Nonprofit 411: Avoid These Three Common Legal Pitfalls

The original version of this article appeared in the “Nonprofit 411” section of the Massachusetts Nonprofit Network newsletter.

Nonprofits are particularly vulnerable to legal trouble despite their good intentions. Operating on shoe-string budgets and allocating limited resources often means simple legal issues are overlooked or ignored. Left unchecked, these issues can become a major problem for an organization and threaten its livelihood.

As the primary provider of pro bono legal services to Massachusetts nonprofits, Lawyers Clearinghouse has identified three common legal pitfalls for area nonprofits.*

1. Failing to comply with federal and state reporting requirements

Since 2010, over 8,000 nonprofits in Massachusetts have had their 501(c)(3) status automatically revoked for failing to file their annual tax-information return form with the IRS. This means they lost public charity status; the donations they collect are no longer tax-deductible and they have to file a corporate income tax form.

To be able to keep offering important services to your target populations, be sure to file these forms every year:

• Form 990-series return with the IRS
• Annual Report with the Secretary of State’s Office
• Form PC with Massachusetts Attorney General’s Office

Note that ANYONE can check your filing status and get information on how your organization is being operated on these websites:

• Exempt Organizations Check (IRS)
• Secretary of State’s Office
• Nonprofit &Charities Search (Massachusetts Attorney General’s Office)
• Noncompliant and Deactivated Charities (Attorney General’s Office)

Consider compliance records posted on the government agencies’ websites as simple, but indispensable, marketing tools to donors—both current and prospective—that their donations are being well-spent.

2. Not having and implementing a WISP

As of March 1, 2010, nonprofits need to have a Written Information Security Program (WISP) if they collect “Personal Information” (PI) about a resident of Massachusetts.  PI is any combination of name AND (1) Social Security Number; (2) bank account number, including credit card number; OR (3) any state-issued ID number, including driver’s license number. The purpose of a WISP is to:

• (a)Ensure the security and confidentiality of personal information.
• (b) Protect against any anticipated threats or hazards to the security or integrity of such information.
• (c) Protect against unauthorized access to or use of such information in a manner that creates a substantial risk of identity theft or fraud.

To learn more, consult these helpful links:

• A Small Business Guide: Formulating a Comprehensive WISP
• WISP Compliance Checklist

3.       Having a poorly written or outdated employment policy

Insurance companies estimate that 70 percent of claims against nonprofits are brought by employees.  Do you have an employee handbook?  Have you updated your Electronic Communication Policy to address issues arising from social media use at work and for work? Do you have a Volunteer Release Form?  When was the last time you had all these reviewed?

These three pitfalls are not an exhaustive list of the legal issues nonprofits sometimes run into, however, they are problems we commonly see and they are completely avoidable. We hope that by arming you with some legal tools, you will be able to better serve your communities.

*Disclaimer: This article is not a substitute for legal advice. It is meant to be a starting point for nonprofits to consider whether or not they need legal assistance. Please contact our Legal Referral Director, Machiko Sano Hewitt (617) 778-1954 if you are a nonprofit seeking pro bono legal assistance.