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Recommended Policies for Nonprofits

Policies Concept with Word on Folder.

For better or worse, a nonprofit shares some similarities with a business. Like businesses, nonprofits are subject to myriad regulations, taxes, and certain duties to owners, employees, clients, and even the public. To protect your mission and avoid unnecessary liability, it’s important to implement and enforce good governance policies. Governance policies are living documents that the directors and officers should periodically review and update to ensure compliance and general best practices. Continue reading for a discussion of several governance policies we recommend for any nonprofit organization. For help drafting or updating your organization’s governance policies, call an experienced Illinois nonprofit governance lawyer.

Conflict of Interest

With certain limited exceptions (e.g., churches), nonprofits must submit a Form 990 to the IRS annually to maintain tax-exempt status. Form 990, the Return of Organization Exempt from Income Tax, ensures that nonprofits are in compliance with their obligations under the law in order to remain tax-exempt. The form specifically asks about a number of governance policies, including conflict of interest. A conflict of interest policy is also vital in ensuring that the organization avoids violating self-dealing, private inurement, or excess benefit laws.

A conflict of interest policy enforces a nonprofit director’s duty of loyalty. The policy should require directors, officers, and key employees to disclose interests that might give rise to conflicts, provide for a recusal process should any director have a potential conflict of interest, and have a process for monitoring and enforcing the policy. An interest that might give rise to a conflict would be any financial interest held by the director, officer, key employee, or any related individual or entity, in any customer or vendor of goods or services with which the organization does or may operate. If a given director has a financial interest in a potential vendor or client, they should be recused from the decision regarding whether to purchase or provide the relevant goods or services.

Whistleblower Protection

Form 990 also asks if the nonprofit has a written whistleblower policy. Federal law imposes criminal liability on nonprofit organizations that retaliate against whistleblowers. A whistleblower may be any party that provides truthful information about the possible commission of a crime. Many nonprofits adopt a code of ethics including a provision encouraging directors, officers, and employees to report information about potential criminal activity, with promises that they should have no fear of retaliation.

Document Retention

Document retention is also addressed by Form 990. Federal law prohibits the destruction of documents that may be pertinent to a federal investigation and imposes criminal liability on any party that unlawfully destroys documents. Various state and federal regulations require certain types of documents to be kept for a specific period of time, while other periods may be inferred by the relevant statute of limitations. The nonprofit should implement and enforce a policy of retaining documents for at least the minimum time required by law. For example, because there is a six-year statute of limitations for the IRS to file a claim for back-taxes for gross income under-reported by more than 25 percent, many policies provide that tax returns and related documents should be kept for seven years before being destroyed.

Gift Acceptance Policy

A gift acceptance policy provides a process for reviewing non-standard gifts. A non-standard gift is typically anything that is not cash or easily converted to cash, which may be more difficult to value and carry hidden liabilities. Nonprofits can protect themselves from unnecessary liability or inadvertent tax oversight by having a policy that automatically triggers a review of any non-standard contributions such as real property, business interests, art, collectibles, or other items.

Compensation Policies

The IRS asks a host of questions about executive compensation, and it’s one of their favorite things to scrutinize. To appease the IRS and avoid unnecessary scrutiny, nonprofits should adopt a thorough compensation policy pertaining to paid executives. The policy should lay out how executives and officers are to be compensated and how the board determines that compensation is not excessive, such as by explaining how compensation is linked to performance, strategy, and/or execution of the organization’s mission. The law provides additional protections for executive compensation policies that include certain procedures designed to avoid excess compensation.

Call a Seasoned Illinois Nonprofit Governance Attorney for Help With Nonprofit Governance and Compliance Matters

If your religious organization or other nonprofit entity requires assistance with governance, compliance, or legal matters in Illinois, get thorough and effective legal assistance by contacting the Chicago nonprofit attorneys at Pluymert, MacDonald, Hargrove & Lee in Hoffman Estates at 847-310-0025 and in Des Plaines at 847-298-5030.

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