Joining the board of a charity is a fulfilling way for individuals to provide monetary support to their favorite cause and share the benefit of their experience and expertise as a board member. As a result of COVID-19, charities are being impacted as much as for-profit businesses; however, the issues related to their survival must be viewed through a lens that is somewhat different than those of for-profit businesses.
The reserves of most charitable organizations are often very thin, and the loss of donations has an immediate impact on operations, resulting in program cut-backs, staff layoffs and, ultimately, questions about the likelihood of survival.
As reported in a study of nonprofits conducted by Charity Navigator and Reuters earlier this month, 83 percent of respondents said they are “suffering financially,” and 75 percent of respondents had to cancel a fundraising event. The study also reports that 64 percent of respondents had to cut back on programs, and 73 percent had to lay off staff. At the same time, 50 percent of respondents said they have seen an increase in demand for programs.
The fiduciary duties of board members take on heightened importance when the charity they steward is in distress. The following is a guide for board members who are considering issues related to the survival of their 501(c)(3) charitable organization as a result of the pandemic.
Many organizations are hopeful that they will make up for lost ground by moving fundraising events to the end of the year, and many fundraisers are being converted into virtual events. An additional Giving Tuesday, traditionally the Tuesday after Thanksgiving, has been scheduled for May 5, 2020 in response to the need created by COVID-19. Charitable organizations are also eligible to obtain paycheck protection loans under the CARES Act and grants may be available through programs that are supported by government or other nonprofit entities. Consider whatever additional funding opportunities are available to your organization to help support continued operations. Some organizations are increasing their reliance on volunteers to help fill roles that were once held by paid staff members.
For organizations with similar or complementary missions, the possibility of a merger of two 501(c)(3) organizations may be a satisfactory solution. Ultimately, the merger should result in one stronger organization, and not one that is weakened by the challenges that are being faced by one or both organizations. When considering a merger, the due diligence that will be required is very similar to the review that is conducted when two for-profit businesses combine.
The following are some issues that should be considered:
If the board concludes that the organization needs to be dissolved, keep in mind that the organizational documents for the charity expressly provide that upon dissolution, the assets of the organization must be distributed to another 501(c)(3) organization. Those assets do not belong to the members, directors or founders, even if those individuals may have been the initial contributors of those funds. As such, the organization’s funds and other assets will need to be distributed to one or more 501(c)(3) organizations as part of the formal plan to distribute assets and dissolve the organization. Often the recipients of those funds will have a similar mission to the dissolved charity.
For more resources and LP's response to COVID-19, visit this webpage.