operating reserves

Just like it’s a smart idea to have a personal “rainy day” fund just in case of an emergency home repair, surgery, or other unexpected large costs, the same goes for a nonprofit organization. Even nonprofits with solid income streams can be hit with unanticipated events, income, and unbudgeted expenses. In these situations, it’s vital to have that financial cushion in the form of operating reserves so the organization doesn’t suffer long-term, negative consequences from temporary dilemmas. Concurrently, it’s essential to have the board adopt and adhere to a policy outlining the details of the reserve.

A common scenario where operating reserves may be prompted can be when a source of a reliable income is withdrawn or reduced without expectation.

Important Elements of an Operating Reserve Policy

Every organization’s policy is going to look different, but there are a few general areas that should be addressed.

  • Purpose– Why is it important for the organization to build and maintain reserves?
  • Definitions- How are the types of reserves, calculation of targeted amounts, and intended use defined?
  • How the reserve is funded– An operating reserve is only as valuable as its reliability. The policy should set out a practical plan for replenishment to the targeted amounts. Often, a worthy reserve goal is about three to six months of expenses. At the very least, on the low end, reserves should cover one full round of payroll.
  • When the reserve can be used– The plan should layout when the reserves can be tapped when unexpected shortfalls hit. The reserves should not be used to address foundational finance issues. In a “last straw” scenario, operating reserves can be used to close down the organization.
  • Classify the operating reserve as unrestricted– Unlike restricted funds that are marked for specific programs and projects, the operating reserve should be set as unrestricted so that the board and management can employ as they choose when the crisis calls for it.

That’s Not All

Because each nonprofit is unique, each nonprofit is going to need policies and procedures tailored to their specific operations. That said, generally, there are at least 10 policies most nonprofits need to be prepared to address on the annual information filing, Form 990. Check out my free guide to nonprofit policies and procedures.

Additionally, keep in mind that an operating reserves policy should be written to correspond with any other financial-specific policies, like an investment policy.

Want to discuss your nonprofit’s policy needs? Don’t hesitate to contact me at 515-371-6077 or gordon@gordonfischerlawfirm.com. I’m based in Cedar Rapids, Iowa but will travel to meet with nonprofit pros all across the state.

Girl holding scary pumpkin

Horrifying. Blood curdling. Hair raising.

These are just a few of the adjectives that can be used to describe six of the scariest things your nonprofit can do (or fail to do). As a lawyer who regularly works with nonprofit organizations to help them succeed in pursuing their missions, these six items literally haunt my nightmares.

  1. Failing to have an employee handbook with necessary policies.

Spine chilling!

Seriously? How can you NOT have an employee handbook? An employee handbook (even if you have but a single employee) makes clear the rights and responsibilities of both the employer and employee. So many disputes can be avoided by a clear, easy-to-read, and direct employee handbook. One of your best bets to fight off this spooky scenario is to get my free guide to developing a quality employee handbook!

  1. Merely copying a handbook off the Internet or “borrowing” it from another nonprofit.

Very eerie!

This is about as bad as not having a handbook at all! Just grabbing a random handbook and adopting it as your own makes as much sense as picking up a random hitchhiker on a foggy night. Others’ employee handbooks may have provisions you don’t need, or worse, ones you don’t want.

I once reviewed a handbook for small-but-sincere nonprofit that worked with the homeless. Several times in the handbook, quite specific medical terms came up—there was a HIPPA provision, there was talk about medical certifications, medical training, and proper handling of medical records. I realized, with a shock, this nonprofit had “borrowed” a handbook from a hospital.

How much faith or confidence will employees have in an employee handbook that’s filled with irrelevant stuff that clearly doesn’t apply to them at all? This is scary stuff, folks, very scary stuff.

Scary skeleton skull

  1. Failing to have an appropriate disclaimer in your nonprofit’s employee handbook

Truly frightening!

An employee handbook is just an employee handbook . . . or so you may think. But, what happens when it doesn’t have an appropriate “disclaimer?”

An employee handbook may constitute an employment contract! If you think about it, an employee handbook has all the elements of a contract—it’s written, it’s specific, it “promises” certain things will (or won’t) happen. It’s even “signed” by the nonprofit/company.

So, an employee handbook could actually be considered a unilateral employment contract unless the employer includes an appropriate disclaimer. Make sure you do so.

  1. Not having adequate job descriptions

Terrifying!

Job descriptions are so important – for the same or similar reasons that employee handbooks themselves are needed. Job descriptions lay out in writing what is required of employees.

Job descriptions are also helpful in relation to what is now-called the American with Disabilities Act Amendments Act (ADAAA). Job descriptions demonstrate the “essential functions” (as opposed to non-essential) job functions of each position.

Also, strongly consider job descriptions for board members.

  1. Failing to have an acknowledgement page in your nonprofit’s employee handbook

Dreadful!

It is critically important your employee handbook include an acknowledgment page that the employee signs and returns. The acknowledgement page should state that the employee understands it is his or her responsibility to both read and follow the policies. The acknowledgement page should be able to be separated from the handbook, so that it can be signed by the employee and saved in the employee’s personnel file.

harvest moon

  1. Not making absolutely clear that your new employee handbook supersedes other, older policies

Ghastly!

Your nonprofit’s new employee handbook must make clear it trumps other, older policies and provisions. The employee handbook needs a “superseding” provision. This provision must state unambiguously this employee handbook is indeed the most up-to-date guidance on your nonprofit’s policies.

ghost in coffee mug

Wow, that was super scary!

