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Badly managed charity?

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What recourse does a member of the public have if there are concerns about how a public-benefit corporation is being run?

If you have reason to be concerned that a charitable nonprofit is being poorly managed, or worse, is somehow engaged in wrong-doing, there are several steps you can take.

First, educate yourself as much as possible. You want to be sure you are not misinterpreting or misunderstanding what’s going on. Ask questions. Talk to others involved with the organization. California law requires nonprofit corporations to provide certain documents, such as the organization’s application for tax exemption and annual informational returns, upon written request. If the organization refuses, this may be grounds for further action.

Familiarize yourself with the relevant sections of the California Corporations Code, especially those related to nonprofit public benefit corporations. This code outlines the legal requirements and obligations of such organizations.

Look up the organization’s records on the Secretary of State’s and Attorney General’s websites. Each has a simple search tool. You’ll be able to see if the organization is up-to-date with its required documents and filings.

Ultimately, if you are convinced there is something wrong, or if the organization refuses to provide the required documents, you may file an official complaint with the Attorney General’s office.

Investing your reserve funds

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Our board is looking to know legalities a nonprofit board should be aware of in deciding how to handle or invest a financial reserve.

When one of our nonprofits approached Spokes for help with that topic, our first reply was, “We are not attorneys, tax experts, or financial advisors.” That said, we can offer practical suggestions based on our experience with the many nonprofits we serve.

The most important thing to keep in mind is the board’s fiduciary responsibility to the organization. As part of that responsibility it must act with prudence and with the organization’s best interests in mind.

California has adopted the Uniform Prudent Management of Institutional Funds Act (UPMIFA), which provides guidelines for the investment and management of nonprofit institutional funds. It includes eight factors to consider:

  • General economic conditions.
  • The possible effect of inflation or deflation.
  • The expected tax consequences, if any, of investment decisions or strategies.
  • The role that each investment or course of action plays within the overall investment portfolio of the fund.
  • The expected total return from income and the appreciation of investments.
  • Other resources of the institution.
  • The needs of the institution and the fund to make distributions and to preserve capital.
  • An asset’s special relationship or special value, if any, to the charitable purposes of the institution.

In San Luis Obispo County, some of our smaller nonprofits with surplus funds have placed them in FDIC-insured certificates of deposit with varying terms to ensure that funds are available when needed. Nonprofits with greater reserves will want to adopt a sound investment policy in line with UPMIFA.

Learn more about UPMIFA.

Can the Executive Committee determine the ED’s pay?

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Our bylaws state that the Executive Committee has full authority/responsibility to review the CEO’s performance and to set compensation, and that the Board “shall be informed” of the Committee’s decision. Is this OK?

Technically, the answer is yes—assuming that all members of the Executive Committee are, in fact, directors. Even so, the board as a whole still has responsibility for the process and outcome.

That said, it’s generally recommended to have a transparent and fair process for determining the executive director’s salary. While the executive committee certainly may play a role in salary discussions, it’s often advisable to establish a compensation committee or involve the full board in the decision-making process.

Having a broader group involved can bring diverse perspectives and ensure a more objective approach to determining the executive director’s salary. This approach is in line with principles of good governance, accountability, and transparency, which are important for the credibility and effectiveness of nonprofit organizations.

Two things to keep in mind:

  • Although the IRS does not provide specific dollar amounts or an acceptable range of compensation levels, they stipulate that compensation must be reasonable and not excessive.“Reasonable” is defined as the value that would ordinarily be paid for like services by like enterprises under like circumstances.
  • Nonprofits filing IRS Form 990 must describe the process they use to approve executive compensation as part of the nonprofit’s responses on the annual return, IRS Form 990, Part VI, Section B, line 15.

Old Invoices

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Our Board recently received an invoice from someone doing social media and website work for our nonprofit, yet it was for work done over two years ago. How late can people submit invoices and still expect to get paid?

Generally, if your organization engaged a contractor to do work , the work was done, and you accepted it, your organization owes the contractor for the work. Not sending you a timely invoice is a poor business practice but does not cancel your obligation to pay for the services you received.

In California, there is generally a four-year limit for filing a lawsuit to collect a debt based on a written agreement. However, the creditor may still send you collection notices, call you to try to get you to pay, or report your debt to credit reporting companies.

Worker Self-Directed Nonprofits

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Someone recently contacted Spokes to say, “I’m thinking of starting a worker self-directed nonprofit. Can Spokes help me?”

A worker self-directed nonprofit? I’d never heard the term. I know about public benefit nonprofits, mutual benefit nonprofits, and benefit corporations, but this inquiry required some research!

The Sustainable Economies Law Center describes a self-directed nonprofit as a sort of cross between a worker cooperative and a 501(c)3 nonprofit. Specifically, it defines a worker self-directed nonprofit as,

a nonprofit organization in which all workers have the power to influence the programs in which they work, the conditions of their workplace, their own career paths, and the direction of the organization as a whole.

In general, a worker cooperative is “democratically managed business that is owned and controlled by the workers.” California corporation code has specific provisions for the formation of a for-profit worker cooperative. California code also has specific, separate provisions for incorporating as a nonprofit. As far as I have learned, California code does not include explicit provisions for something called a worker self-directed nonprofit.

I have lots more to learn on this subject, but it’s intriguing to think about how one might structure a nonprofit within California’s current code that might mimic or embody key features of a worker cooperative such as election of the board of directors. More to come on this topic, but in the meantime, check out these resources:

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