Stephen Falla Riff, Staff Attorney

Table of Contents / 3

Presented by:

Legal Aid Society Community Development Project

Jenai St. Hill, Student

Columbia Law School

Professor Mary Marsh Zulack

Columbia Law School

Beta Version—June 2010

Table of Contents

I. Introduction 4

II. Corporate Governance 5

Follow Your Bylaws 5

Hold Regular Board Meetings and Keep Minutes 5

Hold an Annual Board Meeting 5

Fiduciary Duties of Board Members 7

III. Recordkeeping 9

Create a Recordkeeping System 9

Records related to incorporation and tax exemption 9

Records related to the proceedings of the board and committees 9

Records related to board and committee members 9

Records related to contracts, leases and legal documents 10

Grants 10

Financial Records and Reports 11

Put internal controls into place to safeguard charitable assets 11

Duties of audit and finance committees 11

Accounting records and financial reports, including: 11

Donation receipts (Sample or Template) 11

IV. Personnel Management 12

Employee and Volunteer Matters 12

Employment process 12

Maintain employee records as required by law 12

Create or update a payroll system 13

Adhere to appropriate employment practices 13

Retirement Plan 14

Decide what type of retirement plan is best for your organization (IRS Comparative Chart) 14

Additional tax resources (IRS Retirement Plan Information) 14

V. Filings 15

Annual Exempt Organization Return with the IRS 15

Initial and Annual Filings with the Charities Bureau of the NYS Attorney General’s Office 15

Unrelated Business Income Tax 16

Public Disclosure Requirements 16

VI. Corporate, Employment & Sales Taxes 17

Corporate Tax Records for Unrelated Business Income 17

IRS Form 990-T 17

NYS Form CT-13 17

Payment Records for Employment Taxes 17

Federal Income Tax Withholding (Form W-4) 17

Federal Insurance Contributions Act (“FICA”) Tax (Form W-2) 17

Miscellaneous Income (Form 1099-MISC) 18

Federal Unemployment Tax Act (“FUTA”) (Form 940) 18

NYS Income Tax Withholding (Forms) 18

NYS Unemployment Tax Withholding (NYS-100N) 18

Sales Taxes 18

Certificate of Authority 18

Exemption from Corporate Franchise Taxes (CT-247) 18

Sales Tax Identification Number 18

VII. Insurance Coverage 19

Insurance Coverage Required by NYS 19

Other Insurance Coverage 20

VIII. Fundraising Requirements 21

Charitable Contributions 21

Create solicitation letters 21

Create acknowledgment letters (Sample) 21

Create a “quid pro quo” disclosure statement 21

Note whether contributions received must be used for a specific purpose 22

Non-cash Contributions 22

Complying with Charities Law Requirements 22

IX. Jeopardizing Exemptions 23

Document Transactions or Decisions that May Jeopardize Exemption Status 23

X. Intellectual Property Matters 24

Review Potential Intellectual Property Issues 24

XI. Legal Services Corporation Requirements 25

Maintaining Legal Services Corporation (LSC) Funding 25

XII. Significant Events 26

Retain Records Documenting or Pertaining to Significant Events 26

Introduction / 4

I. Introduction

A New York State (“NYS”) public interest law organization[1] must comply with myriad obligations, including the NYS Attorney General’s rules governing charities; the Internal Revenue Service’s (“IRS”) requirements for Section 501(c)(3) tax-exempt organizations; and the organization’s own bylaws, certificate of incorporation and mission statement.[2] In addition, the organization should engage in nonprofit “best practices” designed to promote transparency and the smooth running of its affairs. This Public Interest Law Organization Nonprofit Compliance Checklist (the “Checklist”) is designed as a diagnostic tool to help nonprofits identify and comply with these wide-ranging obligations. However, please keep in mind that no checklist, including this one, can cover all of the issues that will arise during the life cycle of a nonprofit organization.

The Checklist includes hyperlinks to the IRS, the NYS Attorney General’s Charities Bureau, and other websites that may have sample forms. Websites contain useful information and resources; however, we make no representations regarding the viability of website addresses, or the accuracy of the information provided.

This Checklist is intended to assist public interest law organizations with their management and compliance obligations, to promote best practices, and to engage directors and officers in active stewardship of the organizations they lead. The information provided in the Checklist does not constitute legal advice. Prior to acting on the information provided in this Checklist, your organization should consult an expert in exempt organization matters, such as an attorney or accountant with expertise in the area.