After writing this post, I probably won’t sleep well tonight. But, if you follow these six pieces of advice you’ll rest easy knowing that you’re more likely avoid the nonprofit graveyard. If you’re facing these spooky scenarios don’t hesitate to reach out by phone (515-371-6077) or email to schedule a free consultation. You can also

hand filling out tax form

In June 2018, the U.S. Supreme Court handed down a decision in South Dakota v. Wayfair that changed the way remote sellers (like internet companies) do business in states where they don’t have a physical presence, like a brick and mortar store or a headquarters. Essentially it means these companies will start collecting sales tax in certain states with economic nexus laws already on the books to enforce collection against said remote retailers. Iowa is one such state.

What does this mean for you and your nonprofit? Most nonprofits may start seeing sales tax tacked on to certain receipts for digital accounts/services. (The rate of sales tax is based on your Iowa primary contact address.) But, some nonprofits are exempt from sales tax and therefore will need to remit an exemption certificate to the remote seller.

writing tax on a check

Taxes and Nonprofits

The interplay between taxes and nonprofits can be confusing. Even if a nonprofit is exempt from state and federal income taxes, it does not mean that entity is auto exempt from paying sales tax for goods and (taxable) services. Generally, sales taxes must be paid unless the nonprofit falls under the umbrella of some other applicable general sales tax exemption. (Local option sales taxes must also be paid on purchases made in existing areas.)

However, the Iowa Code does exempt certain nonprofits from paying sales tax on purchases. The Iowa Department of Revenue’s guide to “Iowa Tax Issues for Nonprofits” provides a (non-exclusive) list of entities that are specifically exempt from sales/use taxes under Iowa law. I’ve included the pretty lengthy list here for your convenience!

  • American Red Cross
  • Navy Relief Society
  • U.S.O. (United Service Organizations)
  • Community health centers (as defined in 42 U.S.C.A. subsection 254c)
  • Migrant health centers (as defined in 42 U.S.C.A. subsection 254b)
  • Residential care facilities and intermediate care facilities for the intellectually disabled and residential care facilities for the mentally ill (licensed by the Department of Inspections and Appeals under Iowa Code chapter 135C)
  • Residential facilities for intellectually disabled children (licensed by the Department of Human Services under Iowa Code chapter 237)
  • Residential facilities for child foster care [licensed by the Department of Human Services under Iowa Code chapter 237, except those maintained by “individuals” as defined in Iowa Code subsection 237.1(7)]
  • Rehabilitation facilities which provide accredited rehabilitation services to persons with disabilities and which are accredited by the Commission on Accreditation of Rehabilitation Facilities or the Accreditation Council for Services for intellectually disabled and other developmentally disabled persons and adult day care services approved for reimbursement by the Iowa Department of Human Services
  • Community mental health centers (accredited by the Department of Human Services under Iowa Code chapter 225C)
  • Home and community-based services providers certified to offer Medicaid waiver services by the Department of Human Services that are any of the following:
      • Health and disability waiver service providers, described in 441 IAC 77.30.
      • Hospice providers, described in 441 IAC 77.32.
      • Elderly waiver service providers, described in 441 IAC 77.33.
      • AIDS/HIV waiver service providers, described in 441 IAC 77.34.
      • Federally qualified health centers, described in 441 IAC 77.35.
      • Intellectual disabilities waiver service providers, described in 441 IAC 77.37.
      • Brain injury waiver service providers, described in 441 IAC 77.39.
  • Sales of tangible personal property and services made to nonprofit hospitals and nonprofit hospices (licensed under Iowa Code chapter 135B)
  • Statewide nonprofit organ procurement organizations
  • Nonprofit legal aid organizations
  • Nonprofit organizations organized solely for the purpose of lending property to the general public for nonprofit purposes
  • Nonprofit private museums*
  • Governmental units, subdivisions, or instrumentalities of the federal government or of the state of Iowa (This includes state, county, and local subdivisions of the government of the State of Iowa and those of any other state which provide a similar sales tax exemption to Iowa and its political subdivisions.) *
  • Recreational lake and water quality districts*
  • Federal corporations created by the federal government which are exempt under federal law *
  • Private nonprofit educational institutions located in Iowa *
  • Private nonprofit art centers located in Iowa
  • Habitat for Humanity in Iowa when purchasing building materials *
  • Toys for Tots when purchasing toys
  • Community action agencies as defined in Iowa Code section 216A.93
  • Substance abuse treatment or prevention facilities that receive block grant funding from the Iowa Department of Public Health

Sales Tax Exemption in Action

So, let’s say you’re an Iowa private nonprofit grade school that subscribes to an online newsletter service (which is based in California) so that administrators can design, write, and send a weekly email update to parents of students. Your organization would likely be exempt from the new sales tax charges imposed by the remote seller on your subscription rate.

Down to the Details

Exempt nonprofits must pay for their purchases from the entity’s account and should complete and submit an Iowa Sales Tax Exemption Certificate 31-014 to the remote seller.

Questions? Not sure if your nonprofit qualifies for this exemption? Don’t hesitate to contact me at any time to speak about your situation.

September calendar

Recently my social media feeds were alight with friends and family member’s grinning kiddos holding signs announcing their first day of a new grade. It made me nostalgic! While I wouldn’t want to repeat law school all over again, I do think it’s never too late to head back to the classroom—proverbial or real. So, the GFLF is heading back to school with lessons in English (like legal words/phrases of the day), reading (GoFisch book club) history, finance and the like. Today’s lesson on planned giving crosses over between business and economics, and it’s super important for donors of all gift amounts and nonprofit pros alike.

