Legal Responsibilities Nonprofits and Nebraska Law. Daniel J. Russell, Assistant Attorney General Nebraska Attorney General s Office

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1 Legal Responsibilities Nonprofits and Nebraska Law Daniel J. Russell, Assistant Attorney General Nebraska Attorney General s Office

2 The information provided in this presentation is for educational purposes only and is not intended to be complete and comprehensive. We highly recommend that you seek legal, tax, and financial advice from professionals. The Nebraska Attorney General s Office cannot provide legal, tax, or financial advice regarding new or existing nonprofit entities.

3 The privileges provided by law to public benefit corporations, and other charitable institutions, carry a corresponding obligation to be accountable to the public for the actions such institutions undertake. Gilbert M. & Martha H. Hitchcock Found. v. Kountze, 272 Neb. 251, 259, 720 N.W.2d 31, 37(2006).

4 The Attorney General s Mission & The Public s Interest statutory authority has been given to the AG to act in the public good in enforcing the requirements applicable to nonprofit corporations, particularly public benefit corporations. In other words, the AG has standing to protect the public interest Gilbert M. & Martha H. Hitchcock Found. v. Kountze, 272 Neb. 251, 259, 720 N.W.2d 31, 37(2006).

5 Attorney General s Mission An efficient and successful nonprofit sector is absolutely essential to Nebraska s well-being Our goal is to work with you in support of that goal We believe the nonprofit sector represents some of the best people and ideas in Nebraska Nebraska nonprofit corporations do an incredible job does not get said enough

6 Nonprofits & the Law Nebraska Attorney General s Office Internal Revenue Service Nebraska Secretary of State

7 What is a Fiduciary? A fiduciary is a person who hold a legal or ethical relationship of trust with a person, group of people, or an organization. The fiduciary is vested with confidence, good faith, reliance, and trust to act on behalf of another.

8 Fiduciary Duties Directors and Officers of a nonprofit organization have fiduciary duties to the organization. Duty of Loyalty Duty of Care Duty to Act Lawfully Duty of Good Faith

9 Top Ways to Get Investigated

10 #1 Failure to Follow Mission asleep at the wheel Have a duty to actively work towards fulfilling your mission. Can you say what your organization does? Should have tangible, critical assessments of efficiency and program successes. Bad excuse #1 Technically, it's legal. (but what will your donors and constituents say)

11 #2 Conflicts of Interest A nonprofit corporation should be above reproach. If any transaction gives even the appearance of a conflict of interest, think hard about avoiding it. Would the media and your Mom understand? Would you feel comfortable posting it on your website? IRS, donors, media, and the general public all have different views of conflicts. None are good.

12 Director s Conflict of Interest Neb. Rev. Stat A conflict of interest transaction is a transaction with the corporation in which a director of the corporation has a direct or indirect interest. A conflict of interest transaction is not voidable or the basis for imposing liability on a director if the transaction was fair at the time it was entered into or approved by certain parties.

13 Director s Conflict of Interest Neb. Rev. Stat A conflict matter may be approved either before or after the transaction if it is approved by the Attorney General or the district court. A conflict matter may be approved before the transaction by the board of directors or a committee of the board under certain circumstances.

14 #3 Fraud and Embezzlement, Failing to Respond and Prevent Nonprofit corporations, and their directors, have a fiduciary duty to protect their assets. Why important? They re stealing from you! One sixth of major embezzlements occurs at nonprofits and religious organizations, second only to the financial industry. (Washington Post) Many, many organizations are victims and do not know it.

15 #3 Fraud and Embezzlement, Failing to Prevent and Respond Must take all reasonable steps to prevent. 1. Depends on organizational size. Even the smallest organizations MUST take steps 2. No substitute for constant vigilance! Culture and small steps go a long way Discuss and create polices 3. Remember, audits are generally not designed to catch fraud. Only test accuracy of internal financial statements

16 #3 Fraud and Embezzlement, Failing to Prevent and Respond Fraud or Embezzlement will happen to an organization represented here. Must take all reasonable steps in response. Punish offender Report to law enforcement (and cooperate!) Get your money back Close whatever hole was exploited. Opportunity to strengthen your organization

17 #3 Fraud and Embezzlement, Failing to Respond and Prevent Bad excuse #2: We completely trusted. Bad excuse #2A: We didn t want our donations to suffer, so we didn t tell anyone. Bad excuse #2B: We thought our auditor would catch that.

18 #4 Paying Excess Compensation All of your assets must go to your charitable purposes, and you must pay reasonable compensation. Everything should be reasonable and justified. Avoid paying substantially more than similar organizations and lavish expense accounts. Remember IRS excess compensation rules Expense accounts matter Bad excuse #3 We had left over money so figured we would go to Vegas, buy a BMW, etc.

19 #5 Failing to Operate with the Needed Transparency Top complaint generator Law: Easy for Attorney General to follow up Law: Nebraska statues list required corporate records and inspection rights for members, Neb. Rev. Stat ,165 Law: Directors get everything Goal: A nonprofit should seek to operate with glass pockets Bad excuse #4: Only our Treasurer gets to see the financial records.

20 #6 Directors & Senior Leadership Failing to be Sufficiently Active Directors have a fiduciary duty to be active and obtain sufficient information to make informed decisions. Directors must understand the organization s financial health. There must be regular reporting to the Board. The directors must know all of the nonprofit s activities. Directors must actively seek the information they need. The Executive Director works for the board. Bad excuse #5 We're a volunteer board and don't have the time to.

21 #7 Not Filing What You Should with Government Agencies What Needs to be Filed Internal Revenue Service: Form 990 or other annual form After 1/1/2009 everyone MUST file something Automatic loss of exemption Secretary of State: Biennial Report Administrative dissolution if fail to file Attorney General: Tax Returns 990 PF (IRS Requirement)

22 #7 Not Filing What You Should with Government Agencies Attorney General: Nebraska Nonprofit Corporation Act Dissolution and transfer of assets upon dissolution Neb. Rev. Stat ,131 (See Attorney General handout for guidance) Nonprofit selling/transferring all or substantially all of its assets not within the regular course of business Neb. Rev. Stat ,126 Notice of the commencement of any proceeding that the Nonprofit Act authorizes the AG to bring but that has been commenced by another person Neb. Rev. Stat Others

23 #7 Not Filing What You Should with Government Agencies Why important? Severe sanctions from agency Public will misinterpret Donors, potential donors, clients, and everyone else all see lack of filing All information is just a click away Pay attention to digital footprint Rating sites: give.org, Charity Navigator 990 sites: Guidestar, Foundation Center

24 #8 Convert from Nonprofit to For-Profit Assets committed to nonprofit causes must remain so Generally, cannot convert from nonprofit to for-profit; Neb. Rev. Stat ,118 Must notify the Attorney General of fundamental changes 20 days in advance with respect to: Dissolution When dissolving all assets must go to other nonprofits Merger Sale or transfer of substantially all assets

25 #9 Ignore the Attorney General s Office Need I say more? (also applies to the IRS and Nebraska Secretary of State)

26 Contact Information Thomas J. Freeman Daniel J. Russell Assistant Attorneys General Consumer Protection Division 2115 State Capitol Lincoln, NE (fax)

27 Nebraska Attorney General Consumer Protection and Anti-Trust Division Phone: (402) (800) Senior Hotline: (888) En Español: (402) (888) protectthegoodlife.nebraska.gov