The process of creating a charitable nonprofit or 501(c)(3), can raise many questions for those new to the nonprofit world. One common question: “Do we need a board of directors?”
To clear up confusion, it helps to understand nonprofit laws and how a board of directors serves an organization.
Are Nonprofits Required to Have a Board of Directors?
The first step to becoming a nonprofit is to incorporate in the organization’s home state. States write corporate law and most require all nonprofit corporations (nonprofits that have incorporated) to create and maintain a minimum number of directors on a board of directors.
The minimum board member requirements are defined by the state where the nonprofit incorporates.
There are unincorporated associations that may apply to the IRS for federal tax exemption. However, most nonprofits choose to incorporate before seeking tax-exempt status with the IRS, because individuals (staff and directors) receive protection from personal liability should the organization be sued. Incorporation also makes it easier to apply for federal and state tax exemption, and donors may be able to receive a tax deduction for their donations to your charity.
Do Unincorporated Nonprofits Need a Board of Directors?
In some cases, a nonprofit may remain unincorporated. An unincorporated nonprofit is usually composed of two or more people to support a common goal in a typically temporary and informal way.
Since unincorporated nonprofits are informal entities, they aren’t held to the same laws as nonprofit corporations, and thus do not need a board of directors to operate. Unincorporated nonprofits that have revenues less than $5,000 annually are not required to register with the IRS but can operate as a 501(c)(3). However, if revenues exceed $5,000, they do have to apply for 501(c)(3) status.
Even if a nonprofit isn’t incorporated or falls beneath the threshold of 501(c)(3) eligibility, a board of directors may still be a good idea unless the organization is quite small or temporary. A nonprofit board of directors helps the organization follow best practices, ensuring it stays within legal and ethical bounds.
A board of directors could also help decide if and when it’s time to incorporate.
How Does a Board of Directors Help a Nonprofit?
Starting a nonprofit requires strong organizational skills and structure, and this structure is usually put into place by a nonprofit board of directors.
During the organization’s founding, the board creates corporate bylaws establishing the nonprofit board of directors’ specific duties, and duties for the individual board members and officers. Most organizations’ bylaws also state how long members can serve; the typical term ranges from two to five years. When terms expire, the original board selects new board members.
Nonprofit board members are responsible for helping to develop the nonprofit’s mission statement, and ensure the organization remains financially stable, by evaluating financial policies and approving budgets.
Board members have an obligation to ensure the organization abides by all state and federal laws governing nonprofit entities, and provides support in areas such as public relations, legal matters, and human resources. The board also sees that the organization handles its assets responsibly.
Although incorporation law provides limited liability for board members, thus protecting their personal assets, they could be sued under certain circumstances.
Nonprofit board members are almost always volunteers, although they may receive a tax deduction for incurred expenses, such as board-related travel. Although it’s not illegal to compensate board members, only those in substantial and complex nonprofit organizations usually receive any compensation.
Most states require that board members meet at least once annually, but it’s up to the organization’s bylaws to set more specific meeting times. Meetings cover and document essential matters, such as choosing the Executive Director, programmatic direction, finances, and fundraising.
Board members don’t run the organization’s day-to-day operations. That’s the responsibility of the CEO or Executive Director, and the staff she hires, or the volunteers he oversees. The board doesn’t hire staff, with the exception of the Executive Director.
Together, the board members ensure the nonprofit remains successful throughout its years of operation. The key to a successful board, however, is choosing the right members.
Choosing Nonprofit Board Members
You need enough board members so decisions can occur, even if all of the members aren’t present. Decisions require a quorum, or the minimum number of members for voting, as required by the organization’s bylaws. Larger nonprofits may need more members on their board due to organizational complexity.
When deciding how many members your nonprofit board of directors needs, it’s generally best to choose an odd number to avoid ties when voting.
While the IRS does not specify who should be on your board, a typical nonprofit board of directors consists of a mix of professionals with expertise in a variety of fields, including financial, marketing, technical, entrepreneurial, legal, and social services, depending on the kinds of services you provide. When you apply for tax-exempt status you will be asked to furnish information about your volunteer board members.
Boards often set up advisory committees for various parts of the organization. A board member acts as committee head, and can recruit non-board members from the community to serve on the committee. For example, external public relations professionals can help advise a public relations committee.
Committees are often feeder systems for future board positions as well.
Board members must also commit to acting in the best interest of the nonprofit, not their personal interests. Board member conflicts of interest can prove disastrous, because not making decisions in the best interests of the organization risks the very existence of that organization. As a nonprofit, board members must adhere to a duty of loyalty, including recognizing and avoiding conflicts of interest.
Furthermore, each year you will have to submit a 990, an annual report, to the IRS. The IRS asks about potential conflicts of interest and the policies you have in place to prevent such conflicts, and encourages requiring disclosures of any conflicts of interest.
Nonprofit Board Member Selection Tips
- Match your board members to the task that fits their skills, so the member isn’t overwhelmed.
- Don't select a board member based on personal ties, or because they’re a family member or friend.
- Board members should exhibit a range of qualities benefiting the nonprofit. Business leadership, collaboration, networking, and effective fundraising ability are all crucial board skills.
- Require potential or current board members “to disclose, in writing, on a periodic basis any known financial interest that the individual, or a member of the individual’s family, has in any business entity that transacts business with the charity,” suggests the IRS.
- Board members should have integrity, commitment, and interest in the mission.
- Consider board members who aren’t necessarily professionals, such as heavily involved volunteers within your nonprofit. Passion and commitment are as important as professional skills in some cases.
Takeaway: A Board of Directors Is Important for Nonprofits
Nonprofit board members focus on the big picture and the public interest, as well as ensure the organization abides by the law and stays true to its original mission. Always acting in the organization’s best interests, a nonprofit board of directors secures the organization’s long-term success. Boards legitimize an organization, offering transparency and trust to donors.
A board can guide you through the incorporation process and tax-exempt status applications. They can also help develop your mission, assist in professional networking, navigate new contracts, and help with fundraising.
Essentially, a nonprofit board of directors provides a nonprofit with oversight as well as insight. If you’re thinking of starting a nonprofit, take the time to set up an excellent board of directors.