Joining the Board of Directors of your local youth sports club may not seem like a big deal, but it’s not all fun and games. Being on the Board of Directors of a Corporation – and that’s what almost all nonprofit organizations are – comes with significant responsibilities. And I’m not even talking about the fun stuff that comes with helping run an organization that revolves around children playing games, though there’s that, too. As a Director of the organization, you have actual legal duties to the organization: the Duty of Loyalty, the Duty of Care, and the Duty of Obedience. If you’re not familiar with those terms, you’ll need to be, so here’s a primer for you.
Duty of Loyalty
The principle that Directors of a corporation, as fiduciaries, must act in the best interest of the organization and not themselves or others. That means avoiding conflicts of interest and even the appearance of conflicts of interest when possible, and reporting any that you’re aware of to your fellow Directors. It the organization has a conflict of interest policy in place (more on that in a bit), you’ll at least need to make sure you follow that.
Duty of Care
The principle that Directors must act in the same manner as a reasonably prudent person in their position would. You can’t just do things willy-nilly because it’s not your money that is being spent. As a representative of the organization you need to act prudently with all your actions and be active in the oversight of the organization, including participating in board meetings, overseeing the performance of the executive officers, evaluating the organization’s budget and long-term strategic plans, reviewing the key financial information, etc., etc.
Duty of Obedience
The principle that Directors must:
- ensure that the organization obeys all applicable laws and regulations
- act in accordance with the organization’s bylaws, and
- pursue the mission of the organization
This one might seem like a no-brainer. Who wouldn’t follow rules and regulations? You might be surprised, though. All too often organizations run by volunteers don’t have an in depth understanding of the rules and regulations that apply or what the bylaws specify, which can put the organization (and the Directors) at risk. If you’re not directly responsible for compliance, you are at least responsible for understanding what the organization’s compliance obligations are and whether others are doing what they’re supposed to be doing to ensure compliance.
What You Should Do to Start
First, you’ll want to make sure you’re familiar with the stated mission of the organization and with its inner workings. Read the Bylaws, the Articles of Incorporation, and the most recently filed form 990 of your organization. These documents will help you get an understanding of how the organization is set up, how it is supposed to operate, how it describes its purpose/mission, and its basic financial situation. If there are job descriptions for the various board and executive positions within the organization and you’ll want to read through those, too.
Next, you’ll want to understand the federal and state regulatory requirements for your nonprofit. Hopefully your club has a document that outlines the organization’s responsibilities associated with these regulations already, but if they don’t, you’ll need to get yourself up to speed. Most states have a requirement to file some sort of report for the corporation periodically, usually annually. There are also usually regulations related to soliciting charitable contributions, as well as regulations about property taxes, sales taxes, etc., even if you have exemptions. Some states may also require you to submit your club’s form 990 or even a state-specific nonprofit tax return to them, while others may require financial statement audits, reviews or compilations by a CPA firm.
The federal regulatory requirements will vary as well, but nearly all nonprofit organizations are required to file one of the 990 series of forms annually, and all nonprofit youth sports organizations will have to. If the organization has employees you may have additional requirements related to employees and/or benefit plans, such as issuing W-2s to employees, filing Department of Labor forms 5500 for employee benefit plans, etc. Organizations that pay suppliers for services may also be required to issue forms 1099-MISC to some of those suppliers. For Youth Sports clubs 1099-MISC forms are often issued to coaches and referees in particular.
Lastly, you’ll also want to read through and understand the organization’s key policies and procedures. These normally should include a compensation policy (assuming there are paid employees at your club), a conflict of interest policy, a whistleblower policy, and a document retention policy. While none of these are legally required to receive or maintain your tax-exempt status, it is certainly best practices to have each of these policies documented. That is particularly true with the compensation and conflict of interest policies as having bad practices in these areas can, at worst, leave you with a risk of losing your tax-exempt status, or at best heightening the potential for scrutiny from the IRS or others.
In addition to our articles and many others like them, there are a number of organizations with resources to help you. Organizations like BoardSource, the National Council of Nonprofits, and state nonprofit associations have loads of resources, many (if not most) for free. Good luck and thank you for serving your community!
If you have any questions about the article or need any help, don’t hesitate to contact us. We’d be glad to help.