper gift receipts, misuse of social media, expense reimbursements, acceptance of noncash gifts, document retention/destruction, and whistleblowers.

For me, that first one about the lawyer representing the organization and not you always strikes me as worth repeating. I have never had the ill-fortune of being in a situation where there was a even the whiff of legal action. However, when I am reviewing contract clauses that make me uneasy or am faced with a potentially contentious encounter, I will find myself thinking that the legal department will cover me if worse came to worse. Then I have to remind myself that in fact, they won’t necessarily have my back because they serve the interests of the organization, which may not include protecting me.

Point #5 about mixing in-person and email voting is a reference to a prohibition in California law. However, reading the rationale behind the illegality of such action, it seems reasonable to expect other states would have a similar restrictions.

Since I have heavily summarized his post, it is worth taking a look at everything Takagi cautions and advises for the legal health of a non-profit

Is It Against The Law To Pay Me More?

by

You may have heard about Dan Palotta’s recent TED Talk about how judging charities on concepts like administrative overhead ratios is hobbling their ability to solve huge problems.

He makes some persuasive points, though some of the concerns I had with his proposals when they appeared on the Harvard Business Review blog three years ago still remain.

Gene Takagi picked up on the talk and addressed legal considerations which would prevent non-profits from operating in the manner Palotta suggests. (Just to be clear, Palotta never suggests charities cleave to non-profit status.)

Takagi notes that charity pay scales are limited by laws governing 501 c 3s and so can’t compete well on salary if supporters show tolerance for doing so to attract the best talent. Expenditures are limited in much the same manner,

“If a for-profit spends 90 cents to make $1, it may be a perfectly acceptable profit margin, but if a charity spends 90 cents to make $1, it would be widely viewed as a terrible waste. As a result, many charities fail to properly report their fundraising expenses, and the IRS has raised the possibility of utilizing the controversial commensurate test, which addresses whether a charity is using its resource in line with its charitable mission…But this can’t be judged strictly on percentages, and charities should be allowed to experiment so if an honest fundraising and mission awareness-raising campaign fails, the charity isn’t slaughtered for it. The problem, however, is not the law, but the misguided public ideology of which Dan spoke.”

Charities are also often limited and discouraged from pursuing new revenue ideas by federal and state laws as well as popular sentiment.

I think the biggest question that this whole discussion raises for me is whether social attitudes are such that a for-profit company raising money for social issues will be tolerated. Given that people will give money to projects via things like Kickstarter without much consideration about whether it is non-profit or not, is the idea that non-profits do things that companies won’t due to lack of profitability and governments can’t/won’t due to lack of political will and expertise, over?

Currently I think there is a capricious element to Kickstarter campaigns that make it an unsuitable model for garnering long term support. However the very existence of such mechanisms may be shifting mindsets to a place where worthiness and overhead ratios are not mutually exclusive.

Info You Can Use: You Tweeted What About Me?!

by

So after my post a couple weeks ago about why it is bad in a legal sense to have a restrictive social media policy, I am sure some of you have been wondering under what circumstances you can actually discipline someone for what they post online.

Well thanks to a piece on Forbes website, we have an answer (and hat tip to Gene Takagi)

As I had mentioned in my earlier entry, you can’t forbid, and therefore punish, any attempt to organize employees in a discussion about employment conditions. Under labor law, this is termed “protected concerted activity.” If a person is speaking for a group of employees or attempting to organize a discussion among employees, it is protected.

However, there are some tricky nuances to this and a link on the Forbes article to a National Labor Relations Board report, “Report Concerning Social Media Cases,” delves into the matter and presents specific cases to explain why the employee was or was not protected by the law. As Kashmir Hill, the author of the Forbes article notes, it is actually pretty easy and interesting to read for a government document.

My read is that with the current state of social media it may be fairly difficult to fire someone for complaining about work conditions. Essentially, if other employees chime in either on or off line to agree that an employer is a jerk for making employees work under certain conditions, the speech is protected as representing a group complaint. If other employees just comment that they are sorry to hear a situation upset the poster, then the poster may not be speaking on behalf of other employees.

It is only when a comment passes a certain threshold where a person is wishing violence upon people or making statements which are maliciously false that protection of representing a group complaint may not apply. However, being called a power-hungry, martinet jackass does not meet the standard for maliciously false. Suggesting a restaurant buys rat dropping to make their ground beef go further probably would.

Complaints that are clearly representative of an individual’s opinion aren’t protected, especially if they do not invite or receive the agreement of other employees. The same with complaints about the job which are not terms and conditions of employment like saying your store gets the ugliest customers in town.

