No Good Deed Goes Unpunished

Y Combinator: Inspiring Social Enterprise

Kent Seton - Friday, April 17, 2015

While it just happened a couple of years ago, it is very fresh that Y Combinator, the top incubator in Silicon Valley has now opened its doors to charitable and social enterprises. Who would have thought that techies wanted to save the world too! 


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Does Franchise Law Apply To Charities/ The Girls Scouts Case

Kent Seton - Thursday, March 26, 2015

The U.S. Court of Appeals for the Seventh Circuit handed down a pair of decisions in Girl Scouts of Manitou Council, Inc. (“GS Chapter”) v. Girl Scouts of the United States of America (“GS National”). In short, GS National determined that “realignment” was necessary and attempted to adopt a plan that would reduce the national wide number of its girl scout chapters by nearly two thirds – from 315 to 109 by merging together various chapters (all of which were their own nonprofit corporations under GS National’s 501(c)(3) status) into new, larger, high-capacity chapters. GS Chapter was one of the best operating chapters under GS National and the plan to merge would have split up GS Chapter’s assets among three newly created chapters. GS Chapter’s board of directors concluded that such realignment was not in its best interests and refused to execute documents that would effectuate the forced mergers. The GS Chapter filed a lawsuit seeking injunctions to prevent changes to its jurisdiction or charter.

Ultimately, it was determined that the Wisconsin Fair Dealership Law (WFDL) applied to nonprofit corporations, which covers a broad range of both dealerships and franchises. The statute defines dealerships where (1) there is an agreement between the parties; (2) the chapter has been granted the right to sell or distribute goods or services, or use a trademark, service mark, logo-type, advertising or other commercial symbol; and (3) there is a community of interest in the business of offering, selling, or distributing goods or services at wholesale, retail, by lease, agreement or otherwise. California’s Fair Dealership law set forth in California Civil Code Section 81(b) and its definition of “franchise” set forth in California Corporation’s Code Section 31005(a) have almost the exact definition of “dealerships”. Additionally, the Illinois Franchise Disclosure Act of 1987 (815 ILCS 705/3(1)) also has a very similar definition of franchise on point here.

Accordingly, because the court found that nonprofits are included in the definition of “dealerships” under the WFDL, it concluded that the WFDL’s prohibition of cancellations, terminations, nonrenewals, or changes to the competitive circumstances of a “dealership” without “good cause” was fully applicable to GS National’s effort to eliminate GS Chapter as part of GS National’s nationwide restructuring of chapters. While the determination of whether GS National had “good cause” is a question based on the particular facts and circumstances of the matter, the Seventh Circuit’s holdings have broad implications for nonprofits operating in any state that has an applicable franchise or dealership statute, like California and Illinois, and it is therefore possible that an Illinois and/or California arbitrator or court would similarly find that the relationship between National, the Chapter and the other chapters is defined as a franchise thereby concluding that National is unable to terminate the chapters, including the Chapter, without good cause.

Show Me The Money

Kent Seton - Monday, November 04, 2013

If you are small business or charity, $1500 can mean alot! One of our strategic partners for many years, MyCorporation is offering this prize!  Take a Picture of Your Business for MyCorporation!

All throughout the month of November, MyCorporation.com is holding a “Show Us Your Business’s True Colors” photo contest to celebrate its 15 years in business and give small business owners and entrepreneurs the chance to win $1500!

Photo submissions must be emailed to contest@mycorporation.com , along with the name of the business, company website address, and a summary of 25 words or less on the moment captured in the picture. The more creative, the better!

Participants will receive a URL link to their photo page upon submission. Additional points will be given to photos that are promoted and shared across Facebook, Twitter, and Pinterest with the hashtag #MyColors.

Judging will be based on shares to the contest page with additional points added for the creativity, emotionality, and composition of both the photo and summary accompanying it. The deadline for entry is November 30th and the winner will be chosen on December 2nd and notified via email on their win.

Official rules and regulations can be found at contest.mycorporation.com. Good luck - we’re looking forward to seeing how your business’ true colors shine through!

 

How could a legal audit benefit our charity?

