The 2010 Winter Olympics rocked!  Having grown up in Vancouver, I recognize my bias.  But come on, the Double McTwist 1260, the men's hockey gold medal match between Team Canada and Team USA, both flawless and courageous performances on the ice, the craziness of short track speed skating, k.d. Lang's rendition of Hallelujah at the opening, and giant inflatable beavers at the closing!

So, what does any of this have to do with nonprofit governance?

1. Even if your organization is considered the best at what it does, be creative and push your organization to be even better.  Learn from Sean White.  With the gold medal already secured, the Flying Tomato takes a last run down the halfpipe and unleashes a trick nobody else has done - the Double McTwist 1260.
2. Keep shooting at the goal.  Learn from Sidney Crosby.  The 22-year old heir to Wayne Gretzky scores the gold medal-winning goal in overtime to cap what had been a fairly lackluster tournament by his standards.
3. When you're outvoted and a board action doesn't go your way, continue to act in the best interests of the organization and don't become a distraction.  Learn from Yevgeny Plushenko.  Evan Lysacek wins gold.  Plushenko wins silver, criticizes Lysacek for not including a quad, and (briefly) steps on the winner's podium.  Stay classy, Yevgeny.
4. Put your private interests aside if they will hurt the organization's best interests.  Learn from Lee Ho-Suk.  South Korea was poised to sweep the medals in the 1,500m short-track race, but on the last turn, in a foolish attempt to move to second, Lee cut off his own countryman and both fell to the ice out of the running.
5. Be careful when delegating responsibilities and relying on another person's information.  Learn from Sven Kramer.  Kramer, the pre-race favorite, was on pace to Olympic gold in the 10,000m speedskating race but was disqualified when his coach sent him to the wrong lane on a changeover.
6. When faced with terrible adversity, keep your eyes focused on best furthering the organization's mission.  Learn from Joannie Rochette.  Canada's Rochette skates to win a bronze medal in the strongest field ever, only days after her mother died from a sudden heart attack at age 55.
7. Correct past mistakes and treat them with humor.  Learn from Vancouver.  With a wink to the mechanical glitch at the opening ceremonies that prevented one of the four pillars to rise and complete the lighting of the torch, the closing ceremonies started with a mime-electrician there to correct the mechanical failure.

All too often, the issue of legal compliance receives attention from a nonprofit corporation only after a conflict arises. Instead, a nonprofit corporation can better prevent conflicts and protect itself through regular legal audits. Financial audits alone, while important, will not sufficiently account for the bigger issue of overall compliance with state and federal laws.

A legal audit will include a wide range information-gathering, such as:

Organizational and Operation-related Documents

1. Articles of Incorporation (and any amendments)
2. Bylaws (and any amendments)
3. A list of current board members, officers, and (if applicable) members
4. Meeting minutes (board, membership, annual, special, committee, etc.)
5. Copies of governance-related policies (e.g., conflict of interest policy for directors and officers)
6. Copies of other policies (e.g., internal controls, HR-related)
7. Copies of financial statements and budgets
8. Copies of any contracts for services to be rendered or received
9. Copies of any leases and subleases for real or personal properties
10. Copies of insurance policies

Tax-exempt status and State-related documents

1. Application for 501(c)(3) tax-exempt status (IRS Form 1023)
2. IRS determination letter granting 501(c)(3) tax-exempt status
3. Copies of IRS Form 990 (for at least three years)
4. Copies of communications with the IRS
5. State tax-exempt status determination letter and initial filings
6. Copies of annual state filing requirements (e.g., Franchise Tax Board)
7. Copies of communications with the Secretary of State and/or Attorney General
8. Registrations to engage in charitable solicitations (where applicable)
9. Certificates of authority to conduct business in a jurisdiction
10. A list of jurisdictions in which the corporation conducts business, solicits funds, etc.

In reviewing these documents, questions should look both backward (i.e., have we done what is required?) and forward (i.e., what else can we do?), such as:

• Do the Articles of Incorporation and Bylaws correctly describe the nonprofit corporation as it operates today?
• Are the nonprofit corporation’s Form 1023 and past three filings of Form 990 available for inspection at the principle location?
• Have all board resolutions and any elections been properly executed?
• Has the purpose or activities of the nonprofit corporation changed significantly since applying for tax-exempt status? Do current documents reflect this change?
• Is the nonprofit continuing to meet certain critical financial ratios (e.g., solvency, public support test)?
• Have new laws affecting nonprofit organizations passed since the last legal audit?
• Are there new risks in the nonprofit corporation that should be insured?
• Are there contradictions in the policies and procedures that expose the nonprofit corporation to unnecessary conflict or unsound practices?

The above-mentioned suggestions are a starting point, not an exhaustive list. Depending on the nonprofit corporation’s structure, it may be imperative to thoroughly address other topics such as employees and membership. Additionally, there may be a separate need for legal audits of facilities (e.g., zoning, OSHA compliance) and programmatic activities (e.g., copyrights, licenses, risk assessment and management). While the beginning steps of a legal audit can seem overwhelming, that should not be a reason to avoid it. The benefits of a legal audit are two-fold—not only does it bring a sense of reassurance but it may also help a nonprofit corporation determine whether its current way of conducting business “makes sense.” In turn, a nonprofit corporation can reform or correct past practices—improving record keeping procedures, restating a patchwork of Bylaws or Articles amendments into one clean document, instituting a new filing system, and the like—to help facilitate rather than hinder the ability to undergo a legal audit in the future.

- Emily Chan

A summary of common problems with organizational bylaws is addressed in Gene Takagi’s “Basics About Bylaws."

Carter McNamara’s “Checklist for an Assessment of Legal Activities in U.S. Nonprofits Organizations” provides a sample checklist of legal issues, available here.

The Nonprofit Risk Management Center addresses charitable immunity and volunteer protection in its publication, “State Liability Laws for Charitable Organizations and Volunteers – 4th edition.”

Tamara L. Harper provides general tips for employee legal issues in her article, “Checklist to Help California Employers Comply with New Labor Laws,” available here.

See also George Webster’s article, “Association Legal Audits,” for more document examples in the information-gathering stage and South Florida Community Development Project’s article, “Self-Help Legal Audit,” for additional questions to consider when conducting a legal audit.