One interesting fact that came up in a number of the NLRB case studies is that you can not have a blanket policy prohibiting people from posting pictures of themselves in company uniform or in connection with the company logo. ”

“…Employer’s logos or photographs of the Employer’s stores would restrain an employee from engaging in protected activity. For example, an employee could not post pictures of employees carrying a picket sign depicting the Employer’s name, peacefully handbill in front of a store, or wear a t-shirt portraying the Employer’s logo in connection with a protest involving terms and conditions of employment.”

The NLRB documents didn’t say it outright, but presumably you could fire someone if they posted a picture of themselves drunk in uniform at a strip club or urinating on your corporate logo. Though I have no idea if a number of employees urinating would be considered a group cause or not.

Another part of the NRLB document I found useful was two case studies starting on page 19 that first discussed a company’s social media policy that they considered to be too broad. In the second case, they found the policy was lawful but the other prohibitions were too broad. Finally, there was a case where a company’s policy restricting employees’ contact with the media was deemed lawful.

I felt all three were very useful because they all contained rules that any of us might include in our policies. In the first two cases, it is good to know what types of language one should keep out of policies. The last case included restrictions on media contact out of a desire to have one voice speak for the organization. Again, a situation for which many organizations strive.

“…we determined that a policy that stated that “the company will respond to the news media in a timely and professional manner only through the designated spokespersons” could not be read as “a blanket prohibition” against all employee contact with the media. Additional language in the rule referring to “crisis situations” and ensuring “timely and professional” response to media inquiries further clarified that the rule was not meant to apply to Section 7 activities.

Similarly, we concluded here that the Employer’s media policy repeatedly stated that the purpose of the policy was to ensure that only one person spoke for the company. Although employees were instructed to answer all media/reporter questions in a particular way, the required responses did not convey the impression that employees could not speak out on their terms and conditions of employment.”

Info You Can Use: Volunteer Liability

by

An appreciative nod to the Gene Takagi at Non Profit Law blog for linking to a Charity Lawyer post about a non-profit’s liability in respect to volunteers.

Guest blogger Deanna Rader notes that a non-profit may be liable for the actions of their volunteers under a doctrine known as respondeat superior which holds that an employer can be responsible for the acts an employee commits in the course of executing their duties. Some states have extended this concept to include volunteers.

In this context, Rader suggests that care be taken in selecting and training volunteers.

* How will volunteers be utilized? The risk of liability increases as the volunteer is given more responsibility and independence. Carefully choose the responsibilities that will be given to volunteers. Also, there should be a clear delineation between the tasks performed by employees and those performed by volunteers.

* What selection criteria should be used? You should use care to ensure that the volunteers selected are fit to serve in the positions at your agency. Your selection criteria may differ based on the responsibilities given to different volunteers. If you are using volunteers to serve children, disabled individuals, or other vulnerable populations, your selection criteria may include a background investigation and criminal history check. If your volunteers sort food for a food bank serving adults, however, a background investigation may not be required.

* What training is necessary? Before putting volunteers to work, they need to be trained to perform the assigned tasks. Otherwise, you could be held liable for their negligent performance of those tasks if it causes injury to others. Also, the nonprofit organization could be held liable if a volunteer who is not properly trained injures himself or herself because of inadequate training.

* How will the volunteers be supervised? Volunteers should have appropriate supervision based on the tasks assigned. A warehouse volunteer who is performing physical labor may not need close supervision, whereas volunteers dealing with vulnerable populations may need to be closely monitored.

* How will problems be addressed? Although good volunteers provide invaluable assistance, bad volunteers can expose you to substantial liability. Do not be afraid to address problems head-on and terminate the volunteer relationship if a volunteer exhibits inappropriate behavior.

Rader also address injury that a volunteer might take in the course of the service to the non-profit. Employees are covered under worker’s compensation laws while volunteers are not. However, it is important to clearly delineate between the two categories of workers. In addition, employers have a responsibility to provide a safe work environment to everyone who may enter their premises, regardless of employment status.

“An employer also has a duty to maintain safe working premises for an employee. Many states have applied this doctrine expressly to nonprofit organizations, requiring them to maintain a safe place for volunteers to work or finding them to be negligent in failing to provide a safe place for a volunteer to deliver services. This duty can apply even if the volunteer is working off premises while providing services for the nonprofit organization, making the nonprofit corporation liable for the actions or inactions of a third party.”