Back to school

What is planned giving?

Planned giving is the process of charitably donating planned gifts. A planned gift is a charitable donation that is arranged in the present and allocated at a future date. A planned gift is often, but not always, donated through a will or trust. (I would say this is true 80-90% of the time; put another way, planned gifts are bequests 80-90% of the time). As such, planned gifts are very often granted after the donor’s death.

Besides charitable gifts made through wills and trusts after death, other planned gifts include charitable gift annuities; charitable remainder trusts (along with the entire alphabet soup of CRATS; CRUTS; NIMCRUTS; FLIPCRUTS; etc.); charitable lead trusts, and remainder interest/life estates in real property. All these gifting tools/techniques/vehicles I’ve discussed previously, sometimes numerous times.

What is a Nonprofit?

  • You give $20 to a person you meet on the street who lost his bus ticket home.
  • At your local gas station, there is a collection jar for a local child with leukemia. You donate your change.
  • You leave money in your will for your niece Jane, hoping she uses it to continue her collegiate studies in engineering.
  • You have a neighbor who suffers from dementia. You and your friends decide to have an informal walk to raise awareness about the disease and raise money for your neighbor’s health care needs.

While noble, these are not examples of “charitable giving,” as we use the term here. In this context, we are talking about charitable giving to an organization formed under 501c3 of the Internal Revenue Service Tax Code. A 501c3 agency can be known by several terms in general usage, including “nonprofit organization” and “public charity.” For simplicity’s sake, we’ll use the term nonprofit throughout.

Nonprofits cover an extremely broad swath of types of organizations, including schools, churches, hospitals, museums, social services organizations, animal welfare groups, and community foundations.

Nonprofits Must Embrace Planned Gifts

Sometimes nonprofits are overwhelmed at the thought of expansive planned giving because of the number and complexity of some of the planned giving vehicles. How does this match up when you want to donate a less obvious gift than cash, such as stocks and bonds or grain? Nonprofits need to expand their ability to accept gifts of many varieties for at least three reasons:

Craft Beer Factor

The first reason I call the “craft beer factor.” (Bear with me here for a moment). I’m old enough to remember when there were just two kinds of beer. Don’t believe me? You should, as it was immortalized in one of the most famous advertising campaigns of all time–“tastes great, less filling!” This ad campaign strongly implied there were really just two types of beers.

craft beer on table

Then came the craft beer movement. I’m not sure whether craft beers were a response to consumers, or whether craft beers created a demand; presumably both. In any case, now a place like Toppling Goliath Brewing Company in Decorah, Iowa, has about thirty varieties of beers (this is based on an informal count from their website).

Now any retail establishment which sells beer must offer lots and lots of different kinds of beer. Any retail establishment which isn’t able to offer its customers wide variety risks irrelevance, or worse.

This is true not just of beer, but of everything. Another quick example– McDonald’s has around 145 menu items, that’s up from about 85 items in 2007. Also, McDonald’s now offers breakfast items not just in the morning, but all day-long.

Consumers want what they want, when they want, how they want.

Donors expect and often demand the opportunity to use many different options to assist their favorite charities. No longer can nonprofits simply ask folks to pony up cash, or just accept credit cards. Donors want to be able to converse with their fave charity and discuss using their whole portfolio. Nonprofits need to be able to accept, and intelligently discuss, gifting of many different types of non-cash assets.

A nonprofit which doesn’t offer its supporters a wide variety of giving options risks irrelevance, or even worse fates! So, as a donor, if you’re interested in donating an asset that your favorite nonprofit doesn’t typically facilitate, connect them with an experienced nonprofit attorney to make the gift a reality.

Planned Gifts Consist Overwhelmingly of Bequests

Second, planned giving is still mostly about wills and trusts. As already stated, I estimate 80-90% of planned gifts are bequests. Simple! Nonprofits should put substantial efforts to encouraging increased, larger testamentary bequests. Donors who already have an estate plan, but didn’t realize they could designate their favorite organizations as beneficiaries should contact an estate planning attorney.

Everyone can Understand Planned Giving!

Be it strategies for a monthly giving program or facilitating complex planned giving vehicles like NIMCRUTs, the opportunities for continuous learning about different planned giving technique are seemingly endless! And, there are so many different options, that all donors should feel great about supporting their fave causes with tax-wise gifts that work best for them. I strive to offer free information that breaks down different aspects of planned giving in human terms, as well as promoting community opportunities/events for nonprofit professionals.

heart on blue wood

Still need help understanding planned giving or any particular tool or technique? Want assistance coordinating a complex gift? Reach out to me anytime. I offer a free one-hour consultation to anyone and everyone. You can contact at my email (gordon@gordonfischerlawfirm.com) or on my cell (515-371-6077). I’d truly love to hear from you.

marketing strategy

All nonprofits can benefit from smart and targeted outreach to donors and potential donors. This is especially true when donors are increasingly demanding more options when giving. Long gone are the days when nonprofits can simply ask donors to write a check. Rather, current and potential donors want a wide menu of choices when it comes to charitable giving—choices that give them flexibility in the type of gift, in the timing of the gift, in the tool or vehicle that maximizes their tax benefits, and in how to make their support meaningful both to themselves and to the nonprofit.

There are three methods I’ve found that work well for nonprofits to communicate the many ways donors and potential donors can maximize their charitable giving. The communication methods include (1) newsletters; (2) in-person seminars; and (3) website content. Sure, this may seem obvious, but all of these tactics should be well done for the greatest impact. I am happy to advise and assist nonprofits in developing and implementing off of these methods to create an effective and sustainable program for outreach, information, and advocacy.

