So you're on a Board of a Non-Profit, now what?

Learn more about roles and responsibilities of board members

Transcript

SPEAKER_00 0:03

Welcome to Navigating Nonprofits with Lifeboat Accounting. My name is Amity, and I'll be your captain today as we discuss hot topics around accounting for nonprofits. Lifeboat Accounting is an accounting firm that works exclusively with helping nonprofits stay afloat. We cover everything from accounting to tech stacks, to strategic planning, 990s, grants, board development, and staff training. When I speak at conferences or board meetings, folks have always suggested to me that I needed my own podcast to tell my stories and share my experience. So I'm excited to dive right in and to get to some of my favorite topics and share some special guests with you. Now what? This is a common question that I get from new board members. So today is going to be all about a new board training and education, one of my favorite topics. First things first, if you are volunteering on a board of a nonprofit organization, I want to say thank you so much for volunteering. Your time is so appreciated, and I hope to help give you the tools and resources so that you feel supported in making all of the management decisions and governance decisions for the organization to be successful. For those of you are brand new to nonprofits, it's not a small amount. A lot of folks don't realize how many nonprofits actually exist in the United States. So right now there's over 1.5 million not-for-profits in the United States operating. And there are many different types of not-for-profit designations. The most common is a publicly supported organization. And by publicly supported, it means 33 and a third percent of its support comes from public and charitable operations. Now the tax exempt status for organizations became prevailing in 1913-ish. That's when they started to document a lot of the not-for-profit statues. And it wasn't until 1918 that the actual actually that the IRS allowed charitable gift deductions on tax returns for donations to nonprofits. Each board that operates needs a board for oversight for IRS and state regulations. And each state has a different designation. Members need to be free of conflicts of interests. That means that there's no uh transactions happening within the organization that the board member may benefit from. And also you have to watch out for family relationships and other conflicts of interests. The biggest thing is the goal is that you act in good faith in the best interest of the mission vision of the organization. Um there used to be a statistic, and I wish I could find an updated one, that is like one in four Americans volunteer or active with not-for-profit organizations in the United States. And the thing is, is the the differences by generation is significant. A lot of millennials tend to like social impact and human rights orgs, and they tend to prefer, you know, text donations and donations via website. The Gen X, they really like animals, environments, and social impacts, and they prefer peer-to-peer conversations and email donations. And then the baby boomers really like human rights orgs, disaster orgs, and religious orgs, and they also hold the largest generational wealth and donor database right now. Um they also tend to be the largest volunteer base for a lot of nonprofits since most of them have uh retired by now. So I talked about this in another podcast. I'll also bring it up in this one, is that all nonprofits are at different life cycles. And what I mean by that is that what an organization needs from its ward is different based on the life cycle that they're currently in. And you can jump up in life cycles, you can jump down, you know, it's not a linear process for not-for-profit organizations. Sometimes they grow, sometimes they shrink. Um, so when an off-for-profit organization's in its infancy years, when it's a baby, uh, a lot of the times the founders are still involved. You know, they had the passion, they had the mission, they set the organizational tone, they set the board members, and usually those board members are the friends of that specific founder or anyone that they knew that could sit on the board. And that sets a different tone than a board that is uh strategically taken because they need a legal background, an HR background, a finance background, um, or someone who's within the program. And so young non-for-profits, the board members tend to be in the weeds and very active. They're considered a working board and they're doing the work, they're doing the fundraising, they're doing the management functions. Uh eventually the original founder retires or moves on or rotates off, the board members rotate off, and then the next stage is that the board uh requires a different set of skills and maybe a different set of insight and tone and expectations for the growing nonprofit. And then it becomes a growing organization. And as the not-for-profit grows and has access to additional resources, the board may move from a working board who's in the weeds to what is called a governance or over a governance or an oversight board. And at this point, the board recognizes the organization's really taking off and that they no longer can do all the things that they used to do. So they may start to hire their first executive director or their first staff, hire consultants until they are large enough to have part-time or full-time staff. They might start getting into more complicated funding like grants that required more time and resources. They realize that they need more policies and procedures in place, and that's when they start to really transition the workload to an executive director. And this is the growing pain section. And I always say a lot of organizations between, you know, like 400,000 to about a million is really the pain point where you have enough activities that you're busy, but you don't have enough funding for a full-time development director, communications person, executive director, finance person. So a lot of the times people are wearing many hats. Um, and also at this time is a time where a lot of the boards create new onboarding