Maine Nonprofit Law E-Bulletin August 2010

 

In this Issue:

• Introduction
• Extension for IRS Form 990-N
• A Primer on Membership Issues

Introduction

Welcome to the latest issue of the Maine Nonprofit Law E-Bulletin.  I send E-Bulletins 3 or 4 times per year to provide updates and analysis on legal and policy matters respecting Maine nonprofit organizations.  I do my best to keep the messages brief, timely, and useful to nonprofit staff, board members, volunteers, advisors, and donors.  At the same time, no one may rely on these E-Bulletins as legal advice, and I encourage you to consult a qualified attorney for advice on any particular situation.

If you find this free E-Bulletin to be valuable and interesting, please share it with a friend or colleague.  Subscriptions remain free, and I respect my subscribers’ privacy.  Anyone who would like to receive this E-Bulletin or the Maine Land Conservation Law E-Bulletin can e-mail me at rob@roblevin.net.  If you’d like to be removed from the distribution list, simply drop me a line at that same address.

Extension for IRS Form 990-N

Who says the IRS has no heart?  In an unexpected act of clemency, the IRS is offering a one-time extension for those tax-exempt organizations that missed the May 15 filing deadline for filing the Form 990-N.  The new deadline is now October 15, 2010.

Brief background for those of you still catching up on this issue:  Since 2008, the Form 990-N has been a required annual filing for all tax-exempt organizations that are not required to file a Form 990 or 990-EZ because they fall below the $25,000/year gross receipts threshold.  If an organization fails to file a 990-N for three consecutive years, then its tax-exempt status (for charities, this means its 501(c)(3) status) is automatically revoked.  Because the filing requirement was first implemented in 2008, this year marks the third consecutive year, and thus the first time that the IRS can revoke any tax-exempt statuses.  If you know of any small 501(c)(3) or other tax-exempt organizations out there, you might want to check to make sure they’re aware of the Form 990-N filing requirement.

The IRS has published a state-by-state list of organizations at risk of losing their tax-exempt status because they have not filed for three consecutive years.  As of June 30, there were well over 1,700 Maine organizations on the list.  For more information and to see the list, click here.

 

A Primer on Membership Issues

In my eight years of working with Maine nonprofits I have come across all manner of questions and confusion concerning membership.  Do we have members?  Should we have members?  What does it mean to have members?  Can we switch from a membership organization to a non-membership organization?  Allow me to take a moment of your time to address a few of these questions.

One key distinction to appreciate from the outset is that the term “member” has a specific definition under the Maine Nonprofit Corporation Act, as well as a more colloquial usage that may be different for certain organizations.  Under the Nonprofit Act, a member is a person (either an individual or an entity) “having membership rights… in accordance with the provisions of its articles of incorporation or bylaws.”  Thus, to determine if an organization has “legal members,” as I shall call them, one consults the articles and bylaws.  Hopefully, these two documents are in sync on the issue, although occasionally an organization’s articles will discuss members but not the bylaws, or vice versa.  (Also note that “members” are different from “directors.”  A Maine nonprofit corporation must always have a Board comprised of at least three directors.  But it may or may not have legal members.  Creating some confusion, a director is sometimes referred to as a member of the Board, but this is a casual usage and is different from a legal member of the corporation.)

At the same time, there are many organizations that do not have legal members (i.e., their articles and bylaws do not call for members), but that nevertheless refer to their donors as “members.”  This practice is perfectly acceptable, and can be an effective fundraising strategy by building a sense of ongoing identity with donors.  However, the distinction between “legal members” should be kept clear, so as to avoid confusion internally or with those members.

For an existing organization, it is critical to know whether it has legal members because the Nonprofit Act grants them certain rights, such as access to records and the calling of meetings.  Typically, but not always, articles of incorporation and bylaws give legal members the right to elect Board directors.  Occasionally, legal members also have rights to approve certain key decisions.  Furthermore, the Nonprofit Act requires a corporation to keep accurate membership records, which is essential as a practical matter because in the event of a membership vote, it is necessary to know how many members constitute a quorum and/or a majority.  These calculations become impossible if no one can figure out how many members exist in the first place.

As a general matter, when I am helping a nonprofit corporation start up from scratch I usually recommend not establishing legal members unless there is a good reason to do so.  For example, certain founders want to purposefully cultivate a grass-roots base of supporters who will play a role in decision making; legal membership makes sense in this context.  But barring this exceptional circumstance, as a matter of simplicity, the fewer moving parts to an organization, the lighter the administrative burden and the less of a chance that something can go wrong.  As a non-membership organization, there are only two key arms to the organization, the board and the staff.  The principal arguments in favor of membership are that members make an organization more democratic and broad-based, and provide an additional check on a potential rogue board.  Although this argument has merit, I have generally found that having members adds a third arm whose advantages often do not outweigh the drawbacks.

It is not uncommon for an organization to have been established with legal member years ago, without much thought given to the matter.  Often, in the hustle and bustle of things, the membership aspect has withered away and the organization is no longer following its burdensome, albeit well-intentioned, articles and bylaws provisions on membership.  A Board in this position can do one of three things:  It can amend the articles and bylaws so as to become a non-membership organization (although usually this step requires the vote of the members, so can be easier said than done).  It can change its practices so as to start complying with the membership provisions.  A third and perilous option is to ignore the issue, and hope no one notices or cares.

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              CIRCULAR 230 DISCLOSURE: Any federal tax advice contained in this communication or attachment is not to be used for the purpose of avoiding penalties under the Internal Revenue Code or promoting, marketing or recommending any transaction or matter addressed in this communication.

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