Nonprofit Legal Compliance in an Unfriendly Political Environment

No matter whether the approach is to go on defense or offense, shoring up the organization’s compliance is critical.

Broad segments of the nonprofit sector are concerned about the new presidential administration and the threats it poses to nonprofit organizations. Some have developed contingency plans involving the formation of subsidiaries or affiliates, the transfer of funds to other organizations, and the modification of progressive programs. Others have taken a more combative approach, investing in advocacy, movement building, and legal strategies.

No matter whether the approach is to go on defense or offense, shoring up the organization’s compliance is critical. A charity or nonprofit’s plans can be shut down for a failure to properly register. Its board actions might be reversed because they were not taken pursuant to the organization’s bylaws or applicable corporate laws. Or an organization can damage its reputation and trustworthiness by permitting an unlawful transaction, like one involving prohibited self-dealing by an organizational leader or the conferring of a prohibited private benefit (for example, excessive compensation) on any other party.

Compliance Checklist

The following list of compliance matters will help prepare a public charity or private foundation to address a threat:

1. Review your mission/purpose statements, particularly in your governing documents (for example, articles of incorporation, bylaws), to ensure that they are consistent with your activities and your public representations, including in your fundraising materials.
2. Ensure that the organization is operating consistent with its governing documents, including with respect to provisions governing elections, terms of service, board meetings, board actions by written consent, delegated authority to committees and officers, reports, amendments to bylaws, and voting membership rights (if applicable).
3. Ensure activities are operated consistent with all applicable laws, including Section 501c3 of the Internal Revenue Code and any licensing, registration, zoning, and contractual requirements.
4. Review your communications and communications policies to ensure that they do not create unnecessary risks of copyright or trademark infringement, defamation, fraudulent misrepresentations, or political campaign intervention.
5. Be prudent with your financial resources, looking not only to short-term consequences but also to long-term health, even if this forces you to make difficult decisions now.
6. Ensure that your board is fulfilling its legal duties and that board members are aware of their fiduciary duties of care and loyalty, the practical steps in meeting these duties, and the missteps that can create risks of personal liability.
7. Ensure that your organization is in compliance with all applicable employment laws, it has written policies to guide leadership toward such compliance, and it considers policies that address employee wellbeing and participation in leadership. Dissatisfied employees heighten legal risks.
8. Ensure that your organization is in compliance with its contractual obligations and has appropriate policies with respect to prudently entering into new contracts, particularly those that may have a great impact on the organization.
9. Review your data management and protection policies and practices to ensure current compliance and also to manage future risks; strongly consider the importance of privacy rights whether currently captured in the law or not.
10. Review your plans for addressing future trends and risks, how they may impact your mission and service delivery, how they will impact your employees and beneficiaries, how they will affect your facilities and investments, and how they will affect the broader ecosystem with which your organization is interdependent.

Well-informed consideration of the law may also open up what an organization can do to address risks without allowing fear to become an existential threat.

While legal compliance is of great importance, the reason for an organization’s being must continue to serve as its North Star and guiding principle. This will be captured by its mission/purpose but also by its core values, which may be important to include in its governing documents. These values should include a respect for the wellbeing of the organization’s targeted beneficiaries and the broader ecosystem in which the organization operates.

Going on the Offense

501c3 organizations can engage in many forms of advocacy.

Well-informed consideration of the law may also open up what an organization can do to address risks without allowing fear to become an existential threat. The following list describes activities that public charities and private foundations can engage in to better advance their mission and values:

1. Public charities can lobby, and while there are limits to how much lobbying they can do, if they make the 501(h) election (simply done by filing a very short Form 5768), the limits are generous. The factsheet “What Is Lobbying Under the 501(h) Election?” from Alliance for Justice is a helpful resource.
2. Private foundations can safely support public charity projects that involve lobbying without unlawfully designating their grant funds to lobbying. See, for example, The Project Grant Rule Hub.
3. 501c3 organizations can engage in many forms of advocacy in furtherance of their missions that are not limited by lobbying or political campaign intervention or support rules, including educational issue advocacy, advocacy on administrative regulations, calls for executive action, boycotts, and litigation.
4. Public charities can engage in many pro-democracy activities, including get-out-the-vote drives and voter registration drives.
5. 501c3 organizations can engage in self-defense lobbying without limitation, which would include communications withlegislators to address matters that might affect the existence of the organization, its powers and duties, its tax-exempt status, or the deduction of contributions to the organization.
6. 501c3 organizations must understand that (a) the promotion of social welfare by organizations that conduct activities to eliminate prejudice and discrimination and (b) the defense of human and civil rights secured by law are lawful charitable purpose under 501c3. There is much misinformation suggesting otherwise, but there are ways to mitigate threats where programs designed to advance the rights of particular racial or ethnic groups involve contractual language.

One grantmaking strategy for pursuing racial equity goals without potentially violating civil rights laws applied in reverse is to avoid race-based eligibility requirements and instead use alternative eligibility requirements that are aimed at advancing the racial equity goals. Another strategy to consider where possible is to avoid making the grant pursuant to an enforceable contract while still citing applicable laws that would apply to the grant.

7. 501c3 organizations with investment funds should consider whether these funds can be invested in a way more consistent with advancing their mission and spent in times of need without fearing violation of prudent investor laws (for example, the Uniform Prudent Management of Institutional Funds Act), noting that quasi-endowments (for example, board-designated endowments) are not subject to true endowment spending restrictions.
8. Fiscal sponsors may be able to operate fiscally sponsored projects affiliated with a separate 501c3 organization, which may allow for asset-protection strategies without need for creating a separate legal entity.
9. 501c3 organizations can create affiliated 501c4 organizations, which may engage in unlimited lobbying in furtherance of their missions and in some partisan political campaign intervention. (Note: Currently, regulations provide that political campaign intervention may not be a 501c4 organization’s primary activity, but recent court decisions may put this into question.)
10. 501c3 organizations can enter into joint ventures and other forms of collaboration with for-profits and other types of nonprofits subject to limitations that can be well-managed with the advice of appropriate counsel.