Among the steps Rader recommends taking are having volunteers sign a general waiver and release that informs them about the possible hazards they may face. She also mentions having volunteers work with a buddy or a team so they are never alone.

All this seems very valuable for the performing arts. I have worked in places where volunteers have done everything from ushering to construction to driving farm tractors. There has been ample opportunity for them to injure themselves or each others. We rent our facility out to groups and have had other people’s volunteers damage equipment on a number of occasions for which we held the renter liable.

On the flip side, performance groups often don’t have their own facilities and have their volunteers meet them at an unfamiliar place like my theatre to help them put up a show. In such a situation, you are dependent on the performance facility’s maintenance program and good practices to keep your volunteers safe.

Info You Can Use: Beware Non-Profit Identity Theft

by

Non-Profit Law Blog editor Gene Takagi encourages all non-profits to take note of a recent investigation by Forbes magazine that uncovered someone redirecting non-profit registrations to a post office box in Las Vegas. The majority of the registrations have been for religious organizations, but the weakness in the IRS’ system could be exploited to hijack nearly any non-profit’s registration.

Someone has hijacked the tax identity of more than 2,300 tiny or defunct nonprofits, apparently taking advantage of a hole in a new electronic Internal Revenue Service filing system to list the same person as a charitable official at the same mail box drop in Las Vegas.

[…]

A search on Melissa Data of nonprofits in that zip code produced 2,370 listings. A random spot cross check by Forbes of dozens of them on the official IRS site listed Alexander and the N. Rainbow Blvd. address in every instance. The nonprofits originally were located elsewhere all across the country.

[…]

Another nonprofit listed by the IRS as being led by William Alexander out of Las Vegas is Godsline Ministries. The clothes-donation charity used to be located in McMinnville, Ore.–and died there about seven years ago, according to Rob Rabon, who ran it with his then-wife. “It only lasted two or three years,” he said. “We went to the state and filed papers dissolving it.”

Yet the IRS proclaims Godsline alive and well, with the same tax identification number as when the Rabons ran it.

The problem has its roots in the recent requirement that non profits making less than $25,000 file a statement to that effect. If you recall, there was a big panic last year that these small non-profits would lose their status because they were unaware of the requirement. Since these small entities don’t have a lot of resources, the IRS endeavored to make it easy for them to verify their status with a simple postcard or online filing.

Because so few details are required in the filing, there isn’t a lot of verifiable data being supplied to the IRS. This makes it easy to slip in and replace the authentic organization. The Forbes articles notes that the names of the small non-profits in danger of losing their status were published in an attempt to make people aware of the impending change, but in fact may have been serving to let fraudsters know which organizations were vulnerable to identity theft.

Stuff To Ponder: Alternatives To Forming A Non Profit Org

by

If your new year’s resolution is to do good this year, go for it! But if you are thinking of starting up a non-profit, you should be aware of the challenges you face. Both the normal processes to follow when starting a new organization as well as emerging scrutiny by the federal government. The Non-Profit Law blog has been packing a lot of informational goodness in their posts over the end of last year and the transition in to this one. Among their tweets of the week for last week was news of extra scrutiny of non-profits by the IRS.

The Gene Takagi and Emily Chan who write Non-Profit Law Blog also linked to a piece they wrote for the American Bar Association outlining the considerations a lawyer and their clients should use to evaluate whether they should actually form a non-profit organization. Many of the suggestions made are just good sense for forming any business including evaluating the need, whether it duplicates the efforts of another group, if there is sufficient clientele and a support base present in the community. They make suggestions of alternatives to consider.

But another person they link to in their tweets of the week really does a great job of providing these alternatives. Allison Jones makes suggestions for 6 alternatives with links to more information about pursuing these options.
 I had never heard of an intrapenuership myself.

* Free agent: More and more people are affecting social change outside of an organization. Harnessing social media, you can mobilize your network to take action or support a cause without the hassle of incorporating….

* Informal group/club: If the issue you are addressing is small or very specific (cleaning up a local park or stacking shelves in a local food pantry) you may just be able to round up a group of friends and get to work….

* Giving circle: … In giving circles you pool money and resources together to support an organization you all select. The focus is usually on a local organization, often extends beyond giving financial support, and the circles can be formal or informal….

* Local chapter of a national organization: … You can build on existing resources, support, and guidance to make a difference. Organizations that focus on professions, such as Young Nonprofit Professionals Network, Grant Managers Network, or Emerging Leaders in the Arts, tend to have chapters across the country. However other organizations in different causes, like the Reeve Foundation are open to supporters launching local chapters as well….

