General Legal Issues For Nonprofits Legal Services of Eastern Missouri Community Economic Development Program

Overview Compliance and governance Contracts Employment Intellectual Property Real Estate

Basic Nonprofit Requirements I-990 with IRS Annual report with Secretary of State Permits or licenses Maintain corporate records And make them available to public Adhere to own policies and procedures

IRS Requirements File I-990 annually Based on close of your tax year Generally 4 and ½ months after year end Form depends on organization’s revenue Must notify IRS of any major changes Consequences of failing to file – lose tax exempt status if fail file 3 consecutive years

IRS requirements cont. Must not operate for benefit of private interests Executive compensation Loans to disqualified persons Organization’s constituents No private inurement -- must not distribute earnings for personal gain

IRS requirements cont. Must limit lobbying Must not engage in political activity Must pay taxes on income earned from activities unrelated to your exempt purpose (UBIT)

State Requirements Must file annual report every other year By August 31 st of that year Must apply with Dept of Revenue to obtain sales tax exemption Any business licenses or permits needed to operate?

Local requirements Any business licenses and permits? Zoning restrictions?

Governance Board duties Duty of care Duty of loyalty Conflict of interest Importance of functional bylaws

Ensure an effective board Duty of care Hold regular meetings Distribute meeting agenda and minutes, committee reports Regular communication/updates Follow set procedures at meetings Hold annual elections Follow bylaws!!

Ensure an effective board … Duty of loyalty Establish and follow conflict of interest policy Written expectations to all board members Follow and periodically review policies and procedures

Conflict of Interest Insider has a material interest in a transaction involving the organization Presence of potential conflict does not prohibit the transaction Disclosure and evaluation Process and documentation critical

Conflict of Interest (cont.) Transactions involving a conflict must be Fair to the corporation Approved by a majority vote of the uninterested board of directors If involves director, cannot participate in discussions or vote Consider perception of conflict

Bylaws – how they help Prevent disputes Help ensure efficient operations Maintain institutional knowledge Anticipate growth

Bylaws – important reminders Adhere to bylaws to avoid decisions being challenged Periodically review to ensure continued relevance Written consent in lieu of meeting Must indemnify directors

Contracts May be oral or written Advisable to put agreements in writing Need not be a formal agreement Some types of agreements must be written to be enforceable

Contracts (con’t) Why Make a Contract? Written Agreement: Less room for misunderstanding Clearly articulate each side’s understanding Legally enforceable: Protect yourself from unfair business practices Provides mechanism for settling disputes

Contracts (con’t) Contracts should describe the nature of the transactions Who is getting what? Doing what? Payment and costs Delivery terms and conditions Start/End Dates What constitutes a breach of the agreement Warranties, if applicable Ownership of intellectual property, if applicable Mechanism for resolving disputes

Contract -- Signature Sign with nonprofit name, not your name ABC Nonprofit Corp. By: _________________ Name: [Tom Jones] Title: [Executive Director]

Contract Disputes One party fails to do what was promised under the contract Remedies if other party breaches Encourage other party to cure their breach Stop performance Mediation or arbitration Small claims court or lawsuit

Intellectual Property Trademarks Trade secret Copyright Websites

Trademark Trademarks are the distinctive marks that distinguish the product or services of a particular non profit from those of another Must not be generic Examples:

Trademark (cont) Avoiding Infringement on Other’s Marks Do not duplicate existing trademarks Legal standard for infringement is “likelihood of confusion” In deciding on a name, search the US Patent Office web site ( and the internet to determine if there are existing trademarks in that namewww.uspto.gov Letters from other organizations claiming trademark infringement must be taken seriously

Trade secret Information that has independent economic value because it is not generally known by other people Examples: client lists, recipes, business information Non-disclosure agreement

Copyright Original artistic expressions (e.g., curriculum, books, computer programs, databases) Give nonprofit/individual exclusive right to control the use, distribution, adaptation, display and performance of the work Distinguish: Generic homeownership readiness program (no copyright)/ Homeownership program tailored for non profits’ constituents (copyright)

Copyright (con’t) Copyright is created automatically upon creation of work Formalities: Less involved than trademark protection Copyright notice, e.g., © 2009 Jane Smith Registering with U.S. Copyright Office may be advisable Registration allows you to clearly document the date of creation $35 filing fee Unlike a trademark, ongoing use need not be shown

Copyright (con’t) Practical Tips Avoid infringing on others’ rights: Generate your own pictures, images and marketing materials (Note: copyrighted materials may not have a © symbol) Do not copy software If contractor prepares materials, have him/her assign to organization ownership of materials created

Copyright (cont) For more information on copyright see: ations/files/fairuse.pdf

Websites Have a written contract with web designer/host If possible, obtain exclusive rights to web design Understand liability for violating web host or designer licensing terms

Websites (con’t) Do not use pictures or material found on other websites without consent Make sure domain name connects to name of organization Disclaimer on site content may be advisable but may also be subject to legal limitations Can put links to other websites on your site

Work for hire Who owns intellectual property crated for the organization? Organization if created by employee Individual if created by independent contractor or volunteer Can change these default rules by written agreement

Employment -- Anti discrimination laws: Federal Title VII of the Civil Rights Act of 1964 Applies if have 15 or more employees Illegal to discriminate against employees or applicants on the basis of: national origin; race; religion; sex; color

Anti discrimination laws: Federal Age Discrimination in Employment Act Protects employees and applicants at least 40 years of age Americans with Disabilities Act Prohibits discrimination against individuals with a disability and requires employers to make reasonable accommodations

Anti discrimination laws: Missouri The Missouri Human Rights Act Applies to employers with 6 or more employees Unlike Federal law, individuals may be personally liable

Anti discrimination laws cont. All non profits, regardless of size, should comply Anticipate growth Still can be liable for discriminatory practices Some funders may expect to see policies in place

Employee v. Indep. Contractor Pivotal Question: Who has the right to control when, where and how work is completed? Employer has right to control how the work is performed Independent contractors choose method of completing work

Employee v. Indep. Contractor (con’t) Major Factors to Determine: Who supplies equipment? Who determines when person works? Method of payment Duration of employment Right to discharge See Missouri and IRS 20 factor test at: le.asp#notreport

Employment Policies and Procedures Have employees sign employee handbook Include policy on discrimination and harassment Discipline Determine most suitable form for situation Document measures taken State corrective action and consequences for failure to perform such action Have employee sign Regular performance evaluations

Employment - Terminations “At will” relationship: can fire anyone for any reason as long as it is not an illegal reason BUT…

Employment - Terminations Before termination, consider: Prior notice for unacceptable behavior Reasonableness of policy and fair application Adequate investigation Proof of policy violation Progressive discipline 3 rd person present in termination meeting

Volunteers Volunteers should sign basic volunteer liability waiver Releases nonprofit if something happens to volunteer while working with organization Could also include medical release and/or Photographic release Consider property ownership rights

Federal Volunteer Protection Act Volunteer not liable for harm caused by his/her acts on behalf of an organization, provided Harm was caused by negligent behavior, not reckless or willful Law protects volunteers from lawsuits by third parties Organization still may bring a suit against the volunteer

Commercial leases Total economic costs Other essential terms that could impact organization Do not rely on landlord’s attorney

Contact information Laurie Hauber, Staff Attorney Legal Services of Eastern Missouri, Inc. Community Economic Development Program 4232 Forest Park Ave. St. Louis, MO