NPH Question: What Purpose does the Board of Directors serve?

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It is so important for all nonprofits to have a strong foundation, especially when they’re starting out. With that in mind, choosing your Board of Directors wisely is fundamental. But what role do these key players have within a nonprofit?

The Board of Directors acts as the governing body of your nonprofit. These individuals are responsible for overseeing the organization’s activities. Nonprofits do not have stockholders or singular owners. The organization will be the responsibility of the Board (you’ll all be like co-owners, fun!). Members of the Board will meet periodically to discuss and vote on matters pertaining to the nonprofit. These meetings should take place annually,  with additional meetings to be scheduled as the need arises. A position on the Board is not usually permanent, and most organizations follow a term agreement as set up in their Bylaws. These terms are typically anywhere between two and five years.

You’ll want to find individuals in your community who are passionate about your mission, and will align themselves with your goals. There are no IRS limitations in place to determine who can serve on your Board, so anyone you deem fit can become a Board Member. However, there are some best practice guidelines that will help you to avoid inurement. For instance, you’ll want to make sure you have an odd number of Board Members to avoid a tied vote in meetings, and that board members that are not related outnumber those who are.

In an ideal situation, the Board of Directors will be different than the organization’s paid management staff. However, it is fairly common for small nonprofits and startups to also have Board members serving in these paid positions. If possible, you’ll want to avoid this scenario as having dual roles can often lead to problems. The Board of Directors should prioritize working on the organization’s mission, goals, and strategic plan, while staff members should be focused on implementing the plan.

Some members of the Board will be elected to serve as Officers. These Officers will have a higher level of responsibility than other board members. Initially, they are elected by the Board, and usually serve similar length terms. The most common and essential Officer roles are President, Secretary, and Treasurer. These roles and their terms should be defined in your bylaws. Keep in mind, an individual cannot be compensated to hold an officer position.

The President will head the Board, supervise its meetings, business, and affairs. The Secretary will keep minutes and insure the organization’s activities are in line with their Bylaws. The Treasurer will account for receipts and disbursements, and insure organization stays in good financial standing.

There are no requirements that suggest an organization cannot elect someone outside of the Board to serve as an Officer, but you are free to place such limitations in your organization’s Bylaws. An individual may hold two separate offices, except the President may not serve as the Secretary.

So go forth, and choose wisely! Your Board awaits.

 

 

NPH Question: What’s the difference between “Nonprofit” and “Not-for-profit”?

In order to answer this question, let’s define what a nonprofit organization actually is.

The term is, unfortunately, pretty misleading. It definitely doesn’t mean that the organization is unable to earn a profit. On the contrary, many nonprofit businesses enjoy large and fruitful profits (see: IKEA). And besides, how would a company function without making any sort of profit? Well, it wouldn’t.

The easiest way to define a nonprofit (or non profit, or non-profit, whichever you prefer) is to first define its counterpart: the for-profit organization (see: Target). The purpose of a for-profit is to generate profits for those who own it-the stockholders. So, after all is said and balanced, including employee payroll, the profits go to them and not into the business itself. So what it comes down to, is who profits at the ownership level.

Both types of organizations are able to earn profits at the entity level, but only for-profits can do so at the ownership level. In fact, nonprofits very rarely have owners (they usually have a Board of Directors, or Board of Trustees), and they are not permitted to pass any profits to those who control them. To keep it in super simple terms, as a nonprofit board member, if you touch the money, you can’t pay yourself.

but-hey

Nonprofit organizations are required to use their profits for exempt purposes only, which according to the IRS, are as follows:

The exempt purposes set forth in section 501(c)(3) are charitable, religious, educational, scientific, literary, testing for public safety, fostering national or international amateur sports competition, and preventing cruelty to children or animals.  The term charitable is used in its generally accepted legal sense and includes relief of the poor, the distressed, or the underprivileged; advancement of religion; advancement of education or science; erecting or maintaining public buildings, monuments, or works; lessening the burdens of government; lessening neighborhood tensions; eliminating prejudice and discrimination; defending human and civil rights secured by law; and combating community deterioration and juvenile delinquency.

Okay, so what’s the difference between a nonprofit, and a not-for-profit?

People often use these two terms interchangeably, but they are, in fact, different. The official term you’ll want to use for your organization is nonprofit. The other term is reserved for activities that you do outside of the business or profit scope. For instance, binge-watching Netflix, dressing up your cat, painting, or reading are all not-for-profit activities.  Ready for the kicker? If the IRS determines your nonprofit has gone too long without making a profit, it will reclassify you as a not-for-profit activity, and you won’t be able to deduct expenses.


Always remember that we are a document preparation agency, and can therefore not offer legal advice. Nevertheless, we hope you’ve gained a bit of insight into your nonprofit journey. Feel welcome to reach out to us with any questions or comments you may have.