Tag Archives | compliance

Hiring? Tips Regarding the Process

Finding the right employees can be a daunting task.  Good employees can be the most important component to the success of your business.  While there are many sources for finding new hires, the internet, job search engines, internal postings, word of mouth, current employees, head hunters, etc., it is critical to go through the process thoroughly and properly.

For example, there are numerous employment laws that apply to many employers, such as The American With Disabilities Act, The Age Discrimination in Employment Act, Title VII of the Civil Rights Act of 1964, to name a few.  Be familiar with what laws apply to your company, and ensure processes and procedures to comply.

Along those lines, there are questions that can be considered either appropriate or inappropriate to be asked during the interview process.  Asking an applicant his age, marital status, ethnicity and so forth will get you into trouble, while asking about responsibilities in his most recent position, special skills, education and similar questions will suit you well.  It is critical to know the dos and don’ts before interviewing any candidates to avoid pitfalls and possible liability.

Some employers choose to use offer letters in hiring a new employee, while others are satisfied making the offer verbally.  In either case, be careful not to mislead the candidate or promise something you can not deliver.  For example, avoid statements that give a false sense of security, or what the applicant may understand to be a long-term promise of employment.

For high level executives, it may be appropriate to sign a formal employment agreement covering topics such as the position, term, salary, bonus and benefits, termination rights, job responsibilities and similar items.  Employment agreements also cover provisions regarding confidentiality, non-competition and non-solicitation.  Many companies make the mistake of overusing employment agreements; it is best to keep these to a minimum, reserved for high level employees.

Your employees are critical to your success.  Be sure your hiring tools are up to date and comply with the laws and regulations applicable to your company.

 

 

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The Corporate Minute Book

corporate-minute-bookIt is important to keep your corporate minute book current.  It should include various important documents, such as the company’s articles of incorporation, bylaws, and minutes or written consents of all meetings and actions of the directors, committees and shareholders.

A current corporate minute book is a useful tool in helping you to comply with corporate formalities, which helps prevent shareholder liability.  In addition, in the event you want to raise money or sell your business, attorneys for the other side will likely want to see your minute book.

Problems to avoid include the following:

  • Minutes that the secretary has not signed
  • Written consents without all necessary signatures
  • No minutes for regularly scheduled shareholder or board meetings
  • Written consents authorizing execution of certain documents as attached, but failing to attach the documents
  • Failure to document calls or notices of meetings
  • Notices or calls of meetings that are legally inadequate
  • Shareholder minutes that do not reflect the number of shares present or how they voted
  • Resolutions showing board approval but not shareholder approval where both are necessary
  • Lack of authorization for issuing shares of stock

Keeping an up-to-date corporate minute book is not unduly burdensome, but well worth the time and effort.

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Define Your Charitable Purpose

We receive many calls from people thinking about starting a nonprofit organization to help solve a particular problem or address a particular issue.  The idea is that a nonprofit will allow people to raise money to fund a defined need.  Sometimes, though, the very real problem or issue to be addressed isn’t one that can be funded with a charitable organization.  For example:

  • Something that will benefit a single individual, like a wheelchair ramp to provide easy access to the individual’s home, or
  • Expenses that are someone’s personal or parental obligation, like fees for sports or other extracurricular activities.

hatinhandWhen considering the need for a new nonprofit organization, keep in mind that the charitable purpose must be broad and the organization’s work must benefit a whole community, not just the members of the nonprofit or a specific individual.

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Help From the IRS

irspubsDid the title of this post catch your attention?  Yes, the IRS really can be helpful to nonprofits with many commonly asked compliance questions.  The IRS publishes tons of material each year, much of it very technical and very much geared toward tax professionals.  But they also publish some very clearly written, plain language documents that can help us as nonprofit board members and staff leaders.  These documents are referred to as IRS Publications (as opposed to Forms, Technical Advice Memoranda, Opinions, etc.), and are easily accessible by searching the IRS website.  You can enter the publication number if you know it, or just search by keywords.

Some of the most common issues and questions for charitable organizations are addressed by the following:

  • Publication 526, for rules regarding charitable contributions.
  • Publication 557, for information on how to obtain and keep your tax exempt status.
  • Publication 1771, for rules on receipts and acknowledgements of gifts and contributions.
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Creating a New Non-Profit

orgThere are a lot of issues to consider when you’re thinking about starting a new non-profit organization to run your community or charitable activities.  One of the first is, are you prepared to run a business?  When you start a new organization, keep in mind there are lots of filing and compliance requirements, both with the IRS and with your state, that will apply no matter how small you are, and that last for the life of the organization.  To avoid trouble, you’ll need to take your new organization seriously, and run it like a small business.

Speaking of small business, also keep in mind that your non-profit status is a tax election.  Successful non-profits are still run like a business.  And they make money, too!  A non-profit organization simply can’t distribute its proceeds to individuals such as shareholders or partners.  All of a non-profit’s proceeds must to be used for its charitable purposes.

The form of your non-profit business organization matters, too.  While the IRS does allow various forms of organizations, such as partnerships or LLC’s, to achieve non-profit status, choosing this type of form will create lots of complications and add lots of time to the process of achieving your tax exempt status with the federal government.  So when you form your organization at the start, choose the basic corporate form in your state.  It will save time and aggravation, and allow you to run and grow your charitable business over time.

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Corporate Basics

Corporate shareholders are the owners of the company, their most important function being to elect the board of directors.  The board has overall responsibility for the company’s business, and elects the company’s officers.  Officers manage the day to day business of the company.

Directors must act in the best interests of the company and its shareholders.  They are fiduciaries, a relationship based on trust and confidence.  The board should not be so large as to be unwieldy, and should preferably be an odd number to avoid deadlocks. The board meets annually, but should meet more frequently to provide advice and guidance to the company.