Kent Seton - Monday, February 25, 2013

Legal audits can be very helpful for charities. We just finished an audit for a celebrity client of ours. Your Legal Audit should consider the following important factors:

 

(1) Board Governance & Formality Compliance

(2) Employment Policies and Procedures

(3) Financial (Funding Sources)

(4) Intellectual Property Protection

(5) Liability

(6) Fundraising Rules and Regulations – General Education

(7) Fundraising Rules and Regulations Specifically Related to the Foundation

(8) Contractual Strength

 

Employment Policies & Procedures

How many employees do you currently have? Is it more than 10? If so, we recommend adopting an employment manual.

Do you have employment agreements? Independent contractor agreements? Volunteer releases/agreements? We strongly recommend these agreements as well.

Do you have confidentiality/nondisclosure agreements with employees/ independent contractors/volunteers? This is also recommended taking into account the charitable purposes and activities of your Foundation.

 

 

Financial (Funding Sources)

 

Assignment of Income Doctrine: This doctrine, created by the U.S. Supreme Court holds that income from services is taxed to the person who has performed the services regardless of whether that income is assigned to another (i.e. the Foundation).

 

Donations: If the “Donate” portion of your website encourages donors to donate and receive a gift for a donation over any dollar amount. It is important to be careful when making this kind of offer in that the donation may be considered the sale of goods, rather than a donation (donors are getting a product for payment) and therefore may be considered, by the IRS, as unrelated business income and may be taxed accordingly.

 

Intellectual Property Protection

            

  Trademarks

 

Background on Compliance: After registering a trademark, certain filings must be submitted to the United States Patent and Trademark Office (USPTO) to remain in compliance with this office. Generally, Section 8 Declarations of Use are due between the 5th and 6th, and 9th and 10th anniversaries of your trademark’s registration, and every 10 years thereafter. Section 9 Renewal of Trademark Registration is due between the 9th and 10th anniversaries of registration, and every 10 years thereafter.

 

 

Representations to the Public: When you are marketing and promoting a product, what you say can be extremely important. These are the words and phrases that you choose to use in promoting that proceeds from the sale of a product will go to a charity. The most common mistakes occur when disclosures made to the public are fuzzy or vague. This is the area where lawyers have been known to recently file claims for deceptive, vague and ambiguous statements made to the public about how much of the funds from the purchase of a product will go to a charitable purpose. We therefore encourage you to be specific about the representations that are made in your campaigns to the public. There have been several court cases that reflect this recent trend and we are happy to provide you with cites for such cases.

 

Professional fundraisers/professional solicitors: In general, a professional fundraiser or professional solicitor is a person who for a financial or other consideration engages, employs, directs or contracts with any other person to solicit contributions or directs agents, servants or employees specially employed by or for a charitable organization for the purpose of soliciting contributions. A bona fide salaried officer or employee of a charitable organization, shall not be deemed to be a professional solicitor or professional fundraiser unless that person's salary or other compensation is computed on the basis of funds to be raised or actually raised or the services performed by the person are performed on behalf of some organization other than the one which employs that person or a chapter, branch or affiliate thereof.

Email Solicitations: The use of charity email to solicit funds is a practice sometimes used to great success by charities. In this case, the states generally treat emails in exactly the same way that they treat regular mail or fax. Therefore, if the state requires registration for such activities, then, the charity should follow the same process if it is engaging in email activity with residents of that state.

 

Internet Fundraising: If charities or for profit entities engage in Internet fundraising, some rules may apply. The National Association of State Charity Officials (NASCO) came up with some suggested guidelines known as the Charleston Principles (the “Guidelines”). The Guidelines are a guide that states can adopt in connection with the rules and regulations for solicitation for charitable purposes via the Internet. Again, each state may adopt its own rules and regulations. If you have a website, whether directly or through another platform, and you allow the “interactive” nature of the website such that one may be able to donate online funds or engage in a transaction of purchasing a product or service which will benefit a charitable purpose, then, under the Guidelines:

 

Contractual Strength

 

If your 1023 Application and your Form 990 indicate that you may make donations to other 501(c)(3) organizations then please consider the following. As such, what types of contracts are in place in making these donations? Are periodic reports required? How do you determine how the funds are used? What are your monitoring procedures?

Do you have written agreements in place for the organizations with which you partner?

Do you have written agreements in place with those organizations that donate your Foundation?