Newsletters

Nonprofits interested in using newsletters to communicate with donors should start with an up-to-date email list. Next, divide the list into three groups: (1) donors/potential donors; (2) nonprofits and nonprofit personnel; and (3) professional advisors (accountants, financial advisors, insurance agents, and lawyers…anyone who may recommend or advise your nonprofit). Each group would receive its own newsletter tailored according to its connection to the nonprofit, its interests, and the relationship you want to build with it. Generally speaking, sending newsletters one a month is a good balance. More often than this and you become email clutter, less than this and you’re not keeping the nonprofit top of supporters’ minds.

Donors

The newsletter sent to current and potential donors could focus on a specific topic such as the types of and flexibility of gifts the nonprofit accepts; explanation and use of the Endow Iowa tax credit; and giving through estate planning.

Nonprofits

The newsletter sent to nonprofits and related personnel could focus on compliance controls and internal policies, such as:

Professional advisors

The newsletter sent to professional advisors could take deep dives into complex charitable gifting tools such as different charitable remainder trusts (CRATs, CRUTs, NIM-CRUTS, FLIP-CRUTS, etc.), donor-advised funds, and IRA charitable rollover. Illustrating these tools with real-life case studies (with details changed to preserve privacy) will help professional advisors learn how to recognize philanthropic opportunities when presented by their clients.

Seminars

Monthly seminars on charitable giving are a great way to familiarize current and potential donors about what the nonprofit does and to inform them about the many ways their support can be crafted to fit their financial situation, needs, and interests. Holding seminars at the nonprofit’s offices, rather than at a soulless hotel meeting room or corporate campus, has a number of benefits. Visitors can see where the hard work gets accomplished; they can meet staff and volunteers; and overall, they will develop a closer emotional connection to the organization.

Seminars would be customized to the nonprofit’s unique needs and its targeted audience. I have given many nonprofit-focused seminars over the years and am happy to work together to develop the perfect presentation. There are few topics in the area of nonprofits, estate planning, and charitable giving that I do not feel completely comfortable speaking on.

All presentations I give include an engaging visual presentation, handouts, and plenty of time for questions and discussion. I also send slides used in the session to attendees following the training.

In terms of promotion, it’s best to announce the seminar program well in advance, schedule seminars at the same time every month, and hold them at the same location (e.g., the third Thursday of every month, at 8 a.m., at the Nonprofit Offices).

Website Content

There are three topics I recommend every nonprofit website have no matter its size or mission:

  1. charitable giving through estate planning
  2. tools and techniques for charitable gifting
  3. professional advisors

These topics should each have their own webpages.

The “charitable gifting through estate planning” webpage should describe what an estate plan is; how charitable giving happens through an estate plan; the benefits of trusts; and ways to use the beneficiary designations. The page can provide the official and full name of the nonprofit; address; and federal tax ID number. Also, providing sample bequest language can be incredibly helpful to both donors and professional advisors in starting to organize and think through a bequest.

“Tools and techniques for charitable gifting” should describe options aside from checks and credit cards. Short, concise paragraphs should highlight gifting retirement benefit plans; real estate; gifts of grain; charitable remainder trusts; and charitable gift annuities, among others.

The page for professional advisors ideally has a two-fold purpose. First, it is to demonstrate the nonprofit wants to work with professional advisors; that the nonprofit should be seen as another “tool in the toolbox” for professional advisors. Specific examples of ways the nonprofit have previously worked with professional advisors should be provided. Second, it could provide a deep-dive into the charitable gifting tools and techniques discussed earlier: really provide the gritty details, so it’s a valuable resource for professional advisors, complete with case studies.

Cautionary Note: Policies & Procedures

Before tackling these marketing ideas, nonprofits should put first things first, and be in optimal compliance with proper, well-drafted, and up-to-date policies and procedures. These should include the 10 major policies and procedures that support the best possible IRS Form 990 practices (such as public disclosure, gift acceptance, and whistleblowing). Nonprofits should also have documents in place covering the topics of employment, grantors and grantees, and endowment management. Further, nonprofits should provide regular training for boards of directors.

Please do not hesitate to contact me via email (gordon@gordonfischerlawfirm.com) or on my cell phone (515-371-6077). I’d be happy to discuss prospective nonprofit marketing strategies through newsletters, seminars, and website content, with you at your convenience.

compass over land

Forming a new nonprofit can involve a lot of organization and decision making. There are some essentials you need to put in place, including two important documents—articles of incorporation and bylaws. I would be remiss if I didn’t delve into a couple of mistakes I often run across when reviewing nonprofits’ articles and bylaws.

volunteers walking in field

DIY Internet-Sourced Documents

Some nonprofits pull their articles of incorporation and bylaws from the Internet. These may or may not have all the Iowa-specific info required. Also, there may be provisions that simply don’t apply. For example, if a “regular” nonprofit copies governing documents from a granting nonprofit, like a community foundation, there’s sure to be language that doesn’t fit.

Pulling articles of incorporation off the web may seem cheap and time-saving, upfront. But, if mistakes and oversights from the template render the document ineffective or lacking legal requirements, you’ll be way worse off than if you just enlisted a nonprofit attorney to draft your articles suited to your organization’s unique needs, goals, and mission.

