Category Archives: Tax-exempt Organizations

What is a Quorum and Why Does It Matter?

Do you know what your organization’s bylaws say about quorum? If you know where your bylaws are, it may be a good idea to check!

“Quorum” means the minimum number of people that must be present for a body to transact business.    Generally at the beginning of every board of directors meeting, the secretary takes attendance and determines whether a quorum is present, according to the terms of the organization’s bylaws.

The bylaws may specify, for example, that quorum is the “number of directors present at any meeting”  or the quorum may be set at a specific number.

Massachusetts statute states that the quorum for a nonprofit board of directors is “a majority of the directors then in office”, unless the bylaws specify a different number. Where the bylaws specify the quorum, the bylaws govern.  If the bylaws do not specify the requirement for quorum, then the Massachusetts statute serves as the default—“a majority of the directors then in office” is the quorum.

It’s essential to remember the context for this issue of quorum. Boards have oversight of their nonprofits; and boards can only act collectively and only in the presence of a quorum. The entire board should be making the decisions that will impact the nonprofit, and this responsibility may not be left to the few. Indeed, in organizations with executive committees, the board still must assert its oversight over the acts of the executive committee, through review and ratification. Charities must serve a public interest, and if the body actually doing the governing is too small, private interests may easily take over.

Occasionally failing to meet quorum  requirements is not a problem.  But remember that failing to meet quorum means that no business can be transacted, so even occasionally lacking quorum can cause substantial problems, should the agenda call for a key business decision.

Failing to meet quorum, if it happens frequently, is symptomatic of deeper problems. Sometimes boards respond to this problem by amending their bylaws to allow for a smaller quorum.  This is not necessarily the best solution, since it can result in the organization being run by a small clique, leading to further disengagement of the other directors.  In the same way, making the board of directors itself smaller may not be the best solution either. Depending on the organization’s work, a larger board may be the only way to ensure adequate oversight of the nonprofit (for more on board size, read this post). Nor is the creation of  or defaulting to, an executive committee the solution, for the same reason.  The best strategy is to grapple with the real problem—why board members have become disengaged.

The quorum rule also applies to members’ meetings—that is, meetings of individuals who are legal voting members of the organization. This body of members is in effect another level of governance hierarchy, and some different rules apply to them, and again, this a matter of state law.

Quorum is a concept directors of nonprofits must understand. It’s also one of those concepts that is often overlooked or ignored when things are proceeding smoothly but which can upset the organizational applecart when there are bumps in the road.

How many board members should a nonprofit have?

This is often one of the first questions I am asked by clients who are forming nonprofit organizations. I usually begin my response with the typical lawyer answer, “It depends.”

The board of directors (board members are properly called “directors”) by law holds all the authority of the nonprofit corporation. Individual directors have a fiduciary relationship with the nonprofit—they are bound at all times to uphold the best interests of the nonprofit. The board must oversee all the activities of the nonprofit, develop the nonprofit’s strategic direction, set policy, and generally lead the organization as it carries out its mission. This is a lot of responsibility.

Independence of directors is essential—independence of thought, as well as independence in the sense of freedom from direct or indirect conflicts of interest. For this reason, best practice requires all directors to be independent of each other—that is, unrelated as to family or business relationships.

Initially, to form the nonprofit, three directors are sufficient. In fact, in Massachusetts, one person is sufficient to form a nonprofit corporation, but this is not recommended for a nonprofit that plans to seek tax-exempt status. But to actually move the nonprofit assertively into its mission, more will be required.  Moreover, if the first three directors are the founder plus a colleague and a family member (often the case at initial start-up) for example, additional directors should be added to offset these relationships.  To concentrate the power of the nonprofit in one or two or three individuals who, because of their relationships, effectively constitute a voting block, subjects the nonprofit too strongly to their private interests.  Charities, as the IRS has pointed out, must serve a public interest—not a private interest.

The next consideration is the size and scope of the nonprofit. A new nonprofit with one primary activity and no staff can manage satisfactorily with five directors, for example. A large, established nonprofit with staff and a range of programs, strong fundraising and multiple funding streams, and a board that is fully engaged in strategic planning, will need many more board members—perhaps 12-15 at least, possibly more.