Corporate Governance / 8

II. Corporate Governance

Follow Your Bylaws

Bylaws of a nonprofit organization contain the rules and procedures that the organization must follow. They are typically adopted at the organizational meeting. They include requirements for giving notices, holding meetings, holding elections, the roles of the corporate officers, avoiding conflicts of interest, etc.

Adopt bylaws that comply with the New York Not-for-Profit Corporation Law

Ensure that all notices are given in the manner stated in the bylaws

Ensure that all board members have copies of the bylaws and are familiar with them

Periodically review bylaws for relevance and ease of use. Make amendments, if necessary, and have date of enactment show, for every amendment

Hold Regular Board Meetings and Keep Minutes[3]

Prior to each board meeting, prepare meeting notice and proposed agenda

The board secretary takes notes and prepares the minutes of the meeting (Sample or Template). Minutes provide a history of the board’s activities, and reflect the board’s formal actions on behalf of the corporation. The minutes should remain open to inspection by the members of the board. Minutes may be reviewed by the IRS, the Attorney General’s Charities Bureau, and the courts, to confirm that the organization is acting as required by law, and in compliance with its mission. In addition, anyone performing due diligence on the organization, including funders and lenders, may ask to see the minutes.

i Prior to each meeting, written minutes from the previous meeting are distributed to board members for review. Any necessary changes should be made to the minutes and a new version submitted before the next meeting, when the new version will be reviewed before being accepted.

Hold an Annual Board Meeting

Elect directors[4] and officers

Review mission to assess its relevance and how effectively it is being carried out

Review corporate policies

Present annual report[5] to assess the success of the organization’s mission. The annual report may include the following:

§ Chairperson of the board letter[6]

§ Description of the causes, actions, and accomplishments of the organization

§ Financial statements

· CPA opinion letter [7]

· Income statement

o Unrelated business income

o Related business income

· Balance sheet

· Footnotes[8] and/or miscellaneous information

§ List of directors and officers

§ Information regarding members (if any)[9]

Review and sign (if appropriate) corporate policies, including:

§ Conflict of interest form[10]

§ Whistleblower protection policy[11] (Sample)

§ Document retention and destruction policy[12] (Sample)

§ Code of Conduct and Ethics policy[13]

i REMINDER: E-mail messages and electronic documents are included in this policy as well.

§ Gift acceptance policy (Sample)[14]

· IRS Schedule M (Form 990), if: (1) received more than $25,000 in non-cash contributions (e.g. books, clothing); or (2) received any similar assets (e.g. art, historical treasures)

Fiduciary Duties of Board Members

Directors and officers have a fiduciary duty to the nonprofit organizations they lead. A fiduciary is a guardian—someone who is charged with taking good care of the corporation; as fiduciaries, the directors and officers are expected to put the corporation’s interests before their own. If they breach their fiduciary duties, they may be held personally liable for certain claims against the corporation. The fiduciary duties, described below, are the “duty of care,” the “duty of loyalty,” and the “duty of obedience.”

§ Duty of Care[15]

§ Duty of Loyalty[16]

§ Duty of Obedience and Compliance[17]

§ The “Corporate Opportunity” Doctrine[18]

§ The “Apparent Authority Doctrine”[19]

i REMINDER: New directors should receive an orientation that includes a discussion of their fiduciary duties and of the “corporate opportunity” and “apparent authority” doctrines.

Recordkeeping / 11

III. Recordkeeping

Create a Recordkeeping System

Records related to incorporation and tax exemption

§ Certificate of incorporation

§ Bylaws

§ Recognition of federal tax exemption for a nonprofit organization (Form 1023)

§ Exemption from NYS and local corporate and sales taxes

Records related to the proceedings of the board and committees

§ Notices, agendas and minutes of all meetings

§ Resolutions of the board and of committees

§ Charters of all committees

§ All corporate policies, including conflict of interest, whistleblower, document retention, and ethics.

Records related to board and committee members[20]

§ Contact information

§ Terms of the office

§ Records of the duties and accomplishments of all committees, for example:

· Executive

· Finance

· Audit

· Fundraising

· Marketing

· Personnel, etc.