Misplaced Provisions

This may go along with copying off the web. There are sometimes provisions in bylaws and articles that belong somewhere else—the governing documents aren’t the proper place for them. For example, I sometimes see employee rules in articles/bylaws. Generally speaking, employment provisions belong in an employee handbook or employment contract. The same goes for certain policies and procedures such as those on document retention and the whistleblower process. A nonprofit should definitely have these policies, but they don’t fit in the foundational documents.

arrow to the left

So, How Do I Go About Avoiding Mistakes in my Formational Documents?

Each organization is unique and it’s wise to enlist someone (like an attorney well-versed in nonprofit law!) to draft a quality, comprehensive set of documents personalized for your particular situation.

Questions? Want to learn more about turning your dream of an organization that makes a significant impact or positive change? Grab my complimentary Nonprofit Formation Guide and then contact GFLF for a free consult!

two men shaking hands

You’re not imaging things if it seems like nonprofit charitable organizations are popping up like sweet corn in the summer. According to the National Center for Charitable Statistics, more than 1.5 million nonprofits were registered with the Internal Revenue Service (IRS) in 2015—an increase of 10.4% from 2005.

Is this a good thing?

On the one hand, Americans are incredibly generous, donating $427.71 billion to charity in 2018. On the other hand, more nonprofits mean more competition for those dollars and the duplication of services, both of which can limit a nonprofit’s effectiveness. When nonprofits can’t pursue their missions effectively, those who benefit from their services may suffer.

The issue of whether or not some nonprofits might be better off merging in order to be more efficient and successful in fulfilling their objectives and meeting their goals is a real one. But for the average donor, or those designating an organization in a will or trust, learning that a favorite nonprofit is merging with another nonprofit can raise questions about what this means immediately and in the long run.

The urge to merge

Philanthropy can be incredibly personal. We are motivated to donate time and money to organizations that represent some of our most deeply felt attachments and interests, so when a beloved nonprofit announces it is merging with another one, it can feel like a kind of betrayal.

A merger is a kind of partnership in which two or more organizations become a separate entity. Mergers between and among nonprofits can be well-planned, strategic, and result in greater collective impact and growth. Or, they can be messy, fraught, and lead to confusion and a loss of support.

Nonprofit mergers are more common than you might think and even though they’re often seen as simply a survival tactic to stave off financial ruin, they can take place for many different reasons:

  • Expand the range or improve the quality of services each provides by pooling and leveraging resources
  • Diminish competition between organizations that vie for donors, board members, and funding
  • Compensate for the loss of a founder or key leader that leads the board to question its viability
  • Establish stronger strategic positioning with funders, competitors, and policymakers
  • Formalize an existing relationship or collaboration

Donors and nonprofit mergers

While a merger might be good for a nonprofit, what about donors or volunteers?

Nonprofits should send out a notice to stakeholders early in the merger process and be completely transparent. It’s a smart step to make supporters aware of the following:

  • The reasons behind the merger
  • Information about the other nonprofit and how each organization’s mission and programs align
  • A timeline and status updates
  • The names of the merger team
  • Any anticipated changes in leadership

If donors plan to give a donation during life or make a charitable bequest through an estate plan will they go to the new organization? Or the old organization? For donors, one way to make certain a donation is honored for the purpose it’s given by setting clearly articulated expectations. Merging nonprofits can honor this by offering options for donors to do this via a templated form.

Nonprofits are often reluctant to merge because they fear alienating loyal donors, but a merger can mean reducing costs. It can also mean cutting duplication of services and increasing reach and effectiveness for the charity. Nonprofits that effectively articulate these benefits to their loyal funders will be unlikely to lose supporters of the mission. Furthermore, it’s a good idea to invest in a strong set of policies and procedures, including a gift acceptance policy so that equal standards for all gifts are communicated to current and prospective donors.

Donors that happen to already support both nonprofits already, should consider contributing the total amount to the merged nonprofit. The old nonprofits will cease to exist upon the merger, but that shouldn’t be let that be a reason to end full support for the causes the donor cares about!

Is your Iowa nonprofit considering a merger? Please contact me via email (gordon@gordonfischerlawfirm.com) or on my cell phone (515-371-6077). I’d be happy to discuss best practices for your merger with you anytime. I offer a free, one-hour consultation for all!

business man with coffee

One time I gave a presentation to a group of professionals on “Essential Eight: Clauses That Should be in Every Executive’s Contract.” From my experience in nonprofit formation and compliance, it’s clear that great employment relationships start with smart employee agreements. This goes for both private and public, for-profit and nonprofit, organizations. An employee agreement ultimately benefits both the executive hire and the organization as it can minimize risk for both parties. (Remember, an employee handbook is entirely different than an employee agreement and certainly shouldn’t be mistaken for one!)

A good employment agreement should clearly spell out the terms of the employment relationship and should include (in some form of wording or another) the following eight clauses highlighted below.

Executive employee agreement essential 8

Executive employee agreement essential 8 second half

Dispute resolution and forum selection sound a bit confusing? I would be happy to discuss these clauses in detail with you if you’re getting ready to hire a new executive, forming a new nonprofit, or are updating employee agreements. It’s never too early or too late to make sure you maximize the power of the employee agreement.

Contact me at any time to take me up on my offer for a free one hour consult!

handshake

At times nonprofits that share highly similar missions, goals, and the like can be consolidated to maximize impact. So, in Iowa, what’s the process of a legal merger between two nonprofits?

Definition of Terms: What’s a Merger

Like many legal terms, the word “merger” is capable of multiple definitions. A merger can mean an asset acquisition; partnership; parent-subsidiary relationship; umbrella organization; and, of course, an outright merger.