 

 

4 Things You Need to Know Before Setting Up a 501(c)(3) Nonprofit Charitable Corporation

Kent Seton - Thursday, January 10, 2013

 

Guest post today courtesy of Deborah Sweeney, CEO of MyCorporation.com.

Developing your dream 501(c)(3) nonprofit takes into consideration plenty of steps until it’s completed, starting with the incorporation process of preparing and filing your Articles of Incorporation and even holding an first board of director’s meeting. No matter how well you lay out these steps, occasionally a few can get forgotten along the way – and you definitely don’t want that! Here are four areas you need to be sure to address before you fully set up your 501(c)(3) nonprofit charitable corporation.

1) Determine a Great Name for Your Nonprofit

Once you have determined what societal need you’re working to address and an outline on how you plan to go about addressing that need as your purpose, it’s time to think up a name. The name of your nonprofit should be able to easily distinguish who you are from the crowd and what it is that your nonprofit organization does or provides. As a general rule of thumb, states often vary on business name requirements but the more unique the name is, the better chance you have of being able to use it for yourself. You may include the words “foundation” or “charitable foundation” within the name and nix any words like “federal” or “national” that suggests being associated with a specialized entity.

2) Establish a Mission Statement

What is your purpose? Can you easily define it and the role that you (and subsequent others involved) will have in your nonprofit? Alongside your business, annual budget and fundraising plans, you need to establish a mission statement that sums up your purpose and mission that the nonprofit will focus on in a few short sentences. Make sure you incorporate your mission statement in a succinct and legal manner into the Articles of Incorporation of your 501(c)(3) nonprofit corporation to appropriately describe your charitable activities to the IRS.

3) Obtain Your IRS Employer Identification Number (EIN)

When you receive your official copy of your Articles of Incorporation, be sure to obtain your IRS employer identification number (federal tax identification number) through the IRS. This is necessary for both tax purposes and tax exemption, and it’s important to note on charitable receipts you give to the donors to your 501(c)(3), so they receive the appropriate deduction. You can apply for an EIN online (through the IRS website) and over the phone (1-800-829-4933, from 7AM to 10PM your local time). Additionally, you will want to file IRS Form 1023 to secure your 501(c)(3) tax-exempt status and contact your Secretary of State and Attorney General for any additional forms or applications you may also need to file.  Filing your form 1023 is as easy as 1-2-3, with our trusted partner, Center for Nonprofit Creation.

4) Identify Where Your Nonprofit Will Operate

Whether you’ve got a storefront in state or out of state or even online, it’s important to identify the specific location or place where your organization plans to operate. Be sure to be able to identify the beneficiaries of your nonprofit too!

Author Bio:

Deborah Sweeney is the CEO of MyCorporation.com. MyCorporation is a leader in online legal filing services for entrepreneurs and charities. MyCorporation.com does all the work forming the nonprofit corporation and is a proud partner with Kent E. Seton and Center For Nonprofit Creation, who helps you prepare and file the Form 1023, also known as the 501(c)(3) application, to get 501c3 tax exemption.

  

Should a "revoked" 501c3 org disclose this to donors?

Kent Seton - Friday, December 14, 2012

A donor potential may have a legitimate claim for breach of fiduciary duty and fraud against both the the organization and the individual members of the Board if a deduction taken by a donor were disallowed. In addition, even if the deduction were not disallowed, a donor may claim that the donor was misled into believing that the organization was a tax-exempt organization and that the donor would not have made the donation if accurate information had been disclosed. In our opinion an affirmative duty to disclose does exist. In addition, a donor may seek rescission to force the organization to return the donation based upon a claim that the misrepresentation that the charity is a qualifying organization nullified the bargained for consideration. 

Does the IRS Recycle?

Kent Seton - Wednesday, December 12, 2012

In Revenue Ruling 72,560, the IRS justifies the lawfulness of charities "selling recycled" materials which led to partial funding for the Charity in question. You might say to yourself, "I thought the IRS taxed business activities! Didn't they get this one wrong?!!!!" Well, if you look at this ruling the IRS sets forward some very basic comments concerning organizations that "combat community deterioration". First, the IRS states unequivocally, that such a purpose is CHARITABLE. Then, the IRS says that organizations that acquire a facility, engage staff members, promote workshops and conferences on disposing of waste materials which are "bad" for the environment is doing what is necessary to carry out its stated purposes. Furthermore, the IRS "selling the "waste" is merely incidental to the Charity carrying outs purposes and thus, does not make this a "non-charitable activity". Subject to a lawyers review of your particular circumstances, this seems to indicate a strong leaning by the IRS that it will support organizations engaged in "preserving the environment" and recycling.

