General LegalIssues For Nonprofits

Legal Services of Eastern MissouriCommunity Economic Development Program

Overview

Compliance and governanceContractsEmploymentIntellectual PropertyReal Estate

Basic Nonprofit Requirements

I-990 with IRSAnnual report with Secretary of StatePermits or licensesMaintain corporate records

And make them available to publicAdhere to own policies and procedures

IRS Requirements

File I-990 annuallyBased on close of your tax year

Generally 4 and ½ months after year endForm depends on organization’s revenueMust notify IRS of any major changesConsequences of failing to file – lose tax

exempt status if fail file 3 consecutive years

IRS requirements cont.

Must not operate for benefit of private interests Executive compensationLoans to disqualified personsOrganization’s constituents

No private inurement -- must not distribute earnings for personal gain

IRS requirements cont.

Must limit lobbying

Must not engage in political activity

Must pay taxes on income earned from activities unrelated to your exempt purpose (UBIT)

State Requirements

Must file annual report every other yearBy August 31st of that year

Must apply with Dept of Revenue to obtain sales tax exemption

Any business licenses or permits needed to operate?

Local requirements

Any business licenses and permits?

Zoning restrictions?

Governance

Board dutiesDuty of careDuty of loyalty

Conflict of interest

Importance of functional bylaws

Ensure an effective board

Duty of careHold regular meetingsDistribute meeting agenda and minutes,

committee reportsRegular communication/updatesFollow set procedures at meetingsHold annual electionsFollow bylaws!!

Ensure an effective board …

Duty of loyaltyEstablish and follow conflict of interest

policyWritten expectations to all board membersFollow and periodically review policies and

procedures

Conflict of Interest

Insider has a material interest in a transaction involving the organization

Presence of potential conflict does not prohibit the transactionDisclosure and evaluationProcess and documentation critical

Conflict of Interest (cont.)

Transactions involving a conflict must beFair to the corporationApproved by a majority vote of the

uninterested board of directors If involves director, cannot participate in

discussions or voteConsider perception of conflict

Bylaws – how they help

Prevent disputesHelp ensure efficient operationsMaintain institutional knowledgeAnticipate growth

Bylaws – important reminders

Adhere to bylaws to avoid decisions being challenged

Periodically review to ensure continued relevance

• Written consent in lieu of meeting• Must indemnify directors

Contracts

May be oral or writtenAdvisable to put agreements in writingNeed not be a formal agreementSome types of agreements must be

written to be enforceable

Contracts (con’t)

Why Make a Contract?Written Agreement: Less room for

misunderstandingClearly articulate each side’s

understandingLegally enforceable: Protect yourself

from unfair business practicesProvides mechanism for settling disputes

Contracts (con’t)

Contracts should describe the nature of the transactions

Who is getting what? Doing what? Payment and costs Delivery terms and conditions Start/End Dates What constitutes a breach of the agreement Warranties, if applicable Ownership of intellectual property, if applicable Mechanism for resolving disputes

Contract -- Signature

Sign with nonprofit name, not your name

ABC Nonprofit Corp.

By: _________________Name: [Tom Jones]

Title: [Executive Director]

Contract Disputes

One party fails to do what was promised under the contract

Remedies if other party breachesEncourage other party to cure their breachStop performanceMediation or arbitrationSmall claims court or lawsuit

Intellectual Property

Trademarks

Trade secret

Copyright

Websites

Trademark

Trademarks are the distinctive marks that distinguish the product or services of a particular non profit from those of another

Must not be genericExamples:

Trademark (cont)Avoiding Infringement on Other’s Marks

Do not duplicate existing trademarks Legal standard for infringement is “likelihood of

confusion”

In deciding on a name, search the US Patent Office web site (www.uspto.gov) and the internet to determine if there are existing trademarks in that name

Letters from other organizations claiming trademark infringement must be taken seriously

Trade secret

Information that has independent economic value because it is not generally known by other people

Examples: client lists, recipes, business information

Non-disclosure agreement

Copyright

Original artistic expressions (e.g., curriculum, books, computer programs, databases)

