Common Risks for Nonprofit Organizations and How to Prevent Them
Nonprofit organizations are essential to the well-being of our communities, delivering critical services to support those in need. While their charitable missions empower them to engage in unique, mission-driven activities, they are not immune to risk. In fact, as tax-exempt entities, nonprofits must navigate an added layer of regulations that for-profit businesses often don’t face. Proactively identifying and managing these risks is crucial for long-term sustainability and mission impact. In this post, we’ll examine some of the most common risks nonprofit organizations encounter and how to prepare for them effectively.
1. Conflicts of Interest Must be Disclosed and Addressed
Unlike for-profit entities, board members, officers, or other key persons involved at a nonprofit organization must disclose when they have conflict of interest or potential conflict of interests when making decisions that can impact the organization. When a conflict of interest or potential conflict of interest is identified, it is best practice for that person to remove themselves from the decision-making process.
If an organization engages in a related-party transaction where a conflict of interest exists, it can be at-risk of violating IRS rules that impose a significant tax and possibly jeopardize its tax-exempt status. This is particularly the case for private foundation, where self-dealing, when a key person benefits from a transaction to the organization’s detriment, can result in a hefty excise tax.
Although the IRS does not require a Conflict of Interest Policy, many States, such as New York, require that the organization have one in place to guide them through the decision-making process.
2. Governance and Compliance Risks from Internal and External Sources
Governance and Compliance risks cover a host of issues that nonprofit organizations may face. It is critical that board members, officers, and other key persons at an organization be familiar with the organization’s internal policies and aware of external laws. This includes complying with state, local, and federal tax rules to ensure the organization is only engaging in activities that carry out its charitable purpose in order to maintain its tax-exempt status.
A nonprofit organization must ensure that it is complying with its internal policies (Bylaws, Conflict of Interest Policy, Grant Policy, OFAC Policy, etc.) in order to maintain seamless and reliable operations. It is recommended to review internal policies every 3-5 years and ensure new board members get familiar with the organization’s governing documents before joining the organization.
Organizations must ensure compliance with external laws and requirements. This includes changes to nonprofit corporation laws, tax laws that impact the organization and applicable agency laws. By having ongoing communications with its general counsel, an organization can be nimble in responding to sudden changes in the law in order to avoid jeopardizing its legal standing.
3. Communication Risks to External Parties May Harm Organization’s Reputation
A nonprofit organization must be mindful of its communications. This includes social media posts, emails, and when members of the organization speak in public settings.
A nonprofit should have a procedure in place to review its communications prior to publication to confirm they accurately describe its charitable mission in a transparent manner. If a nonprofit organization does not, it may be at risk misrepresenting itself in contract negotiations, grant applications, or donor engagements. The result may be catastrophic if funding is lost or the resulting reputational harm is irreversible.
When advocating for or informing the public about its charitable goals, nonprofits must avoid engaging in partisan political activity and must not have a substantial part of their activities be lobbying. Organizations are allowed to advocate for supporting their charitable causes, but they cannot engage in prohibited political activity as there is a high risk of potentially losing 501(c)(3) tax-exempt status.
Adopting a policy and process for external communications will help create parameters on the type of language that can be used, the authorized platforms, and the individual responsible for reviewing the final products.
4. Financial Responsibility Cannot Be Abdicated
Nonprofit organizations rely on donations, grants, and fundraising events to support its operations and activities. It is the Board’s responsibility, both collectively and individually, to oversee the financial health of the organization.
The organization’s financials must be handled in a transparent manner and ensure the majority of funds are used to carry out the organization’s charitable mission.
The organization should reiterate to its Board that financial compliance and responsibility remains with the Board at all times and is not a responsibility that can be transferred to someone else, whether a committee, CPA, attorney, or outside consultant. There should be checks and balances in place to ensure that filings are submitted to the IRS on a timely basis and that the finances are properly invested to meet the organization’s overall goals. Failure to do so may result in loss of tax-exempt status, which requires significant cost and time to regain from the IRS.
5. Reputational Risks May Result from Internal or External Events
Reputational risks usually refer to the potential loss of public trust and credibility due to actions, behaviors, or external perceptions of an organization. A “bad reputation” can cause a ripple effect through the organization and impact its internal structure and external partners. This is because nonprofits rely on their reputation in order to receive donations, grants, and enter into contracts. Reputational risks can cause internal disruption and cause a stagnant Board not be able to make important decisions for the organization. It can also cause community backlash, loss of funding and opportunities, and may even prompt an investigation from the Attorney General.