Asset Acquisition: Assets of an organization are transferred to another entity, but the organization itself is not acquired.

Partnership: A relationship in which two or more organizations pool money, skills, and/or other resources and share risk and reward, in accordance with mutually agreed-upon terms.

Parent-Subsidiary: A relationship in which two separate corporations are maintained after a merger, with one (the “parent”) being a member corporation with its only member being the other corporation (the “subsidiary”).

Umbrella: An overarching organization that holds several smaller organizations under it, each participating in the same branding and organizational structure as the umbrella, for the purpose of gaining efficiencies, improving and expanding available administrative services, and coordinating programs to better and/or more widely serve the community.

Outright merger: The process of combining two or more organizations into one organization.

Iowa Revised Nonprofit Corporation Act 

The Iowa statute which governs nonprofits is known as the Iowa Revised Nonprofit Corporation Act (“RINCA”) and can be found at Iowa Chapter 504. RINCA has a specific subchapter on mergers, Subchapter XI. Here’s a list of the major sections:

RINCA, Iowa Code Chapter 504, Subchapter XI: Merger

504.1101         Approval of plan of merger

504.1102         Limitations on mergers by public benefit or religious corporations.

504.1103         Action on plan by board, members, and third persons

504.1104         Articles of merger

504.1105         Effect of merger

504.1106         Merger with foreign corporation

504.1107         Bequests, devises, and gifts 

RINCA Definition of Terms

RINCA continually refers to nonprofit as “corporations.” To prevent confusion, and for simplicity’s sake, I change this and refer to “nonprofits.”

Also, RINCA discusses three kinds of nonprofits: religious, mutual benefit, and public benefit.

  • Religious nonprofits,” just as you would expect, refer to nonprofits with a sole or primary purpose that is religious in nature.
  • Mutual benefit nonprofits” work for the betterment of a select group of members, rather than for the benefit of the public. The most obvious type of mutual benefit nonprofit is a membership organization, such as a union, business chamber of commerce, or homeowner’s association.
  • Most nonprofits fall into the third category — “public benefit” nonprofits. This would include nonprofits like the Girl Scouts, Red Cross, and Iowa Public Radio.

Also, RINCA repeatedly refers to “foreign” nonprofits. Foreign nonprofits are simply nonprofits organized under other state laws; states other than Iowa.

Articles of Incorporation and Bylaws

RINCA continually refers to nonprofit articles of incorporation and bylaws. Usually, in a phrase like, “Unless the articles of incorporation or bylaws provide otherwise . . . . ” RINCA very often defers to the nonprofit’s own governing documents. In that way, RINCA acts as a “gap filler,” providing rules where nonprofits’ governing documents are silent or ambiguous.

Step One to Merger: Plan of Merger

RINCA begins quite sensibly by stating that nonprofits may merge. Nonprofits may merge, IF a proper plan of merger is properly approved.

What’s a plan of merger? A plan of merger must contain all of the following:

(1)       The name of the nonprofits;

(2)       The terms and conditions of the planned merger; and

(3)       The manner and basis, if any, of converting the memberships of each nonprofit into memberships of the surviving nonprofit.

A plan of merger may include any of the following:

(1)       Any amendments to the articles of incorporation or bylaws of the surviving corporation to be affected by the planned merger.

(2)       Other provisions relating to the planned merger.

Step Two: Approval of Plan of Merger

Who Approves the Plan of the Merger

Precisely who has the right or obligation to approve the plan of merger? The Iowa Code starts to answer that question with the common phrase, “unless . . . . the articles or bylaws impose other requirements . . . ” and then goes on to say: . . . a plan of merger for a corporation must be approved by all of the following to be adopted:

(1)       The board

(2)       The members, if any, by two-thirds of the votes cast or a majority of the voting power, whichever is less.

(3)       In writing by any person or persons whose approval is required by a provision of the articles authorized by section 504.1031 for an amendment to the articles or bylaws.

OK, so of course the Board of Directors approve the plan of merger, makes perfect sense. What about (2) & (3) above?

Members’ Approval

Who are the “members”?  That term, “members,” has a very specific meaning under RINCA.

RINCA defines “members” as: “Member” means a person who on more than one occasion, pursuant to the provisions of a corporation’s articles or bylaws, has a right to vote for the election of a director or directors of a corporation, irrespective of how a member is defined in the articles or bylaws of the corporation. A person is not a member because of any of the following:

(1)       The person’s rights as a delegate.

(2)       The person’s rights to designate a director.

(3)       The person’s rights as a director.

Note, again, very unusual for RINCA, that the definition of a “member” is given by RINCA, period, irrespective of how a member is defined in the articles or bylaws of the corporation. And, under RINCA, a member is someone who has a right to vote for directors.

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Third Person’s Approval

As to who approves the plan of merger, RINCA goes further, however, to include:

. . . a plan of merger for a corporation must be approved by all of the following to be adopted:

. . . In writing by any person or persons whose approval is required by a provision of the articles authorized by section 504.1031 for an amendment to the articles or bylaws.

What is this Section 504.1031? That section reads as follows:

504.1031 Approval by third persons. The articles of a corporation may require that an amendment to the articles or bylaws be approved in writing by a specified person or persons other than the board. Such a provision in the articles may only be amended with the approval in writing of the person or persons specified in the provision.

So, nonprofits looking to merge must look to their own Articles to see if any third persons must also approve the plan of merger.

 How Does the Board and Members Approve the Plan of Merger

According to RINCA, there are three different ways that a plan of merger can be approved:

(1)       at a membership meeting;

(2)       by “written consent;” or

(3)       by written ballot.

