“Executive session” during a board meeting. What is it?

I have discussed executive sessions a couple of times in the past few months as they relate to my nonprofit clients, to school boards and Ohio’s Open Meetings Act, and to Freedom of Information Act (FOIA) requests.  What is an executive session?

A executive session is any meeting that is closed to the public and outsiders and where contents of the meeting are confidential, and is typically held within an otherwise open meeting (open to the public).  Very generally, executive sessions often occur when discussion involves legal issues and personnel issues.  I believe I see more mishandling of executive sessions and with violations of the law than witnessing smooth and compliant executive session meetings.

The intent behind open meetings legislation–often called “Sunshine Laws”–is to ensure transparency to the public with any group or public body that receives public funds or public support of any kind.  Because you receive public money, and make decisions regarding the public’s money or support, the public has a right to know what you’re doing and how you’re doing it.  However, some discussions need to be kept private, namely, most legal discussions, many discussions involving sensitive personnel issues, discussions involving large contracts, among other topics.  When, in the course of a board meeting, it becomes necessary to discuss sensitive topics, the board moves into private executive session.

Here is where this blog post goes from general executive-session discussion, to Ohio-specific discussion, and where I tend to see problems.

Problem #1: Abuse

The law is clear: public bodies are to vote and to conduct deliberations in public.  As with everything there are exceptions, but transparency is the rule.  Some boards will go into executive session excessively, and since the sessions are private, the public doesn’t know if the executive session is warranted or not.  This is why Ohio has 8 reasons for going into executive session, and the justification for your executive session must fit into at least one of those reasons.  See Ohio Revised Code Section 121.22(G)(1-8).  And, there can be no major decisions made in executive session.  There can be a lot of discussion, but an actual vote must be taken in a public meeting.

Problem #2: Procedure

I’ve been in a meeting that qualified as an “open meeting” where a board member stated that he wanted to break into an executive session, the board said “ok,” and then asked the public to leave.  This was a violation of Ohio law under the Open Meetings Act.

First, there must be a motion by a board member to “adjourn” or go into executive session.  That motion must, by Ohio law, contain the enumerated reason or reasons for going into executive session that are provided in Ohio Revised Code Section 121.22(G)(1-8): “If a public body holds an executive session to consider any of the matters listed in divisions (G)(2) to (8) of this section, the motion and vote to hold that executive session shall state which one or more of the approved matters listed in those divisions are to be considered at the executive session.”

The motion must be specific, not general.  For example, “I make a motion to adjourn into executive session after this board meeting to discuss the following reasons permitted by the Ohio Revised Code.  First, ORC section 121.22(G)(2), to discuss the purchase of public property at 555 Maple Street, where pre-disclosing information would provide unfair competitive advantage, and (3), conference with our attorney Mr. John Joe regarding legal matters.”  As stated, the reasons cannot be stated generally–“Public property discussion.”  The reasons given must be specific–“Discussion related to acquisition of 555 Maple Street.”  Another board member then seconds the motion.

Second, a board can’t state that they are going to discuss reasons (2) and (3), then discuss other reasons in the executive session.  Each executive session must be limited to the purposes stated. (Vermilion Teachers’ Assn. v. Vermilion Local School Dist. Bd. of Edn., 98 Ohio App.3d 524, 648 N.E.2d 1384 (6th Dist.1994)).  In fact, boards are to use wording directly from the statute (above) in their resolution to adjourn into executive session.

Problem #3: Confidentiality

Most board members are aware that executive sessions are private, and disclosing content from these sessions is unethical.  My guess is that most board members are unaware that disclosing what transpires in an executive session can be a violation of Ohio Revised Code Section 102.03(B), which is a first degree misdemeanor.

Problem #4: Consequences

Executive sessions are for discussion only.  All acts and deliberations must be taken in an open meeting.  Actions taken in executive sessions are void, as are actions taken in open meetings that are the result of an unlawful executive session.  Courts have invalidated actions taken by a board because the board had conducted improper executive sessions.

