When it comes to creating, funding and maintaining a nonprofit organization, it’s every bit as challenging as running a major “for profit” company — perhaps even more so. While its base mission is usually altruistic, a nonprofit must run like a business if it is going to survive. Having a healthy board with multiple business talents is essential.
“We always try to look at it like a business,” says John Krizansky, CPA, director of business development at HW&Co, who serves as an auditor, consultant and business advisor for both nonprofits and privately-held companies. “A nonprofit doesn’t mean no profit. We always try to look at it in a business sense. A board is ultimately responsible for the budget and approving the budget. We approve it and then we challenge management, going through it line by line. We have to run it like a business because if we don’t, it is not going to survive.”
This ultimately impacts the altruistic mission of the nonprofit.
Krizansky has interacted with many nonprofit boards and served on others. In addition to serving on HW&Co.’s board of directors and management committee, Krizansky is also the former board chair for Centers for Dialysis Care and Centers for Dialysis Care Foundation and is still on the board of directors as well as the finance committee chair and executive committee member for both organizations.
Most executives working in the nonprofit space agree that boards have to address many different challenges and issues, often on a daily basis.
“So it’s incredibly important for nonprofit board members to understand their roles and responsibilities,” says Elizabeth Voudouris, president and CEO of Business Volunteers Unlimited (BVU), an organization that has provided consulting, training and executive coaching services to thousands of nonprofits and businesses in Northeast Ohio. “But they also need to surround themselves with the right people who are sitting around the board table with them.”
Krizansky concurs.
“Maintaining solvency and day-to-day operations is the responsibility of the CEO, but the CEO reports to the board,” says Krizansky. “By default, at the end of the day, everybody is reporting to the board. Serving on the board means holding people accountable and asking the right questions.
“Having the right board mix is key — not everyone has to be a financial whiz. Hopefully, the board will create committees, some might have finance or audit committees, investment committees and other people to ask financial questions. But then you also need people on the board to be a part of strategic planning committees or operations.”
You might also need people involved in succession planning, and not just of the CEO and management, but key operational executive positions within the organization such as marketing or HR as well.
While a nonprofit board needs to be diverse in a business sense, it does have a focus on finance.
Most nonprofits, of any appreciable size will be subjected to audits, says Krizansky. Board members must obviously be aware of their fiduciary responsibilities.
“The finance committee works with the auditors to really understand what the risks are and then works with management to make sure there is a good control structure in place with the proper checks and balances,” says Krizansky. “If there are any issues with an audit or financial statements, it could significantly impact an ability to finance, operate or do proper fundraising.”
This all includes the proper filing of Form 990, which is the tax form the IRS uses for nonprofit organizations.
“There is box on the form that indicates that the board has had a chance to review the tax return and that they approved it,” says Krizansky.
So a board must understand nonprofit expenses, which are detailed in the statement of functional expenses on the Form 990 and are broken down by three different expense categories; the nonprofit’s mission or charity, administration or operations and then expenses related to fundraising. Today, more than ever, potential donors and other benefactors like to see how their funds will be distributed through a nonprofit.
“People like to see what percentage of their dollars are going to the nonprofit’s actual mission, and not to the administration of the business or fundraising,” says Krizansky. “As a board, you really want to scrutinize those percentages, so you at least have about 80% going to mission programming, as opposed to 20% for administration and fundraising. If you don’t have those numbers, you may have a hard time getting donors, because a lot of people don’t want their donations going to administrative functions or salaries.”
As you might suspect, serving on a nonprofit’s board exposes both the individual executive as well as the organization to risks, many of which are easily mitigated. But they should be noted.
Tom Ubbing, a veteran attorney who now serves as vice president and general counsel for Centers of Dialysis Care, is an expert at identifying and mitigating risks, at least from a legal perspective.
“In my mind, there are essentially two different kinds of risk,” he says. “On the personal side, board members have a potential risk that comes from serving on the board. Then you have an organizational risk that comes as a part of your fiduciary duties to make sure your organization is properly addressing specific issues.”
Board members may have to sign off on the proper disposal of assets or the distribution of assets and keep track of those expenditures for tax purposes. This means understanding IRS rules for tax-exempt 501(c)(3) organizations, which includes not violating private inurement rules. These forbid the diversion of a nonprofit’s money or assets to private individuals or insiders instead of distributing or using them for the charitable purposes for which they were intended.
“So just serving on a nonprofit board does expose that member to some potential legal risks due to the legal responsibilities of board members,” says Ubbing.
So, how do you minimize and mitigate those risks?
“In my opinion, as a starting point, no one should ever go on a nonprofit board unless they first perform due diligence on the organization itself,” says Ubbing. “Talk to people including, if possible, former board members of the organization. Conduct internet searches to see if they have had issues in the past.
“The other thing I would advise someone is to never go on a board unless the nonprofit has agreed to indemnify board members in the event the board members are named in a lawsuit. But this is pretty standard practice. You should also confirm that the organization has directors and officers liability insurance in place, at appropriate limits.
“These are the kinds of things you need to look at and make sure they are in place prior to joining a board.”
Later this month, HW&Co is hosting a free webinar that more completely covers this topic. For more information go to hwco.cpa or call 216-831-1200.