Each of these has different requirements.

Requirements for Membership Meeting, at Which Plan of Merger is to be Approved

If the board seeks to have the plan approved by the members at a membership meeting, the following requirements must be met:

(1)       Notice to its members of the proposed membership meeting in accordance with Section 504.705.

(2)       The notice must also state that the purpose, or one of the purposes, of the meeting is to consider the plan of merger and contain or be accompanied by a copy or summary of the plan.

(3)       The copy or summary of the plan for members of the surviving nonprofit shall include any provision that, if contained in a proposed amendment to the articles of incorporation or bylaws, would entitle members to vote on the provision.

(4)       The copy or summary of the plan for members of the disappearing nonprofit shall include a copy or summary of the articles and bylaws which will be in effect immediately after the merger takes effect.

What is sufficient “notice” under Section 504.705?

Under RINCA, nonprofits must give notice, consistent with its bylaws, and in a fair and reasonable manner. Helpfully, RINCA provides a description of when a notice is fair and reasonable.

Notice is fair and reasonable if all of the following occur:

(a)        The corporation notifies its members of the place, date, and time of each annual, regular, and special meeting of members not more than sixty (60) days and not less than ten (10) days, or if notice is mailed by other than first-class or registered mail, not less than thirty (30) days, before the date of the meeting.

(b)       Again, the notice of a meeting includes a description of the plan of merger.

(c)        Again, the notice of a special meeting includes a description of the purpose for which the meeting is called, e.g., approval of the plan of merger.

Requirements for Merger is to be Approved by Written Consent

Under RINCA, nonprofits may take action by “written consent.” In other words, action by written consent refers to a person’s right to act by written consent instead of a meeting, e.g., a signed document.

Written consent can be limited or even prohibited by a nonprofit’s articles or bylaws of the corporation. Here’s a potential problem: the action must be approved by members holding at least eighty percent (80%) of the voting power. That is a high bar.

Requirements for Merger to be Approved

By Written Consent or Ballot

Whether approval by written consent or written ballot, both share some requirements. If a nonprofit seeks to have the plan of merger approved by the members by written consent or written ballot:

(1)       The material soliciting the approval shall contain or be accompanied by a copy or summary of the plan of merger.

(2)       The copy or summary of the plan for members of the surviving corporation shall include any provision that, if contained in a proposed amendment to the articles of incorporation or bylaws, would entitle members to vote on the provision.

(3)       The copy or summary of the plan for members of the disappearing corporation shall include a copy or summary of the articles and bylaws which will be in effect immediately after the merger takes effect.

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Email for Written Consents or Written Ballots

Can email be used for either written consents or written ballots? Yes! (The issue with email and written consents is the requirement of a signature; the issue of email and ballots is the “checkmark” or “X”).

Unless prohibited by the articles or bylaws, a written ballot may be delivered, and a vote may be cast on that ballot by electronic transmission. Electronic transmission of a written ballot shall contain or be accompanied by information indicating that a member, a member’s agent, or a member’s attorney authorized the electronic transmission of the ballot.

The last sentence simply means there must be an indication that the returned ballot was from the member to whom it was emailed (a block signature, etc.).

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 Step Three: Prepare Articles of Merger

Let’s assume a plan of merger has been approved pursuant to RINCA, specifically, Iowa Code Sections 504.1101 and 504.1103 (and the Iowa Code provisions set forth therein). Next step? Articles of merger.

The articles of merger must contain all of the following:

(1)        The names of the parties to the merger.

(2)        If the articles of incorporation of the survivor of a merger are amended, or if a new corporation is created as a result of the merger, the amendments to the articles of incorporation of the survivor or the articles of incorporation of the new nonprofit.

(3)        If the plan of merger required approval by the members of a nonprofit that was a party to the merger, a statement that the plan was duly approved by the members.

(4)        If the plan of merger did not require approval by the members of the nonprofit that was a party to the merger, a statement to that effect.

(5)        If approval of the plan by some person or persons other than the members of the board is required a statement that the approval was obtained. (This is the “approval by third persons” (Section 504.1031) discussed above).

Articles of merger must be signed on behalf of each party to the merger by an officer or other duly authorized representative. (But only to be signed after the plan of merger is approved).

Step Four: File Articles of Merger with the Iowa Secretary of State

Articles of merger must be delivered to the Iowa Secretary of State for filing by the survivor of the merger. If there are other filings resulting from the merger, say, new and revised Articles of Incorporation, these may be filed as a “combined filing.”

Once the articles of merger are successfully filed, the merger is complete.

Step Five: Recognize the Legal Effect of Merger

Upon a successful merger, all the following occur:

(1)       Every other party to the merger merges into the surviving nonprofit and the separate existence of every nonprofit except the surviving corporation ceases.

(2)       The title to all real estate and other property owned by each party to the merger is vested in the surviving nonprofit without reversion or impairment subject to any and all conditions to which the property was subject prior to the merger.

(3)       The surviving nonprofit has all the liabilities and obligations of each party to the merger.

(4)       A proceeding (e.g., a lawsuit) pending against any party to the merger may be continued as if the merger did not occur or the surviving corporation may be substituted in the proceeding for the nonprofit whose existence ceased.

(5)       The articles of incorporation and bylaws of the surviving nonprofit are amended to the extent provided in the plan of merger.

“Bequests, Devises, and Gifts”

An interesting side note: RINCA’s subchapter on merger contains a provision about “bequests, devises, and gifts.” Bequests are property left to someone by a decedent through his or her will. A devise is the same, only given through a trust. The term “gifts” here means “charitable gifts.”