Removal of board members by a Court is another possible consequence of improper executive sessions, and violations of Ohio’s Open Meetings Act.  In two cases, school board members violated the Open Meetings Act by repeatedly holding lengthy executive sessions, then returning to the open board meeting to vote on matters discussed in the executive sessions with little to no public discussion.  (Evans v. Rock Hill Local School Dist. Bd. of Edn., 2005-Ohio- 5318 and In re: Removal of Kuehnle, 161 Ohio App. 3d 399, 2005-Ohio-2373.)

The foregoing cases, and Ohio’s Open Meetings Act’s purpose and language, make it very clear that transparency is expected of public boards, and deviation from transparency should have specific, statutory reasons behind it.  Executive sessions should be used when your reason fits into the list of reasons provided in the Ohio Revised Code, and actions resulting from the executive session must be taken in public during an open meeting.  Trying to justify excessive executive sessions to a court will be an uphill climb for any public body.

If you have any questions about executive sessions or Ohio’s Open Meetings Act, please email me at julie@juliemillslaw.com.

 

For Nonprofits: Classify your donations correctly

When someone donates money or something else of value to a charity (typically tax-exempt nonprofit, or 501c3), that donation is restricted or unrestricted–a charity’s assets are classified as either with donor restrictions or without donor restrictions.  Charities must know the difference between these terms and what problems might arise with any restrictions, and keep track of donations appropriately.

If I donate $500 to my favorite charity with a statement somewhere (could be written in my donation letter or email, or even on the memo line of a check) that my donation is to be used for a specific purpose of the charity–my gift is to the Humane Society of the United States to fight puppy mills, then my donation must, by law, be used for that purpose, to fight puppy mills.  This is a restricted gift.

If I donate $500 to the United Way with no statement anywhere about what purpose it is to be used, or I state that my donation can be used however the United Way sees fit, then the United Way can use my donation however it determines–operating expenses, any of its programs, etc.  This is an unrestricted gift.

What if a nonprofit that provides assistance with medical bills, raises money through GoFundMe or something similar, for a specific event–a person facing a specific surgery, then that surgery is no longer needed?  Or all of the funds raised aren’t needed–$50,000 was raised but only $30,000 is needed to pay medical bills?  The nonprofit has $20,000 remaining of a restricted gift.  Just because the bills only total $30,000 does not mean that the nonprofit has $20,000 to use as it wishes, since the donors who gave that money did so to pay for that specific surgery.  Your state’s Attorney General would become very interested in what happens to those donations.

If the purpose for the gift no longer exists, it is possible for the charity to remove donor restrictions from a gift/donation.  It can:

  1. Talk to donors.  You can go back to donors, tell them that the purpose for their donation no longer exists and ask them what they would like you to do with their donation, or for permission to put it towards another use.  If you use due diligence in this effort, then the Attorney General might not intervene since their purpose is to protect the public.  Perhaps you would put a notice on your website or Facebook page to reach the specific donors, try to contact them directly, or publish something in the newspaper asking for donors to the campaign to come forward.
  2. Talk to the Court.  It is possible to go to court requesting a modification of the gift’s restriction if the purpose for the gift no longer exists, has become unlawful, impossible to achieve, or wasteful.
  3. Talk to the Attorney General.  If the donations total less than $250,000 and are more than 10 years old, you could provide 60 days’ notice to the Ohio Attorney General of your intention to modify or release the restriction. If the Attorney General does not object, then you can release or modify the restriction–the $20,000 from the GoFundMe surgery campaign could be used for another medical bill, another program, overhead, or whatever the charity determines.

The best advice for nonprofits is to keep detailed financial records of donations and any restrictions that are attached.

If you have any questions regarding donations, charities or anything in this post, email me at julie@juliemillslaw.com.

No will? The state has one for you and it might not accomplish what you want.