Give nonprofit/individual exclusive right to control the use, distribution, adaptation, display and performance of the work

Distinguish: Generic homeownership readiness program (no

copyright)/ Homeownership program tailored for non profits’ constituents (copyright)

Copyright (con’t)

Copyright is created automatically upon creation of work

Formalities: Less involved than trademark protection Copyright notice, e.g., © 2009 Jane Smith Registering with U.S. Copyright Office may be

advisable Registration allows you to clearly document the date

of creation $35 filing fee Unlike a trademark, ongoing use need not be shown

Copyright (con’t)Practical Tips

Avoid infringing on others’ rights:Generate your own pictures, images and

marketing materials (Note: copyrighted materials may not have a © symbol)

Do not copy softwareIf contractor prepares materials, have

him/her assign to organization ownership of materials created

Copyright (cont)

For more information on copyright see:http://www.publiccounsel.org/tools/

publications/files/fairuse.pdf

Websites

• Have a written contract with web designer/host

If possible, obtain exclusive rights to web design

Understand liability for violating web host or designer licensing terms

Websites (con’t)

Do not use pictures or material found on other websites without consent

Make sure domain name connects to name of organization

Disclaimer on site content may be advisable but may also be subject to legal limitations

Can put links to other websites on your site

Work for hire

Who owns intellectual property crated for the organization?Organization if created by employee Individual if created by independent

contractor or volunteerCan change these default rules by

written agreement

Employment --Anti discrimination laws: Federal

Title VII of the Civil Rights Act of 1964Applies if have 15 or more employeesIllegal to discriminate against employees

or applicants on the basis of:national origin; race; religion; sex; color

Anti discrimination laws: Federal

Age Discrimination in Employment Act Protects employees and applicants at least 40

years of age

Americans with Disabilities Act Prohibits discrimination against individuals with

a disability and requires employers to make reasonable accommodations

Anti discrimination laws: Missouri

The Missouri Human Rights ActApplies to employers with 6 or more

employeesUnlike Federal law, individuals may be

personally liable

Anti discrimination laws cont.

All non profits, regardless of size, should comply Anticipate growthStill can be liable for discriminatory

practicesSome funders may expect to see policies in

place

Employee v. Indep. Contractor

Pivotal Question: Who has the right to control when, where and how work is completed?Employer has right to control how the work

is performed Independent contractors choose method of

completing work

Employee v. Indep. Contractor (con’t)

Major Factors to Determine:Who supplies equipment?Who determines when person works?Method of paymentDuration of employmentRight to discharge

See Missouri and IRS 20 factor test at:http://labor.mo.gov/DES/Employers/

reportable.asp#notreport

Employment Policies and Procedures

Have employees sign employee handbook Include policy on discrimination and

harassment Discipline

Determine most suitable form for situationDocument measures takenState corrective action and consequences

for failure to perform such actionHave employee sign

Regular performance evaluations

Employment - Terminations

“At will” relationship: can fire anyone for any reason as long as it is not an illegal reason

BUT…

Employment - Terminations

Before termination, consider:Prior notice for unacceptable behaviorReasonableness of policy and fair

applicationAdequate investigation Proof of policy violationProgressive discipline

3rd person present in termination meeting

Volunteers

Volunteers should sign basic volunteer liability waiver

Releases nonprofit if something happens to volunteer while working with organization

Could also include medical release and/or Photographic release Consider property ownership rights

Federal Volunteer Protection Act

Volunteer not liable for harm caused by his/her acts on behalf of an organization, providedHarm was caused by negligent behavior,

not reckless or willfulLaw protects volunteers from lawsuits by

third partiesOrganization still may bring a suit

against the volunteer

Commercial leases

Total economic costsOther essential terms that could impact

organizationDo not rely on landlord’s attorney

Contact information

Laurie Hauber, Staff AttorneyLegal Services of Eastern Missouri, Inc.Community Economic Development Program4232 Forest Park Ave.St. Louis, MO 63108314.256.8747ljhauber@lsem.org