Not-For-Profits 101

            Perhaps your child plays a sport and you wish to serve on the board of directors for the youth sports organization.  Or, you are involved in your church and serve on a charitable entity created by your church community.  Perhaps you serve on the board of directors of your child’s nursery school, or on the board of directors of the parent-teacher organization.  There are a  multitude of artistic or historical societies, homeowners associations, religious organizations, membership organizations and other not-for-profit entities that are governed by boards of directors comprised of community-minded people who want to contribute by volunteering to serve on the board of directors of an organization that is important to them.

But perhaps once you are elected or appointed to the board of directors you find that it’s not the rich and rewarding experience that you thought it would be.  Perhaps the founders of the organization are still running the show and there is little or no transparency, formality, or even opportunity for others to participate in governance or control over the decision-making process.  There appear to be no meetings, financial statements, membership records, or votes on expenditures.  Things are done the way they have always been done, and the entity is run more like a lemonade stand than a corporation.  You may find yourself asking, is this the way it’s supposed to be?  And if not, what can I do about it?

As an attorney, this is a common scenario that I encounter, and I am consulted when a real problem arises.  Perhaps my client has complained too much and is facing retaliatory removal proceedings from a board of directors.  Or, worse, a client may suspect financial wrongdoing by the directors who are running the organization.  In any case, I frequently find myself advising my clients that yes, there are formalities that should be observed by boards of directors of not-for-profits, and yes, they are right to question the informal and obscure way things are being handled once they are serving on the board of directors.

Among the formalities that should be observed are the holding of regular board meetings that are properly noticed and attended.  There should be an agenda and minutes of the meetings to document what was discussed and the decisions that were made.  Significant expenditures should be reasonably deliberated and approved by a majority vote.  Board meetings should be conducted in a professional and courteous manner – they are not the time for airing of personal grievances or raising interpersonal disputes.  Board members have a duty to act in the best interest of the organization, and the business of the organization should be conducted in a mission-focused manner.

Board members should also read and be familiar with the entity’s certificate of incorporation and its bylaws and should follow them.  Board members should know what the mission of the organization is and act in a way so as to promote it.  There should be internal financial controls and oversight over the finances of the organization.  Each board member should know and understand the budget and financial expenditures that are being made.  This requires regular reporting by the treasurer or other financial officer to the board of directors.  The board should be maintaining regular books and records of its member database, meeting agenda and minutes, and its financial statements.  Every member of the organization has a right to view these upon a reasonable request.

The New York Not-For-Profit Corporation Law provides several civil remedies to members who need to challenge the conduct of boards of directors when they suspect wrongdoing.  Not-for-profit corporations in the State of New York are also subject to the oversight and supervision of the Office of the Attorney General and the Charities Bureau.  The Attorney General’s office has the ability to bring an enforcement action against a not-for-profit that does not comply with New York law.  Thus, even if the entity is small or has a small operating budget, corporate formalities should be observed.  Although the organization does not exist for profit, it is a corporation nonetheless and should be governed as such.

This is not intended to be legal advice.  You should contact an attorney for advice regarding your specific location.

Kara J. Cavallo is senior counsel on our Litigation Team. She can be reached by calling 845-778-2121 toll free or 845-778-2121 and by email.