Any bequest, devise, gift, grant, or promise contained in a will or other instrument of donation, subscription, or conveyance, that is made to a constituent corporation and which takes effect or remains payable after the merger, inures to the surviving corporation unless the will or other instrument otherwise specifically provides.

That’s really pretty great, right? So, if someone should leave property (cash, stock, bonds, real estate, whatever) through a will or trust, or just about any other way, to a “non-surviving” nonprofit after a merger with a surviving nonprofit, the property will go directly, without question, to the surviving nonprofit (unless specific instructions are left to the contrary).

Is your Iowa nonprofit considering a merger? Please contact me via email (gordon@gordonfischerlawfirm.com) or on my cell phone (515-371-6077). I’d be happy to discuss the Iowa laws on merger with you anytime. I offer a free, one-hour consultation for all.

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Employment policies are vital to the well-being of your favorite nonprofit. Such policies set workplace expectations, define work guidelines, reduce and eliminate confusion and misunderstanding, and provide steps necessary for any disciplinary action. Formalizing workplace rules makes certain that everyone—from independent contractors to management to staff to board members—are informed and on the same page.

Benefits of Employment Policies

An official set of well-developed employment policies provides many benefits for your nonprofit. For nonprofit employers, policies capture the values you wish to instill in your workforce, outline the standards of behavior you expect, and provide a clear guide for rights and responsibilities. Instituting strong, fair, and unambiguous policies not only contributes to a happier workforce, but it can also improve employee retention. Further, employment law is vast, complicated, and can be tricky to navigate. Well-drafted employment policies, as described below, can also help you avoid legal issues and costly mistakes.

Employee Handbook

Employee handbooks are not required by law, but having one is in the best interest of your nonprofit and those who work for you— even if you have just one employee. A good employee handbook effectively communicates your nonprofit’s policies and procedures to employees and makes clear the rights and responsibilities of employees in your organization. Many disputes can be avoided by a clear, easy-to-read, and straightforward employee handbook.

 Employment Agreement

An employment agreement sets the conditions, terms, and obligations between you as the employer and an employee. It’s considered a binding contract that should be administered in writing and signed by both the employee and an acting officer.

Employment agreements need to be individualized to suit each employment relationship. But important elements of employment agreements may include salary; benefits; work schedule; paid-time off (PTO) allotment; restriction on confidential information; non-compete and non-solicitation provisions; mandatory mediation and arbitration for all disputes; and making certain the employee is considered to be only “at-will,” that is, the employee can be fired at any time for any reason.

 Formal Performance Review

Formal performance reviews are an assessment of an employee by a supervisor and employee (it’s a two-way, not a one-way discussion) that are based on jointly determined job goals and performance objectives. While often overlooked—and sometimes dreaded—performance reviews are of great value to nonprofit employers and their employees.

You should have in place a standardized form and consistent processes for conducting individual performance reviews of all employees. Evaluating the quality of an individual’s work, ability to meet goals, communication skills, adherence to your nonprofit’s mission, attendance, and dependability, among other criteria, is key to effective workforce management and to building trust with employees.

 Employee Personal File

A personnel file is a hard copy folder or digital file that contains information related to every new employee, existing employees — full and part-time — and former employees. Knowing what needs to be stored in a secure personnel file — and what NOT to keep in it — will help your nonprofit in promotion and termination decisions; provide a means of tracking vacations, training, and achievements; and are necessary to comply with local, state, and federal regulations.

A personnel file should only contain items related to his or her job or employment status. These include (but are not limited to):

  • Application and resume
  • Signed acknowledgment page from employee handbook
  • Pay information including timesheets, W-4s, and withholding forms

Just as important as having the right information in a personnel file, is to avoid placing the wrong documents in a personnel file. Some items that should NOT be in an employee’s personnel file include:

  • Medical information and accommodation requests
  • Whistleblower complaints
  • Court orders, such as garnishment or restraining orders

Independent Contractor Agreement

Self-employed, freelancer, consultant. No matter what they call themselves, people who provide goods or services to your nonprofit, but are not your employees, are considered independent contractors. Independent contractors differ from employees in that IC’ers control their financial and work-related relationships and pay their own self-employment, Social Security, and Medicare taxes.

When you hire an independent contractor, you should have a written and signed contract that clearly outlines the scope of work, price, and payment, severability, deliverables, and clearly identifies the person as an independent contractor. Also, you can minimize and avoid legal liability by placing the right provisions in an independent contractor agreement.

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Updating Employment Policies & Additional Policies Needed

If you already have some (or even all) of the above-listed employment policies in place, when were they last updated? Think about the many ways your organization has changed and grown since they were written, including new employees you hired and existing employees whose roles evolved. Changes to state and federal laws may have rendered some elements of your employment policies incomplete or out of compliance. It may be time to renew your commitment to a productive and happy workplace by revising employment policies.

What Other Policies Do You Need

Be aware this blog discusses only employment policies. To work toward optimal IRS compliance, you should adopt the nine major policies and procedures which appear on IRS Form 990. Also, you should have documents in place covering ethics; grantors and grantees; endowment management; and legal training for your board of directors.

Let’s Talk!

To discuss further, please don’t hesitate to contact me via email (gordon@gordonfischerlawfirm.com) or on my cell phone (515-371-6077). I’d be happy to discuss this blog post, and employment policies, with you any time. I provide a one-hour free consultation, without any obligation whatsoever.