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Charity Board Members - Their Obligations

CONSUMER ALERT

BILL SCHUETTE
ATTORNEY GENERAL


The Attorney General provides Consumer Alerts to inform the public of unfair, misleading or deceptive business practices, and to provide information and guidance on other issues of concern. Consumer Alerts are not legal advice, legal authority, or a binding legal opinion from the Department of Attorney General.


CHARITY BOARD MEMBERS - THEIR OBLIGATIONS

 

You've Been Asked to be on the Board of a Charity. What Now?

 

To operate effectively, every charity must have a strong, capable board of directors. Achieving that can be difficult, however, due to considerable turnover on many boards. As a result, charities frequently are seeking new board members. For those who have been asked to serve on a board, this consumer alert will help you make an informed decision.


Should I serve?  

There are many facts and questions to consider.

Why were you invited onto the board? Who invited you: management or other directors? What will be expected of you? Are you asked to serve only for your name or for a financial commitment, or do they need your expertise and good judgment? Is a financial commitment expected? What is the time commitment? What is the current makeup of the board? What is its relationship to the organization's management? Will you be protected from personal liability in the event of financial problems? Is it running smoothly, or is it experiencing a fiscal crisis? Do you understand that, not only can the charity be sued, but you as a board member can also be sued individually? Perhaps most importantly, what will be your legal responsibilities? Do you want to rely on others to maintain compliance with the charity's legal responsibilities when you personally can be held responsible?

These are but a few of the questions you should ask. And we haven't even considered whether the cause is right for you.
 

What are some of the legal responsibilities?

 
While the questions and issues discussed above are all important, another vital question remains: Is the charity in compliance with state and federal law? You must remember that the board is ultimately responsible for the charity's actions and operations. To avoid potential embarrassment to you (or worse), you should ensure that the organization is knowledgeable and capable of handling its legal responsibilities.

  • How was the charity organized? If it is a Michigan corporation, is it current in its annual filings with the Corporations Division of the Department of Licensing and Regulatory Affairs? 

  • Has it received charitable tax-exempt status from the IRS? In order for donors to claim a tax deduction for any contributions to the organization, and in order to apply for most funding grants, the charity must have applied for and received 501(c)(3) status under the Internal Revenue Code. Is there a copy of the IRS 501(c)(3) determination letter in the charity's records? 

  • Is the organization current in its annual filings with the IRS? According to the IRS, charitable organizations must file either Form 990 or 990-EZ unless their annual gross receipts are normally less than $25,000.  Private Foundations filing Form 990-PF must file regardless of annual gross receipts.
     
  • Does the charity report to the Department of Attorney General? The organization's records should reflect its status with the Attorney General's Charitable Trust Section. Most charities in Michigan are required to register and submit annual financial reports to the Charitable Trust Section. Are these filings up-to-date? Many charities are also required to be registered or licensed before conducting charitable solicitations or fundraisers. If it is required to have a solicitation registration, is that registration current? 

  • Does the organization contract with a professional fundraiser for solicitation or fundraising activity? Is the professional fundraiser licensed by the Charitable Trust Section? Does the board aggressively oversee, not only the activities conducted by the professional fundraiser, but also all representations made by the fundraiser using the charity's name? Is the percentage of donations going to the professional fundraiser unreasonably high?

  • Should the charity report to, or be regulated by, any other governmental agencies? If it conducts bingo or raffles, has it applied for licensing with the Bureau of Lottery? Does it have a sales tax exemption from the Department of Treasury for purchases it makes? Does it collect sales tax on items it sells? Does it withhold taxes from employees and send withholding payments to the IRS and Michigan Department of Treasury? Should it be licensed by any agency for any of its charitable programs?

 

This short checklist of some of the legal responsibilities that charities and their boards must face is only intended as a preliminary guideline to aid you in making your decision whether to serve. Service as a director of a charity can be wonderfully fulfilling. Your decision to serve is extremely important to you and the charitable activities you seek to advance. To help ensure that your experience is rewarding and to protect both you and the charity you serve, be ready to ask the right questions and make sure the charity knows the answers. Being aware of the legal responsibilities that accompany board membership can help both you and the charity avoid embarrassment - or worse - down the road.