“Everyone has a will.  Either you prepared it, or your state did.”  It’s true–if you have not prepared your own last will and testament, then a state’s statute of descent and distribution (here is Ohio’s) kicks in when you die.  These state statutes prescribe who inherits your assets at your death.  So yes, everyone is covered by either their own will, or your state’s laws, for distributing your assets when you die.  The question becomes whether you want to decide who inherits your belongings, or whether you want the state to decide.

For example, in Ohio if you die intestate (with no will), here is how your assets are distributed.  My summary below doesn’t cover every situation possible–see the link above to the statute if your situation in Ohio is not included in scenarios below.  Note that children who are adopted are treated legally the same as biological children:

  • Spouse is alive:
    • all kids are yours and spouse’s: all to spouse
    • no kids with spouse or anyone: all to spouse
    • kids survive but none are with spouse: some to kids, some to spouse
    • kids survive but some with spouse, some not: some to kids, some to spouse
  • Spouse died before you:
    • kids survive: to kids or their lineal descendants (your grandkids, great grandkids, and on)
    • no kids or their lineal descendants survive: all to your parents or surviving parent
    • no kids/lineal descendants, no parents survive: to whole or half blood brothers and sisters, or to any of their lineal descendants
    • no kids/lineal descendants, no parents, no whole/half blood brothers and sisters or their lineal descendants survive: one-half to surviving maternal grandparents or survivor of them; one-half to paternal grandparents, or survivor of them
    • none of above are surviving: to lineal descendants of grandparents (e.g., your grandparents’ children and their descendants)
    • none of the above are surviving: to stepchildren, or to their lineal descendants.
  • If none of the above are surviving when you die, then your assets escheat (go to) the state.

If absolutely no one survives you, do you want the state to get your assets when they could have been donated to a charity, or to benefit a school program, or sold to provide funds for a food pantry?  Perhaps you have pets and would want your assets sold to provide for their care?  Perhaps you have a dear friend who you would want to receive your assets?  Designating something in a will accomplishes what you want to happen.  Assets escheating to the state is not as uncommon as people think.

Contact me at julie@juliemillslaw.com to discuss what you wish to happen to your assets at your death.

 

10 Essential Steps to Start a Nonprofit–Final Step

Step #10:  Dissolving Your Nonprofit

Step #10 runs contrary to the title of the series, “10 Essential Steps to Start a Nonprofit,” but should be reviewed by those who are forming (or thinking about forming) a nonprofit.  Dissolving a nonprofit happens for many reasons: it becomes too difficult to raise funds or obtain grants; there are too few resources or revenue streams to offer programs or services; the mission or cause is no longer relevant or has been accomplished; or it has failed to file necessary forms and tax-exempt status has been revoked, leading the board of directors and voting members to vote to dissolve.  Whatever the reason, start with these steps (this list is not exhaustive!) to dissolve your Ohio nonprofit.

  1.  Have the board of directors and voting members vote to adopt a “resolution to dissolve.”  This resolution provides authority to move forward with the dissolution process.  In certain circumstances it is possible for directors alone to authorize dissolution–check to make sure you can proceed this way before starting.  Your dissolution should comply with the dissolution terms set forth in your code of regulations/bylaws.
  2. File a Certificate of Dissolution with the Ohio Secretary of State.
  3. File a Final Annual Report and Asset Disposition form with the Ohio Attorney General.
  4. File a tax clearance certificate with the Ohio Department of Taxation showing that all necessary tax obligations have been met.
  5. If your nonprofit had employees, you will need to notify the Department of Job and Family Services that contributions are either not required, or have been paid.
  6. On your IRS tax forms 990 or 990EZ, you will need to file a Schedule N (Liquidation, Termination, Dissolution, or Significant Disposition of Assets) as well as some organizing documents to notify the IRS that your nonprofit has dissolved.