Contact Our Experienced Nonprofit Lawyer Today
Risk is an inevitable part of running an organization, but it doesn’t have to hinder a nonprofit organization’s activities. Recognizing risk is the first step to resolving it. By taking proactive approach to risk management, board members, officers, and other key persons can help set up the organization for long-term success to make a lasting difference in their communities.
At Abelaj Law, P.C., we understand the various risks nonprofit organizations face and work with them to mitigate and resolve current or potential issues. Our work is about giving the tools and resources an organization needs in order to succeed. To hear more about our services, call a seasoned lawyer at Abelaj Law, P.C. You can reach them at 212-328-9568.
Also, check out or Board Member Training: How to prevent Disruptions Before They Occur https://www.abelajlaw.com/elevate-your-nonprofit-governance/
Unilateral Silencing of Charities Deemed to be Terrorist Organizations: Pending Legislation
Although it has not made much news, a proposed Bill titled Stop Terror-Financing and Tax Penalties on American Hostages has been making its way through Congress. As of November 21, 2024, the Bill was approved in a vote of 219-184 and received support from all Republicans except for one and by 15 Democrats.
As of December 2, 2024, the Bill was received by the Senate. If approved, it would only take approval by the President for this Bill to become law and potentially silence nonprofits that a presidential administration deems to be involved in terrorist activity.
Nonprofits Are Already Prohibited from Supporting Terrorist Activity
The Internal Revenue Code already provides a mechanism for a nonprofit to lose its tax-exempt status if it is deemed to be engaging in terrorist activity. The definition of terrorist activity, the process of revocation and the rights of the accused charity are outlined in paragraphs (1) through (7) of Section 501(p) the Code.
A terrorist organization whose tax-exempt status may be revoked is defined in paragraph (2). Terrorist classification is determined by other Federal acts and departments, including the Immigration Nationality Act (INA), an Executive Order related to terrorism under the authority of the International Emergency Economic Powers Act, or an Executive Order issued under the authority of any Federal law related to INA or as it pertains to subnational groups. In other words, it’s a method of checks and balances where the Treasury Department relies on the expertise and knowledge of other Federal departments to identify and designate a terrorist organization.
Key Points of the Bill that May Silence Nonprofits
The Bill proposes adding a new paragraph (8), which would vest the Secretary of Treasury with unilateral authority to designate a nonprofit as meeting the definition of a terrorist organization as defined in paragraph (2). The Secretary of Treasury is a Presidential appointment.
Although it appears that the Secretary would be limited to the definition of a terrorist organization based on an outside agency or Act, there is a vulnerability to organizations which may be deemed as a subnational group, which is one that advocates for a certain point of view or policy which may not be supported by the Federal government.
In addition, if the Secretary identifies a nonprofit as a terrorist organization, the organization has only 90 days from the date of the notice to provide a response or certification that it did not support the alleged terrorist activity. This leaves the nonprofit very little time to understand the allegations and prepare a satisfactory response.
Take Action to Improve Internal Controls
Nonprofits support charitable causes throughout the world and advocate for improved human rights with the United States. It is important to maintain updated policies and expenditure responsibility.
This may include the following:
- Reviewing your OFAC Policy to comply with anti-money laundering laws
- Auditing your expenditure responsibility reports and
- Updating your grant agreement policies.
On a regular basis, review your Bylaws and Committee Procedures to determine if they reflect the latest laws and best governance practices.
In addition, maintaining timely and detailed minutes is important for all organizations as they reflect the decisions made and the underlying reasons.
Finally, prepare a team of professionals to support your organization, including an accountant, attorney and other advisors who understand your organization before a need arises. At Abelaj Law, PC, we are committed to assisting nonprofits with their governance needs. Contact our experienced legal team today at 212-328-9568 for an introductory call to learn more.
Protecting Non-Profit Volunteers From Liability
Many nonprofit organizations rely on volunteers to accomplish their goals and serve their causes. Just like workplaces with paid employees, nonprofits that use volunteers need to be aware of potential liabilities related to these activities. Fortunately, the federal Volunteer Protection Act of 1997 protects volunteers from liability in many situations, and several states have their own volunteer liability protection laws. However, volunteer liability is a complicated legal concept, and there are some circumstances in which a volunteer can be held liable for injuries or property damage. To learn more about protecting nonprofit volunteers from liability, and to ensure that your nonprofit organization is legally protected, contact the nonprofit lawyers of the Jennifer V. Abelaj Law Firm at 212-328-9568.