· Treatment of conflicts of interest, for example:

o Relationship between the board and its chief officers/key employees

o Relationship between the board and its single member (if applicable)

Records related to contracts, leases and legal documents

§ Leases and renewal of leases[21]

§ Contracts concerning property and equipment

· Records showing competitive bidding and review of bids for possible savings and renegotiation of interest rates

Grants[22]

§ Proposals

§ Create grant compliance checklists:

· Federal[23], state and local grants

· Private foundation grants

· Individual donors

· Grant compliance issues including reports on deliverables, financial accountability and the relationship with the grantor

· Donor-restricted gifts[24]

· Cy pres doctrine[25]

i REMINDER: Noncompliance can result in: (1) termination of the contract; (2) the requirement to refund money; (3) adverse publicity; or (4) non-renewal of grant.

Financial Records and Reports

Put internal controls into place to safeguard charitable assets[26]

Duties of audit and finance committees

Accounting records and financial reports,[27] including:

§ Annual income statement

§ Annual statement of financial position (i.e., balance sheet)

§ Budget and budget deviation analyses

§ Cash flow reports

i REMINDER: Make sure that no single individual is responsible for receiving, recording and depositing funds, or writing and signing checks.

Donation receipts (Sample or Template)

i Donor receipts must include:

(1) The donor’s name;

(2) The amount of money or a description of the item donated;

(3) A statement indicating whether or not any goods or services were provided in return for the gift (receipts from religious organizations must include a statement indicating that “intangible religious benefits” were provided but they have no monetary value for tax purposes); and

(4) A good-faith estimate of the value of goods or services provided.

Charitable solicitation records (see: Section IX, “Fundraising Requirements”)

Employment records, as required by law (see: Section V, “Personnel Management”)

Personnel Management / 14

IV. Personnel Management

Employee and Volunteer Matters[28]

Employment process[29]

§ Job description:

· Time commitment

· Interest of the organization[30]

· Description of the position[31]

§ Interviews

· All applicants should be asked similar questions and evaluated in a consistent manner using job-related criteria. Legally impermissible questions must be avoided.

§ Offer letter[32] (Sample)

§ Retention efforts

· Performance management is an ongoing process where the manager/supervisor and employee work together to plan, monitor and review an employee’s professional objectives and overall contribution to the organization

· Learning, training and development will help employees develop professionally

Maintain employee records as required by law

§ Names and social security numbers[33]

§ Employee tax withholdings (Form W-4)

§ Employment Eligibility Verification Form (Form I-9)

i REMINDER: Employees must complete and submit an Employment Eligibility Verification Form I-9 within 3 days of employment to their employers. Employers are required to retain I-9s for up to 3 years.

§ Records for each payroll period

i For each payroll period, record: (a) beginning and ending dates; (b) the days (or weeks, etc.) each employee worked and the earnings for each day (or week, etc.); and (c) all payments made to the employee, including bonuses and vacation pay.

Create or update a payroll system

§ See: Withholding Tax Forms (NYS Department of Taxation & Finance) for official forms of:

· Withholding requirements (federal, state & city)

· Requirements for payment of funds withheld (federal, state & city)

· Reporting requirements for funds withheld (federal, state & city)

Adhere to appropriate employment practices

§ Proper classification of independent contractors and employees

i Generally, you must withhold income taxes, withhold and pay Social Security and Medicare taxes, and pay state unemployment tax on wages paid to an employee. Section 501(c)(3) organizations are exempt from payment of the federal unemployment taxes (“FUTA”). Nonprofits do not generally have to withhold or pay any taxes on payments to independent contractors. To understand the difference between an independent contractor and an employee, refer to: IRS Determination Guidelines on the classification of employees and contractors.

§ Employee handbooks[34] (Sample)

§ Termination of employment

§ Mandatory notices for employees[35]

§ Compliance with federal, state and local anti-discrimination and wage and hour laws

§ Conduct periodic organizational reviews to ensure compliance and harmonization of all corporate policies with the law

Adhere to appropriate employment practices

§ Letter agreement[36]

§ Volunteer handbooks[37]

Retirement Plan

Decide what type of retirement plan is best for your organization (IRS comparative chart)

Additional tax resources (IRS Retirement Plan Information)

Filings / 16

V. Filings

Annual Exempt Organization Return with the IRS

IRS Form 990 (IRS Form 990)

IRS Form 990-EZ[38] (990-EZ)

IRS 990-N (the “e-Postcard”)[39] (990-N)

i REMINDER: The e-Postcard is due every year by the 15th day of the 5th month after the close of your tax year. For example, the e-Postcard for an organization whose tax year ends on June 30, 2010, will be due by November 15, 2010.