Are Your Board Members Independent?

Kenneth Tornheim, CPA, CFE

Not-for-profits must state on their IRS Forms 990 the number of independent voting members on their board of directors. Donors, state attorney generals and the media increasingly have been scrutinizing this reporting, believing that independent directors are a key ingredient of good governance.

Some organizations mistakenly think that independence is only about addressing conflicts of interest. But, the concept of independence in the not-for-profit context is broader than that.

IRS Definition

For purposes of reporting the independence of board members on Form 990, your not-for-profit must use the IRS’s four-part definition. Under it, a board member generally is independent if he or she meets these criteria:

1. The member wasn’t compensated as an officer or other employee of the organization or a related organization.
2. The member didn’t receive total compensation exceeding $10,000 from the organization and related organizations as an independent contractor during the tax year. This excludes reasonable compensation for services provided as a board member.
3. Neither the member nor any family member was involved in a transaction with the organization that must be reported on Schedule L, “Transactions with Interested Persons.”
4. Neither the member nor any family member was involved in a transaction with a taxable or tax-exempt related organization that must be reported on that organization’s Schedule L.

You also must disclose on Form 990 whether any of your current officers, directors, trustees or key employees had a family or business relationship with each other at any time during the tax year.

Reasonable Effort

Not-for-profits are not required to engage in more than a “reasonable effort” to obtain the necessary information for the disclosures about independent directors’ family and business relationships. For example, you could distribute an annual questionnaire to all of your officers, directors, trustees and key employees asking for the relevant information.

Note, too, that a board member isn’t considered to lack independence merely because he or she is a donor to the organization. In addition, a board member can be independent even if he or she receives financial benefits as a member of the group it serves (for example, a member of a chamber of commerce who also serves on its board). A religious exception may apply if the board member has taken a vow of poverty and belongs to a religious order that receives sponsorship or payments from the organization or a related organization that don’t qualify as taxable income to him or her.

And remember, you aren’t required to have only independent board members. However, some charity watchdog groups suggest that a substantial majority (meaning at least two-thirds) should be independent.

Roles for Your Independent Directors

Independent directors are a greater testament to your organization’s integrity when they take on specific roles that can benefit from their independence. For example, the audit and compensation committees should include only independent directors. This helps assure compliance with IRS guidelines for conflicts of interest and establishing executive compensation.

It’s also a good idea to include independent directors on the governance and nominating committees and in any other board decisions where relationships could be viewed as preferential — for example, decisions related to employee salaries. And consider holding all executive sessions of your board meetings with only the independent directors.

Matter of Best Practices

Appointing independent directors to your board isn’t just a matter of appearance — it’s a critical component of good governance. IRS requirements aside, your not-for-profit should regularly assess whether any of its directors’ financial or familial relationships affect their abilities to act in your organization’s best interests.

For more information, contact Kenneth Tornheim at [email protected], or call him at 312.670.7444. Visit ORBA.com to learn more about our Not-For-Profit Group.
© 2018

Coworking for Not-For-Profits is More than the Financial Savings

MICHAEL MARRION, COLLIERS INTERNATIONAL, GUEST AUTHOR

Coworking is all the rage these days.  Simply stated, the concept is use of shared office space that provides access to resources that alone, smaller organizations would not be able to afford.  For example, a reception area for guests, large conference rooms for board meetings, a classroom facility and event space.  Additionally, many coworking spaces offer access to shared back office services such as finance and accounting, IT and others.

Although the economies of scale allow these smaller groups to have resources that they couldn’t normally afford, that is not the main attraction to these spaces.  The real draw and value is the ability to collaborate with other like-minded people in an open and energetic community setting.

In the not-for-profit arena, we’ve seen these spaces facilitate the sharing of great ideas such as how to create a revenue producing arm to support the mission.  The frequent interaction can also foster the formation of partnerships that can strengthen assistance efforts as well as eliminate overlap and duplication of efforts.

Coworking can also provide an opportunity to share frustrations and understand how to bounce back from things like the disappointment of not receiving a grant that appeared imminent.

Shared Space, Shared Opportunities

In addition to connecting with other organizations, a shared space that is focused on social impact can also attract interest and engagement with potential volunteers and other supporters.  A small space stowed away at a hard to find location discourages this kind of interaction.  But by joining together to make rent dollars go farther, groups can create mini “impact hubs” that folks like the uber-socially conscious Millennials are drawn to.

Traditional funders such as foundations are also attracted to these coworking centers as a means of increasing their exposure to many organizations at the same time.  As donor organizations look to innovate how they support their chosen sector, they have increasingly looked for opportunities to engage a more diverse cross section of grantees.

Another aspect of the coworking space is unique to the not-for-profit sector.  Because not-for-profits who lease space from for-profit landlords are subject to real estate taxes, a north suburban foundation has begun to look at purchasing a small, stand-alone building or condo interest in a few floors of a larger building.  With a 501(c)(3) organization as the owner, there would be no real estate taxes assessed on the property and this savings would allow smaller not-for-profits to lease the space from the not-or-profit owner at below market rents.

Do They Work?

The Nonprofit Centers Network (http://www.nonprofitcenters.org/) based in Denver actively works with communities and organizations around the country to help build and support these community spaces.  A day long “Boot Camp” can help groups figure out what kind of center is best for them and how to go about building interest and raising necessary funds.

And yes, there is one right here in Chicago’s West Loop.  It’s the Literacenter.  The three-year-old coworking space is home to over 125 Chicago-based, literacy-focused not-for-profit organizations.  Some of the members are there everyday and call it their permanent home, while others use it as more of a “touchdown” spot when they are in the Loop for other meetings.  Still, others primarily use technology (blogs, forums, seminars, etc.) to engage in discussions with the rest of the literacy community.

Toronto and New York are home to successful Centre for Social Innovation (CSI) https://socialinnovation.org/), a concept that embraces a diverse cross section of not-for-profits and social entrepreneurship.  Centers in major cities like this have also been able to attract significant corporate sponsorship of events held at social impact coworking spaces.  The desire for businesses to prove to the millennials they are recruiting that they place a high value on active social responsibility has been an unexpected boon for revenue at CSI.

Most centers currently average about 30,000 square feet of space and are home to 12-15 tenants.  Normally, a staff of three full-time employees is adequate to manage the operations.  One person is normally required to be an operations manager but it is vital to have a community manager as well.  This person must be someone who is passionate about the community that has been created and works daily to foster open and honest communication among members

Themed coworking spaces have been incredibly beneficial to tech entrepreneurs at 1871, bio pharma startups at Matter and The Hatchery, and a space for food and beverage start-ups is currently under construction.  Merging this new way to work into the not-for-profit sector in Chicago is much needed and will be a great benefit to many organizations and the populations they serve.

For questions on coworking and shared spaces, contact Michael Marrion at [email protected].