Understanding the Volunteer Protection Act
In 1997, the United States Congress passed the Volunteer Protection Act in an effort to promote volunteerism. This law protects nonprofit volunteers from civil liability for injuries or property damage as long as the volunteer:
- Was acting within the scope of their volunteer duties;
- Had proper licensing, if needed;
- Did not cause injuries or damage due to gross negligence, willful misconduct, recklessness, or a conscious disregard for the safety of the person injured;
- Was not using a motor vehicle, aircraft, or any other vehicle when the injuries or damage happened
Although state volunteer protection laws vary, this federal law uniformly protects nonprofit volunteers in all 50 states. However, the VPA does not protect the nonprofit organization from liability, only individual volunteers. Nonprofit organizations can still be held liable for negligence by their volunteers. Additionally, nonprofit volunteers can sue an organization they volunteered for if they suffered an injury due to the organization’s negligence.
New York Courts and Nonprofit Volunteer Liability
The New York State Supreme Court recently dismissed a negligence claim filed against a nonprofit volunteer, ruling that the defendant was statutorily immune from liability according to the federal Volunteer Protection Act. In Jeraci v. Cooper, the plaintiff and defendant were both members of the Sullivan County ATV Association, which is a 501(c)(3) nonprofit that raises charity funds through all-terrain vehicle rallies. The plaintiff sued the defendant, the ATV Association, and other parties for personal injuries he sustained during trail maintenance before an event.
In this example of the VPA in action, the plaintiff suffered an injury when his saw got stuck in a tree and the defendant used an excavator on the tree trunk, causing it to move suddenly and break the plaintiff’s leg. The defendant and his legal team filed a motion to dismiss the complaint, which was opposed by the plaintiff’s legal team. However, the court sided with the defense and dismissed the claim based on the protections guaranteed by the VPA.
How Can Nonprofits Minimize Volunteer Liability Risks?
While federal law protects nonprofit volunteers from liability in most situations, nonprofit organizations also have a responsibility to do what they can to reduce the risk of potential liability for both the organization and its volunteers. You can learn about minimizing nonprofit liability risks and protecting nonprofit volunteers from liability by contacting the experienced nonprofit lawyers of the Jennifer V. Abelaj Law Firm.
Some general best practices that can help minimize liability risk include:
- Use reasonable care when deciding whether to accept or reject volunteer applicants, including a screening process to identify risky volunteers.
- Properly train volunteers and provide professional guidance.
- Write and distribute a volunteer handbook with instructions for reporting and resolving any issues that arise.
- Have rules for the supervision of volunteers.
- Terminate volunteer agreements when the volunteer shows that they are unable to safely perform their duties.
- The nonprofit board members should be familiar with state and federal volunteer liability laws and situations in which a volunteer could be exempt from liability.
- Make sure that insurance policies adequately cover the potential liability risks for volunteers.
What Happens When a Nonprofit Volunteer is Sued?
If a nonprofit volunteer causes injuries or other losses due to negligence or another circumstance not covered by the Volunteer Protection Act, they could face liability. For example, imagine that a volunteer is on the way to conduct an errand for a nonprofit and causes a car accident, which injures the other driver. This incident would not be covered by the VPA because the injury involved a motor vehicle. Thus, the other driver would have the option to seek financial compensation by filing an insurance claim. In some cases, the injured person may have grounds to file a personal injury lawsuit for damages beyond the volunteer’s insurance coverage.
Lawsuits Against Nonprofits for Volunteer Negligence
If someone is injured in an incident involving a nonprofit volunteer but is unable to seek damages from the volunteer directly, they may consider filing a lawsuit against the nonprofit organization itself. While tort lawsuits against nonprofits are relatively rare, they can be extremely costly if the court awards a judgment to the party filing the lawsuit, or if the nonprofit needs to offer a settlement based on the facts of the case.
Nonprofit leaders should take preventative measures to minimize the risk of injuries and subsequent lawsuits. Board members should regularly evaluate the organization for potential risks and make specific plans for minimizing those risks. A well-managed organization with strong safety and supervision guidelines can drastically limit the organization’s risk of facing liability for preventable injuries.
Learn More From Our Nonprofit Lawyers
Liability is one of several important legal considerations for nonprofit organizations. Nonprofit leaders must account for their liability risks and take all appropriate measures to reduce these risks as much as possible. However, identifying these risks and crafting effective solutions can be a difficult process. This is why many nonprofit organizations enlist the help of experienced nonprofit lawyers who understand how to evaluate risks and take action to minimize these risks.
At the Jennifer V. Abelaj Law Firm, our team of veteran nonprofit lawyers has experience helping nonprofits limit their liability risks, respond to lawsuits for alleged negligence, and handle all other legal matters related to running a nonprofit. If you have questions related to protecting nonprofit volunteers from liability, you can learn more by contacting the Jennifer V. Abelaj Law Firm today at 212-328-9568.