Some nonprofits choose to just let the organization “expire”: the IRS revokes tax-exempt status after three years pass without filing the 990 tax form; the Secretary of State takes control of business records and lists the nonprofit as inactive if filing dates are missed, etc.  However, it is recommended (by me, for example) to complete the steps in the dissolution process so that you officially end the nonprofit corporation’s existence.  The main benefits of formal dissolution are that you make the organization beyond the reach of claimants and creditors, and you fulfill your obligations under Ohio law of distributing any remaining assets properly (i.e., to a like-minded nonprofit).

If you want to discuss how to dissolve a nonprofit, email me at julie@juliemillslaw.com.

10 Essential Steps to Start a Nonprofit (cont’d)

Step #9: Money and People!

You have completed most legal steps to forming your nonprofit, now it’s time to start the steps that help truly launch your organization, i.e., money and people.  Securing funding, forming partnerships—these steps will put your group in a position to accomplish your goals.

  1. Fundraising: know your state’s laws on fundraising that involve gambling or alcohol. Keep detailed financial records of the funds you receive.  If your events involve minors or animals, have waivers and releases ready!  Inquire when you need insurance for events.  Obtain the correct permits and permission from local authorities before your event.  If you are serving or selling food, be sure to check with your local health department and other agencies to see if you need to provide information.  This list is not exhaustive.
  2. Grants: educate yourself, your grant committee if you have one, and others who want to help with grants, on grant writing and the grant application process.  How you present your organization when applying for a grant affects how grant funders view your organization.  They are determining whether to give your group money from the application you submit.  Are your financials in order?  Are your goals and mission clearly described?  Are you organized, which implies trustworthiness with the money they give to you?
  3. Corporate sponsorships: one thing I learned when trying to identify potential corporate sponsors is that you want to look beyond what the corporation does and sells.  For example, animal related nonprofits tend to approach animal-related companies, e.g., pet food, pet supply, pet boarding companies.  This leaves out a potentially large source of funding.  A large contributor to local pet charities in my town is a basement foundation and repair company.  Another large sponsor of animal rescue-related charities in my area is a laptop repair and sales business.  Expand your outreach with companies!
  4. Partnerships: other organizations can be one of your greatest assets. Leverage your contacts in forming partnerships.  The food pantry you start would get much public view if you partner in an event with a group who fills bookbags with food to provide weekend meals for kids who suffer from food insecurity.  Contact organizations who might benefit from your group, and who might provide a benefit to yours.
  5. Media: send the word out to local media about your group, your events. Become familiar with preparing media releases.  Connect with Facebook groups, prepare a content calendar for posting on social media such as Facebook, Instagram, Twitter, Pinterest, etc.

Information about grant writing, fundraising, partnerships and related topics could fill a book.  The information above should serve to get you started in launching your organization’s work.  I’m happy to answer any questions–contact me at julie@juliemillslaw.com.

10 Essential Steps to Start a Nonprofit (cont’d)

STEP #8: WAYS TO LOSE YOUR TAX-EXEMPT STATUS

Most charities rely on donations to operate.  To attract donations, nonprofits will pursue tax-exempt status from the IRS so they can tell donors that their donations are deductible from their taxes.  People generally recognize the IRS code, 501c3, as an indicator that their donations are deductible.  Tax-exempt status makes it possible to secure grants, and makes the organization attractive to corporations and business who want to donate, for “good will” reasons and/or to receive a deduction off taxes.  Losing your tax-exempt status can be a huge blow to a charity, both financially and to the charity’s reputation.  Becoming knowledgeable on ways to lose tax-exempt status is crucial in running a tax-exempt nonprofit.

The federal government grants your organization tax-exempt status if you agree to certain behavior.  The government is saying, “we won’t make you pay certain taxes, but you now owe the public certain things (disclosure and accountability), and you must not do certain things.”  Not following the rules means that the IRS could revoke your organization’s tax-exempt status.

