PMA Consulting, LLC

Potential Risks for Organizations – Part II of II

Today we continue our discussion of a previous post with four more risks organizations face, and the possible fixes for each.

5. Lobbying and political activity compliance

Restrictions by the IRS keep many tax-exempt nonprofits from being involved in governmental affairs. Because of the impact political players and issues can have on nonprofits, boards need to understand their own limitations. For example, a Section 501(c)(6) association may engage in limited political campaign activities and may lobby as its primary activity. However Section 501(c)(3) public charities must avoid all political campaign activities and keep lobbying within permissible limits.

The Fix: Learn the rules and make sure the organization’s needed advocacy falls safely within the limitations. Consideration should be given to federal and state lobbying disclosure requirements, campaign finance laws, and gift and ethics rules.

6. IRS Form 990 and federal tax-exempt status

Tax-exempt status relieves an organization of most federal and state corporate income tax liabilities, while also giving it the ability to receive tax-deductible charitable contributions. However, with all the good that comes, restrictions are also attached. Federal tax laws restrict a tax-exempt organization’s income, fundraising, meetings, educational programs, publications, lobbying and political activities, standard setting, certification, and other activities. Tax-exempt status can be jeopardized when an organization fails to comply.

The Fix: Educate the organization. The IRS’ Form 990 is a comprehensive tool used for monitoring compliance. Understanding the reporting mandates of the form, as well as basic tax law restrictions is a first good step. Setting up policies and procedures responsive to the requirements is an even smarter second step.

7. Third-party sexual harassment

Sexual harassment to employees committed by and to vendors, volunteers may not be an obvious problem. Board members need to realize the nonprofits they serve can be exposed to these types of claims, and the employment policies are usually the responsibility of the board.

The Fix: Implement training. Sufficient training should be put in place to make staff aware of how to keep harassment from occurring in the first place. Any illegal harassment should be handled with care in a timely fashion. Make certain that policies include wording that includes third-party harassment.

8. Contracts

Contracts, while often negotiated and agreed upon with a handshake, need to be outlined in a formal document. Failure to do so could leave the organization open to liability and other challenges. Not having restrictions on signing authority for contracts can also lead to problems.

The Fix: Write it down. Anything agreed upon in principle should be in writing, including:

  • Obligations of each party
  • Performance benchmarks
  • Payment terms
  • Intellectual property use and ownership
  • An exit strategy

Educate staff members on common issues to address in contracts. Authority to sign contracts should be reserved to only a qualified few and knowing when to seek legal advice is also smart.