Another key consideration is the need of the board for a variety of skills, experience, and contacts, and for a generally diverse make-up. Boards should reflect a range of skillsets, experience, and preferably multiple and different networks of contacts that can be used to the benefit of the nonprofit. For some nonprofits, a board that is representative of its community is crucial.  Does every board need directors who are accountants and lawyers? No. But some financial savvy is essential, along with analytical ability, networks of contacts, and subject matter expertise. If the nonprofit’s board is only three individuals, is all that likely to be covered?

Boards of directors are not static. A board is never finished, set, complete. Boards are more like living organisms—they are born at the time of corporate formation, they grow and develop; they change over time. Indeed, a nonprofit whose board is unchanged many years after formation is likely stagnant, stuck, unable to move forward.

So how many board members does a nonprofit need? The short answer is, “Enough to get the job done.”

Tax-exempt Status! Congratulations!

We are proud to announce that

the Legal Center for Nonprofits, Inc.,

has been recognized by the IRS as a

501(c)(3) tax-exempt charity!

But wait–we have more great news!

Congratulations to our Clients!

The following organizations have been recently recognized by the IRS as tax-exempt organizations:

Dudley L. Brown Post 2846 Veterans of Foreign Wars (Onset, MA)

Helfand Farm Community Gardens, Inc. (Dartmouth, MA)

Hemingway Language Institute, Inc. (Fall River, MA)

Marine Renewable Energy Collaborative of New England, Inc. (Marion, MA)

Mastery School of Independent Learning, Inc. (Fall River, MA)

Minuteman Chapter, Inc. (Dartmouth, MA)

Odie’s Place, Inc. (Dartmouth, MA)

SouthCoast Bikeway Alliance, Inc. (Taunton, MA)





Latest News from IRS on Tax-exempt Status Applications

I just returned from Washington DC where I attended Representing & Managing Tax-exempt Organizations, the annual nonprofit law conference presented by Georgetown University Law School.  This conference is always interesting as it brings together many nonprofit law luminaries, but it is also eagerly looked forward to because the IRS Exempt Organizations Director always presents the first session on the first day, offering news about IRS activities relating to tax-exempt organizations.

Tamera Ripperda was introduced as the new Director of IRS’s Exempt Organizations Division—she has been in the job just since January this year.  She began by acknowledging the lengthy wait time for determination letters, but then offered context for the wait.  On average, IRS receives 60,000 applications per year for exempt status.  This has been compounded by automatic revocation—organizations that have been automatically revoked must reapply for recognition as tax-exempt, and as a result, in the period 2011-2013, applications have been averaging 80,000 per year.  At the moment, IRS has 10,000 applications for reinstatement in hand.  Of the applications “in inventory” right now, 15% are over a year old.  Receipt of applications outpaces closure of cases.

Ripperda, however, brought some good news, stating that IRS is focusing on closing out the old applications ahead of the new, and expects that all of the old applications will receive a determination by this summer.  The goal is to achieve a 9-month turnaround for all applications—a vast improvement from the current 12 to 18-month wait, but still a far cry from the good ole days when the turnaround was 4 months.

Ripperda also discussed the new IRS Form 1023-EZ, that is expected to help ease the determination crunch by providing a much simplified process  for smaller nonprofits meeting specific criteria. Planned to be fully operational this summer, Ripperda said she anticipates 70% of applicants should be able to use it,  and it will significantly reduce the burden on smaller organizations.  At the same time, however, she alluded to a “back-end review process” IRS will use to look at compliance of those organizations using the 1023-EZ.

An eligibility worksheet will help nonprofits determine whether they  can usethe 1023-EZ.  The form itself will include self-attestations as to annual gross receipts, organizational structure, nature of activities, and the like. It can only be filed electronically, and will be automatically rejected if it is incomplete or the user fee is incorrect—this by itself will save IRS an enormous amount of time.

I will have more to say about the rest of the two-day conference, as well as a first take on 1023-EZ.  Stay tuned!