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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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Piercing The Corporate Veil

One of the most attractive features of a corporate structure is limiting the personal liabity of the company’s shareholders (or members in a limited liability company).  But simply incorporating your business is not enough; it does not automatically protect you from your company’s creditors.

Generally a corporation’s creditors can’t sue its shareholders for their personal assets (limitied liability). However, in certain instances courts will allow the creditors to pierce the corporate veil and do exactly that.  For example, courts sometimes allow piercing the corporate veil in instances of fraud or similar wrongdoing, not allowing the shareholder to hide behind a false or flimsy corporate veil.

It is important to adhere to corporate formalities, and treat the corporation as a separate entity.  (You and the corporation are NOT one and the same.)  Properly document transactions between the corporation and its shareholders, officers and directors, and make sure the transactions are fair and reasonable and in accordance with applicable corporate law.

Though piercing the corporate veil is not terribly common, it is important to protect yourself against even the possibility of losing your limited liability.

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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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Protecting Your Mark

trademark is a word, phrase, symbol or design that you use to identify and distinguish your goods from those of others.  A service mark is similar to a trademark, but refers to services rather than goods. In practice, however, the term “trademark” is often used to refer to both trademarks and service marks.

Must all marks be registered?  No, your use of your mark in commerce affords you common law rights to the mark.  However, federal registration has several advantages, including notice to the public of your claim of ownership of the mark, a legal presumption of ownership nationwide, and the exclusive right to use the mark on or in connection with the goods or services described in your registration.  Registration allows you to stop others from using a mark or trade name that is confusingly similar to your protected mark.

To register your mark, you must first file an application with the US Patent and Trademark Office.  The best marks are fanciful, arbitrary or suggestive. The USPTO generally does not register generic terms.  Examples of well-known marks include the Nike swoosh, Xerox and Windows, to name a few.

More information can be found at http://www.uspto.gov/trademarks/basics/.

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Letter of Intent

There are numerous types of contracts that will be important during the life of your business. An example is a letter of intent, which is often used for doing a particular deal. A letter of intent conveys to each party that the other is serious about doing the deal.

There are two differing thoughts as to how to draft a letter of intent.  One suggests that letters of intent should be short and to the point, highlighting the key points of the proposed deal.  The second says that letters of intent should be fairly detailed, addressing every major point of the proposed deal.  Which version works for you depends both on the circumstances of the particular deal and your personal preference.  The more detailed the letter of  intent, the more assurance there is of a meeting of the minds between the parties (though of course, that is not guaranteed).

Letters of intent often include certain basic terms, such as the confidentiality of ongoing discussions, the basic structure of the deal, the price and terms of the deal, the key obligations of each of the parties, the proposed closing date, whether or not negotiations are exclusive between the parties, conditions to be met prior to closing, and what obligations of the letter of intent are legally binding upon the parties.  These are just examples, and each letter of intent should be specific to the particular deal to which it applies.