packets and training packets so that future board members can understand the needs and commitment levels because it's changing. The same board members that started at the beginning may not be the same board members that continue when the organization is going through all of its different cycles. When the organization becomes a mature organization, they have the resources that they need to do what they they need to do to fulfill the mission. Not saying that there isn't greater need or all needs are met, but they're getting there. Um, and then they've adopted a lot of the majority of the operational policies and management policies that are kind of like best practice and industry standards. Sometimes they adopt a strategic plan, have key performance indicators, and they're also seen as like a resource in the local communities and they can quantify their impact. And all of this is important because as a new board member, you kind of have to ask where they are in the life cycle and how will that impact how you're serving that specific not-for-profit organization. So there are specific duties that board members are required to maintain. Um, they also have legal duties regarding the governance of the not-for-profit. And a lot of states have uh attorney generals that are responsible for the compliance at the state level, and at the federal level, it's the IRS. And that although board members do not manage the day-to-day activities of the organization, they do act as stewards of the charitable entity. And then accordingly, there's also fiduciary duties that require directors to act in good faith and in the best interest of the organizations. Now, a lot of state websites have training programs for not-for-profit organizations, either through the not-for-profit association in that specific state, or if you have a charitable trust unit, a department of justice, a secretary of state, usually they have training programs or PDFs on the state websites that board members can access and use as a training tool too. You do not have to recreate the wheel. Then there's other websites like board source, they're also available out there as well. So I'm going to use some old archaic outdated language, and please forgive me. And this language is a little bit different state to state, so you want to make sure that you follow the rules and regulations in your specific state that the organization is registered to operate in, which may mean that there's actually more than one. And so there's some old terms. Uh the first one is the duty of loyalty. And the duty of loyalty, in essence, means that the organ that the board members must give loyalty and act in the best interest of the organization and not try to seek personal gain from property or transactions. Um, one of the best tools to kind of mitigate the situation for board members is to adopt an enforce a conflict of interest policy and then complete an annual conflict of interest survey. Uh, the conflict of interests are public record. They're supposed to be reported on Form 990 once they meet a certain dollar threshold. And a lot of states also require a different, usually smaller threshold than the IRS to report any potential transactions. The next one is the duty of care. And the duty of care means that board members should act reasonably. And usually there's some type of definition, such as like a prudent person in similar circumstances, or be familiar with the organization's activities enough to understand the financial condition and to participate in good faith and make informed decisions. The biggest thing is that the board's goal is to oversee the work of the executive director and to ensure that the charity is carrying out its charitable purpose without extravagance or waste. That's one definition I found. So one of the ways that you can do this is evaluate programming to ensure that the mission is the focus. And I also recommend reviewing the 1023 application that you sent to the IRS to become a tax-exempt organization. There's many times where there's mission creep that has occurred since you last told the IRS what your intended purpose was. And so it's always good to go back to the original documents and double-check things. But you really want to make sure that the programming is related to the mission vision. And you know, a strategic plan is always helpful in this space, against duty of care, responsibilities, um, attending board meetings. But also, I want to add the warning that a lot of the times there's always this challenge, especially with uh new board members and new executive directors, there's sometimes a rub because sometimes the board tries to overdo versus oversee. And that's where the question is along the life cycle: are we a working board or are we an oversight board? The final kind of old archaic term I'll use is the duty of obedience. And the duty of obedience must mean that the organization oversees the and complies with any of their restrictions placed on funds received from donors or government grants or other funding sources. So, in this terminology, essentially is if someone gives you an endowment and the organization runs out of operating cash, you simply just can't take the endowment funds out because you need it. If someone donates $100,000 to create widgets, then you have to make those widgets before you spend the money. So, one way to kind of manage this is to create and review an annual budget and then make sure that your restricted funds and grant funds are accounted for properly. This is where I get called in a lot when things are going wrong. A lot of people don't come to the accountant just like they don't come to a doctor when you're healthy. Uh, people don't go to the doctors when they're healthy, they go when they're sick. So a lot of the times when I finally hear about a situation with a nonprofit, it's almost to the to the danger zone in the sense that maybe they weren't keeping track of their restricted funds or their grants properly, and now they need to get help and figure out how to fix the situation. And I never want anyone to be in that situation. It's not fun. But uh, I recently just recorded a podcast about uh strategically