Certain corporate actions require shareholder approval.  The corporation generally holds an annual shareholder meeting, but can hold special meetings as needed.  In addition, shareholders can approve corporate actions by their unanimous consent without a meeting.

A corporation’s minute book holds important corporate records, and should be kept current.  For instance, the minute book holds the company’s articles of incorporation, bylaws, and minutes and written consents of meetings or other actions of the company’s directors and shareholders.

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Contracts and Small Business

We recognize that many small business owners often operate with various informal agreements.  However, we want to ensure you recognize that it is frequently important to formalize an agreement with a legal contract.  For example, any agreement upon which you rely that can affect the future of your business is important enough that it should be formalized.

Among other things, contracts allow both parties to clearly define their obligations and expectations to and from one another, establish (and potentially limit) their liability, set forth payment terms, and allow each party to understand its responsibilities.

A legally valid contract has four basic components:

  1. A meeting of the minds.  Both parties understand and agree to the essential elements of the arrangement.
  2. Consideration.  Something of value must be exchanged by each of the parties.  This can be in the form of money, goods, or even a promise to do something.
  3. An agreement to enter into the contract.  A written contract signed by both parties satisfies this requirement.  (Oral agreements can also be valid in certain circumstances.)
  4. Legal competence.  Each party must have the capacity to enter into the agreement, meaning each must be of sound mind, and neither can be a minor.

While most contracts address specific items, such as payment terms, timing issues, and the exact subject of the agreement, the  above four components are a critical starting point.  Remember, if it’s important enough to cause you to wonder, it’s probably important enough to formalize the agreement.

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Duties of Non-Profit Board Members — Duty of Compliance

In addition to the nonprofit board members’ duties of care and loyalty, directors also have a duty of compliance with laws and legal standards. The duty of compliance has often been referred to as the duty of obedience, but “compliance” is the more common term in modern governance discussions. Obviously, the duty to comply with legal standards requires the board to ensure the organization is acting within the scope of relevant law when operating its programs.  The duty to comply with legal standards also includes the following, sometimes overlooked, responsibilities as well:

Filing tax returns accurately and on time.  In most cases, a staff member or outside firm will prepare necessary tax returns.  It is the responsibility of the board, or a delegated committee of the board, to review and approve those returns.  Ensuring procedures are in place in the organization to keep complete and accurate financial records and to monitor due dates is part of the compliance responsibility.

Registation and annual filings with state attorneys general.  Many states, including Ohio, require annual reports on fundraising activities or financial performance.  Often these reports will be required in each state in which the organization operates or solicits contributions.

Registrations for planned giving compliance.  Many states, especially New York, California, and Florida, require additional registrations and/or reports from organizations soliciting planned gifts in the states.  If you actively solicit planned gifts, especially gift annuities or charitable trusts, make sure you check on any specific state law requirements for registration, reporting, disclosure or documentation.

Lobbying activities.  Most nonprofit organizations achieve their tax-exempt status under IRC Section 501(c)(3), which specifically prohibits such organizations from engaging in most lobbying activities.  Since political alliances are often vital relationships for an organization, it is very important to have policies in place to ensure board members and staff do not engage in any activities that would be considered prohibited lobbying activities when they are acting as representatives of the nonprofit.

complianceIn most organizations, staff members will have day-to-day responsibility for legal compliance.  Sometimes, in smaller organizations, board members themselves may assume a hands-on roll.  In either case, the ultimate responsibility to ensure compliance rests with the board.  Governance best practices suggest that all compliance activities and due dates be reviewed annually, along with specific assignments for responsibility for any required tasks.

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Duties of Non-Profit Board Members — Duty to Manage Accounts

In this blog series, we’ve already explored a non-profit board member’s duties of care, loyalty and compliance.  Now we’ll look at the duty to manage accounts.

Directors of non-profit organizations have the duty to be good stewards of the organization’s assets, and the responsibility to ensure that adequate financial resources are available to accomplish the organization’s mission.  Keep in mind, though, that ensuring financial accountability doesn’t just involve reviewing financial statements.  The duty to manage accounts requires the board to:

Establish a budget.  Creating the organization’s budget and monitoring performance relative to that budget will help the board evaluate what programs the organization should offer to most efficiently promote its charitable purpose.

finsstmtsMonitor investments.  It is important to regularly review investment statements and understand the information presented.  Investment policies should reflect a risk tolerance appropriate for the organization, and should take into account necessary spending policies.

Retain records of all income and expenses.  The IRS requires organizations to be able to document all information presented in the annual Form 990 filing.  The board should ensure good records retention policies and procedures are in place. Oversee fundraising.  The board has the duty to promote the organization’s financial sustainability by ensuring there are adequate sources of support.  Director’s own financial support is a very important part of a director’s service on a board, but interestingly, there is no legal duty to fundraise or contribute.

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Duties of Non-Profit Board Members — Standard of Accountability

In previous posts, we examined the legal duties of non-profit board members — the duties of care, loyalty, compliance, and management of accounts.  Given these duties, exactly what is the standard of care required?

In Ohio, the standard of care as a matter of state law.  Section 1702.30 of the Ohio Revised Code states:

“(B) A director shall perform the duties of a director, including the duties as a member of any committee of the directors upon which the director may serve, in good faith, in a manner the director reasonably believes to be in or not opposed to the best interests of the corporation, and with the care that an ordinarily prudent person in a like position would use under similar circumstances.”  O.R.C. 1702.30(B).

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Directors are entitled to rely on outside information from reasonable and reliable sources.  For example, directors may rely on investment reports from the organization’s investment managers, financial reports from its accountants, legal advice from its attorneys, etc.  Directors are also entitled to rely on information and recommendations presented by committees.

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