US Charitable Organizations Operating and Supporting Foreign Activities

Kent Seton - Wednesday, December 12, 2012

The issue of US Charities supporting activities that further the charitable purposes of the US Charity is quite a complex topic and one that must be carefully tread to not violate the many rules and regulations in this area. Suffice is to say, that while this blog entry is not a comprehensive treatise on the matter, it is mean to discuss a few important concerns. First, one must be aware that simply setting up a charitable conduit (or charitable arm) in the US to support a single foreign based charity is not lawful per Revenue Ruling 63-252. Furthermore, making grants to to specific projects abroad and/ or to specific organizations will not be allowed unless there is sufficient control and oversight over the disbursement of funds. That being said, while ,there are many more rules and complexities to these matters, the idea of providing charitable work in a foreign country by a US Charity through the hands of those hired and engaged as volunteers of the US Charity is entirely within the law.  In addition, before engaging in any foreign activities, one would be well advised to look at The Office of Foreign Assets Control (OFAC) as this deals with countries that you are legally allowed to interact and deal with and who you cannot. Again, you can see that those organizations "doing things" abroad should seek wise legal counsel prior to engagement. In addition, you are highly recommended to review Revenue Ruling 66-79 which deals in even more detail with the guidelines of the IRS as it relates to these types of activities.

The Policy of "Policies", Why Charities Should Think Seriously About the New 990 Policies

Kent Seton - Wednesday, December 12, 2012

Charities have so much to be careful. If I asked who owns the assets of the charity, you might say "Noone"! and you would be right! That being said, since there is no ownership of assets, the directors of a charity are the custodians of a charity assets and any mismanagement of said assets could give rise to a claim against the board, of among other things, breach of fiduciary duties. If you going to serve on the board of a charity, you would be well advised to take this "service" seriously. After all, under Section 5210 of the California Corporations Code, you are ultimately responsible for the affairs of the charity. 

Under the same Corporations Code, as a director, you are held to act "reasonably" and "prudently".  Thus, if you do not, you may be liable for the debts and obligations arising from your failure to do so. That being said, you may try to insure yourself and fellow board members from liability by procuring directors and officers insurance. The reality is under Section 5233 of the Cal. Corp Code, you may be required to do so. But, does this insurance defend against behavior that is not "reasonable" and/ or "prudent"? There answer is "no". 

The liability of board members is not only "what you did", it is also, "what you didn't do". Abstaining from voting or not being at a meeting may not be a "good enough".

Since there is a potential for lawyers to sue the board members for reasons called "deep pockets", as a board member you should welcome "board policies", like the "conflict of interest" policy, "whistleblower policy", etc. The question is why? Well, it can "narrow" claims agains the perpetrating board members, rather, than against board members who happened to be "just around". 

For example, if you require a yearly disclosure of "potential" conflict of interests" and a board member does not properly disclose a conflict of interest, the other board members probably have a good argument that they could not be liable for a conflict of inters they had no reason to know about.

The more you "police" the policies" the better it is. 

The recommendation to establish a "governance committee" which looks at updating all policies and procedures very two years could well be a wise one.








How Religious Is Your Landlord: For Churches, Temples and Synagogues

Kent Seton - Wednesday, December 12, 2012

If you are a Church, Temple or Synagogue, AND, you are leasing your premises, you be able to utilize the property tax exemption entitled to Churches pursuant to Section 2602 of the California Revenue and Taxation Code. In a nutshell, this code states that, "absence a contrary provision in your lease", a Church should be able to get a credit (or an offset) in rent for the benefit of a tax exemption for property taxes which the landlord has enjoyed as a result of you being a tenant. For example, if a Church i renting a facility for $100,000 per year and the Landlord is exempt from property tax due to the Church's activities, then, the amount they landlord would have paid in property tax should be credited against the tenant, in this case, Church's rent. Refer to the Code section if you are interested in learning more.