* Intrapreneurship: Do you work or volunteer for an awesome organization? Maybe you noticed a need because of the work you do? This can be tricky as many organizations are pressed for resources and time. However, you can harness your organization’s infrastructure to make small steps in addressing the need you have identified. Organizations are more willing to support innovation if there is someone (i.e. YOU!) willing to take the lead. Start by collecting information on the need and presenting it to your organization….

* Fiscal sponsorship: In fiscal sponsorship a nonprofit will allow you to operate under their 501c3 status….You should find an organization whose mission and work align with what you want to do and reach out to them directly….

More On Mergers And Alliances

by

I have had non-profit mergers on the mind of late due to some personal experience so it is no wonder that two entries on the subject from different blogs caught my attention today.

The first was a book review by Gene Takagi at Non-Profit Law blog. He recommends Nonprofit Mergers & Alliances by Thomas A. McLaughlin. Takagi starts out referencing a quote from the book supporting the old truism that it is best to enter a negotiation in a position of strength.

“Indeed, the book had me at “hello” or, rather, its first sentence: ‘The best time to consider a merger or an alliance is before it is necessary, when coming together with another organization will mean combining strength with strength, and when the collective energies and the creativity of the two or more entities can be used proactively instead of being sapped by the demands of crisis management.’ “

This concept is actually central to the commentary made in the second blog post I saw today, Drew McManus talking about Philadelphia Orchestra and Philly Pops decision not to merge. The former would have absorbed the latter. Drew cites the troubles the Utah Symphony and Utah Opera had with their merger. The orchestra and pops adopted a gradual approach to the merger and that revealed some of the potential difficulties they might face as a single entity. Both organizations will work in close partnership, but retain separate governance structures.

As you might imagine from the title of the book he reviews, Takagi notes that there are different stages to both mergers and alliances and lists them out. According to Takagi, the book outlines the pros and cons to both approaches and provides some good advice about very complex undertakings.

The book may be a good resource for the next generation of non-profit leaders. Apparently McLaughlin feels that “nonprofit services are fragmented and how consolidation is part of a nonprofit’s life cycle.” Given all the talk about mergers of late, I believe there is more behind that statement than just an attempt to sell a book about how to accomplish such things.

Things To Ponder: Who Is Your CEO?

by

Gene Takagi at the always enlightening Nonprofit Law Blog links to a two part entry on why the title of the senior leader of a non-profit should transition from Executive Director to President/CEO. The argument made in the pieces is that the person in that position gains credibility within and without of the organization.

Takagi only touches upon this very briefly because his greater concern is who is legally the CEO of the organization, the executive director or board chair. I voraciously consumed the post because I have dealt with organizations where the dynamics were such that one was clearly in a dominant position. I often wondered to whom people would look for leadership in a crisis–versus who was ultimately responsible for the decisions that were made during that time.

Takagi’s advice is-

“However, if the organization has a paid executive director who is tasked with operational leadership and the board chair is a volunteer who is not active in management of the organization’s operations, the CEO designation should be given to the executive director. Nonprofit boards should (1) review their bylaws to understand how their management structures have been established, and (2) amend them, as necessary.”

Acknowledging that the board chair may not want to give up the CEO title in this case, especially if said person is the organization’s founder or the board is very active, Takagi suggests the board seriously think about what is in the best interests of the organization. There are legal repercussions the nominal CEO may face.

It must not be overlooked that whoever has the CEO title may face increased exposure to liability for failure to meet his or her duties. Any CEO should be very familiar with the organization’s current financial position, programs, legal compliance issues, and overall strengths and weaknesses. Imagine a judge’s or jury’s reaction to a CEO who claims not to have reviewed the financials for several months or failed to take any steps to help ensure that the operations of the organization were compliant. Such reaction may be very different if it were the volunteer board chair’s liability that was being considered and the organization had a separate executive director designated as the CEO.

I did a quick read of other sources to see if Directors and Officers Insurance and Errors and Omissions Insurance would cover this sort of negligence and my results were inconclusive. Different insurance companies offer different coverages which contain different exclusions. Some seemed to imply this was the sort of thing you buy the insurance to guard against. Others said the insurance companies will look for any blatant omissions to use as a pretext to deny a claim.

Joe Patti's Musings on practical solutions for Arts Management

/ Find It!

/ Recent Comments

Butts In The Seats by Joe Patti is licensed under a Creative Commons Attribution-NonCommercial-NoDerivs 3.0 Unported License.
LinkedIn