How to jeopardize your tax-exempt status:

  1. Inurement,” or private benefit.  First, as you read the definition of inurement, know that any amount can jeopardize tax-exempt status.  Second, inurement means to “benefit.”  The prohibition against inurement means that there shall be no using income or assets of a tax-exempt organization to unduly benefit an individual or organization that has a close relationship with the tax-exempt organization.  The inurement prohibition is absolute.  Assets and income are to be used to further the organization’s mission, period.
  2. Unrelated Business Income (UBI).  If your organization runs a business that produces income for your organization, but the purpose of the business is unrelated to your organization’s mission, then the organization is subject to tax on its income from the business.  If your tax-exempt organization provides clothing for shelters and low-income families, and receives income from a thrift store it runs, it is unlikely there would be a risk for UBI.  If your organization is a pet rescue and receives income from a nail salon business, the rescue might have UBI.
  3. Political campaign activity.  As with the inurement prohibition, any amount of political campaigning in support or opposition of a candidate is prohibited and could result in loss of 501c3 (tax exempt) status.  I counsel nonprofit clients that the organization can’t engage in political activity regarding a candidate, but can generally support or oppose an issue.  The tax-exempt “clean oceans” organizations can oppose a ballot initiative to ease pollution restrictions, for example.  I caution to proceed carefully, since tax-exempt status can be revoked if political activity is deemed to be “substantial,” and there are tests the IRS uses to determine this.

Guard your organization’s tax-exempt, 501c3 status.  Having to reapply is cumbersome if you lose this status, and it might give donors a reason to donate their money to an organization who has not behaved in ways that result in losing this designation.

If you have any questions about getting, maintaining, or losing tax-exempt status, email me at julie@juliemillslaw.com.

 

 

10 Essential Steps to Start a Nonprofit (cont’d)

STEP #7: EDUCATING YOUR BOARD

When I see articles on starting a nonprofit I rarely see “educate your board” yet this step is crucial.  Educate about what?  Why?

Educate about what? Inform about liabilities board members might face, educate about their duties and rights, educate on actions that could jeopardize the organization, particularly its tax-exempt status .  This list is not exhaustive.

Why?  Board members need to know what they are required to do, what laws govern their actions, how they can unwittingly get into trouble, among other reasons “why.”  In some situations, although uncommon, board members can face personal liability.

People have good intentions when forming a nonprofit that will pursue a charitable cause.  There are legal responsibilities and potential liabilities if you don’t do what you are supposed to as a board member.  Unfortunately, awareness of these duties and liabilities often comes after there’s an issue.

Board member responsibilities, in general (can be in addition to state law requirements):

  1. Duty of Care: duty to exercise reasonable care when he or she makes a decision for the organization. Reasonable care is what an “ordinarily prudent” person in a similar situation would do.
  2. Duty of Loyalty: A board member must never use information gained through his/her position for personal gain and must always act in the best interests of the organization.
  3. Duty of Obedience to the Mission: A board member must be faithful to the organization’s mission.  He or she cannot act in a way that is inconsistent with the organization’s goals. The board member is trusted by the public to manage donated funds to fulfill the organization’s mission.

Board members should have bylaws in place that govern the functioning of the organization.  They should be apprised of potential legal pitfalls that could impact them or the organization.  There should be short primers provided on open records laws, aka “Sunshine Laws,” and how they impact board meetings and public attendance; a primer on insurance, waivers and releases for events, protocol to be followed if someone is injured at an organization event; fundraising do’s and don’ts, liability with alcohol at fundraisers; political activity and what is permitted; among many other topics relevant to nonprofits.

Sitting on the board of a charitable organization can be rewarding, and board members do have a responsibility to educate themselves on what liability they could face.  Moreover, nonprofits should educate their boards on personal and organizational liability so board members can act accordingly, and avoid making decisions that unknowingly put themselves or the organization at risk.

If you have questions about board member liability, contact me at julie@juliemillslaw.com.