seeking out funding based on organizational needs and capabilities rather than just accepting all types of gifts that might be helpful in kind of reviewing the duty of obedience and making sure that the money that you're accepting is something that you can actually spend and use wisely. We're almost done here. Just a couple other things to talk about is that when you form a not-for-profit organization, there's a set of things that are created, usually by an attorney or an accountant, um, that you should be aware of and have your hands on somewhere. And it's very uncommon when I talk to organizations, they're like, oh yeah, that's in a Google Drive somewhere, or that's in someone's email three executive directors ago. So it's good to have a packet and have this stuff readily available. Um, the first one is if you have an article of incorporation or bylaws, and then having the most recent mission vision statements available. And it's really interesting how many times I go into places and they don't have an official board approval for mission vision changes. So just make sure that that's actually been documented. You want to make sure that you have your original 1023 application with the IRS, because that's your official registration, and that's where you told them what you were going to do as a nonprofit organization. And then the follow-up with that, make sure that you have copies of the 990s. If you do not file your 990s for three consecutive years, you could get automatically revoked from your tax exam status. And I hate to have that happen to you because it takes forever to get reinstated. Um, you also want to make sure that you know what states you're registered in and make sure that you're in in touch with the Secretary of State or the charitable trust units to make sure that you are following the rules and regulations there as well. Sometimes states have mandatory minimum board numbers. Like, for example, in New Hampshire you have to have five with no conflicts of interest, and in Vermont you need to have three. And then some states require audits after an organization receives uh or grows to a specific size. Um, it's really unique between New Hampshire and Vermont because, for example, in New Hampshire the threshold right now is $2 million, but in Vermont there's none at all. And then there's the federal grants limit at a million dollars. So it can change based on where you are and what state you're operating in. So if you expand your services to a new state, you also have to consider do we have reporting requirements over there too? Um one thing I haven't talked about too much was uh the charitable giving. There used to be this thing where uh it in order to be on a board of a nonprofit, you had to give a financial contribution. And I am kind of glad that this is changing a little bit because not all boards are fundraising boards, and just because you don't have financial means to donate doesn't mean you don't have the value that you can bring to a board. A lot of boards are switching to a meaningful contribution, whatever that means to you, and not setting a specific minimum threshold. The other positive to that is that you can get more of a diversified board from people from all walks of life to give their voice to a specific organization. Um, but one thing to think about is just having that type of verbiage in your board training handbook and also know each member's strengths. You can also do surveys with each other to say, hey, I have uh experience in HR and this organization or this board member has uh experience in finance. And you can kind of start to build out the board skill set and map out each other's members' areas of strength for if the executive director needs a resource. And then um generationally, each generation has a kind of a completely different method of contact, so making sure that when you're all discussing and talking things that it it works for everyone. Um yeah, I think that that kind of covers the high level. I really do recommend board members to go through some sort of training program, and there's a lot of them out there that are available. Uh because sometimes uh organizations face challenges that the for-profit world doesn't. And if the all the board members are from the for-profit world, sometimes there can be a little bit of a rub there too. Uh, there is definitely a board membership talent pool shortage. Um, it's just generationally it's changing. And a lot of people are working two jobs now and just don't have the same amount of time to volunteer like in the past. Uh, people don't really retire traditionally like they used to as well, so they don't have as much free time to volunteer. Um, in the nonprofit space, there's definitely staffing shortages, and sometimes there's a scarcity mindset that can creep in. And there's also tax law changes and there's social and economic changes that impact programs too in charitable giving. So it's always good to kind of be on top of that by attending ongoing seminars or trainings that are available nationwide to board members. And I highly recommend kind of uh talking to other boards too, and other board members on unrelated nonprofit organization boards to kind of figure out what they're doing and seeing if you can be a resource to each other. Um the IRS website, though it's been slimmed down in 2025, there still is some information for charities and nonprofits on the IRS website. There's also the National Council of Nonprofits, and there's also Board Source, which is also another great tool as well. Other resources include your state chapter associations for nonprofits. And we also have a bunch of resources from the AI CPA. The American Institute of Certified Public Accountants provide a lot of checklists and templates, and we have policies and procedures too that we have here. But it's just really important to kind of go through this process of training and learning and educating yourself about nonprofits so that you can be the best steward for the not for profit organization. And as you go through that process, if you have any questions, feel free to reach out. We're here to support you. And again, thank you for your support.