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Starting Managing Nonprofit Organization Danielle Merrick

Danielle Merreck | Attorney

In this insightful interview, Danielle Merrick, a law professor at UMKC and director of Kansas City volunteer lawyers and accountants for the Arts, shares valuable knowledge about starting and managing a nonprofit organization. She discusses the wealth of resources available in Kansas City, the legalities of nonprofit formation, and the importance of planning, budgeting, and setting up a board of directors. Merrick also explains the difference between a nonprofit corporation and tax-exempt status, emphasizing the need for internal controls and annual filings. This interview is a must-watch for anyone considering starting a nonprofit or seeking to improve their existing organization’s management practices.

visit them here: https://law.umkc.edu/

 

What Nonprofit Questions are Answered?

  1. What are some resources available for starting and maintaining a non-profit organization?
  2. What is the difference between a non-profit corporation and tax-exempt status?
  3. What are some common mistakes made by non-profits?
  4. How can non-profits amend their bylaws?
  5. What is the annual event mentioned that pairs non-profits with attorneys?

 

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KC Cares, Kansas City’s nonprofit voice, tells the stories of Kansas City nonprofits and connects them with the community.  

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Transcript:

(00:00) City nonprofits and the people behind them KC cares is the intersection of the non-profit and the profit communities making Kansas City a better place to live work and play this KC care segment is brought to you by the Ewing Marion Kaufman Foundation www.koffman.org I’m Ruth Baum Bigus many non-profits are started because of the passion of the founder to help the community in some way while Noble and purpose there are many things to consider including legal issues and obligations when the word legal is mentioned in the same sentence

(00:33) as non-profit it may send shutters up the spine but our guest today on this ask the expert episode is here to ease your worries and break things down for us KC cares welcomes Danielle Merrick she is a University of Missouri Kansas City professor in the School of Law and a director of the Kansas City volunteer lawyers and accountants for the Arts and many other things that Danielle is involved in that’s just a snapshot that I thought we’d start with so welcome to the show thank you I’m doing well well as I said uh legal

(01:10) may send those shutters or spook or Scare some folks who go in and they you know they want to help heal somebody raise money for some other where does someone start with legal issues and a non-profit where’s bring us in so the first thing is is that um there are a lot of resources in the Kansas City area that can assist you with um both information about how to form a non-profit and do it properly and then also with maintaining that non-profit so one of the places that I recommend on a regular basis is the Midwest Center for non-profit leadership

(01:56) um also non-profit connect um so the Midwest Center for nonprofit leadership is a program that’s actually through the blocks School of Business through UMKC and it puts on I believe it’s quarterly um they put on a quarterly a um basically so you want to form a non-profit class and I believe it’s maybe an hour and a half or two hours long and they have illegal non-profit expert that comes in and just talks about the basic building blocks about setting up a non-profit um they also talk about kind of the

(02:32) um sorts of planning that an individual or group of individuals needs to go through to successfully form a non-profit so if you are someone that’s in the very beginning stages in the what I like to call you God told me to do X stage then that’s a great resource is to start there to kind of get some of that exposure to that um non-profit connect and Midwest Center for nonprofit leadership nonprofit connect is basically an affinity group for individuals who are already either involved with a non-profit whether that

(03:08) be as Board of director members or executive directors or Founders or whatever and it provides a few things it provides a um networking platform they have events where you can network with other non-profits so that you can kind of uh compare War Stories they also put on classes and events that are designed to educate people on non-profit best practices um so like the Midwest Center for nonprofit leadership has a fundraising certificate so if you have a board or an executive director member who wants to be more Savvy at fundraising there’s a

(03:41) fundraising program that they can go through non-profit connect puts on similar classes like that so I always say you know do that first if you’re starting at that the next thing I would suggest is that one of the things that people don’t really understand about non-profit is that um well two things one is that non-profits are owned by the people of the state in which they’re formed they’re not owned by any one individual so one of the things that I tell people when they’re thinking about forming a non-profit is

(04:15) you have to decide whether or not your primary goal is for this to be your baby and you control it or your primary goal is whatever the mission is and the mission might go on without you and you might not be involved with your non-profit at all in the future so you have to decide which is more important and there’s not a right or wrong answer to that because some people are like no this is my baby I want to always be involved in it and I never want to be parted from it and if that’s the case then a for-profit

(04:50) structure is probably a better structure for that um but if it’s more Mission driven and your personal affiliation with it is not as important then a non-profit structure might be the right way to go the second thing that a lot of people don’t understand about nonprofit is that their the legal work to set up a non-profit is like the last 10 percent ninety percent of it is all y’all like you’ve got to come up with your budget you’ve got to come up with your program and you have to figure out your board of

(05:22) directors you I mean you have to do all of that the lawyers are not going to do any of that for you nobody nobody’s going to come to me and go I’d like to set up a homeless shelter and we go okay yeah I know exactly how you want to run this and let me just you know dictate everything to you I’m gonna go okay great tell me all about your homeless shelter and if you say uh well I don’t know I haven’t decided I’m not charging for my services with all of my clients so you’re all you’re doing is wasting some

(05:50) time but if you’re paying an attorney they’re charging you for you to Fumble around and not be able to tell them what your program is so you know really kind of doing that research ahead of time and really knowing a lot of those types of things before you go consult with an attorney to start setting things up will save you money it will save you time and it’ll save you frustration um so I recommend all of those things when we first are setting up a non-profit um just as a total complete site and you’re

(06:28) probably aware of this already um given that you interface with non-profit stuff on a regular basis is that um Kansas City has a lot of non-profits like a lot we do yes I do a lot a lot um and you know some people could say that that’s the generosity of the Midwest and the generosity of the city as a whole um but it does create problems um there was a study by Midwest Center for nonprofit leadership I believe it was in 2019 Maybe 2018.

(07:00) uh all I’ve noticed it was before the pandemic this is after the pandemic um and it basically said that due to the number of non-profits in Kansas City all these existing nonprofits are essentially competing for the same 43 individual donors so my thing when anybody approaches me about starting a non-profit the very first thing I ask them is have you volunteered with a non-profit that’s doing what you’re doing is it possible there’s a nonprofit you could already partner with and be a program under an existing non-profit as

(07:33) opposed to setting up a fully formed secondary non-profit and that should always be anybody who has a great idea that they want to help somewhere in the community that should always be their primary problem of focus is there somebody already doing this or something ancillary to this that I could expand on and just assist that mission as opposed to diverting Dollars to the administration of another non-profit so um you know that all being said when I get a non-profit client in I usually spend the first 30 to 45 minutes trying

(08:06) to talk them out of forming a new non-profit oh no oh no but you know sometimes there are reasons that partnering with another organization doesn’t work or maybe you know they have part maybe they have been very involved in what they’ve been doing and have been doing in a grass level level for several years and they just want to formalize it and so there are reasons why they might want to form a non-profit anyway um non-profits in both Missouri and Kansas are under corporate law um which seems a little weird but that’s

(08:44) how it is Missouri and Kansas are slightly different Missouri has set all of their non-profit corporate law into a whole separate section Kansas and Kansas is stupid sometimes and I can say this because I live in Kansas Kansas was like no we’re just gonna smash the non-profit corporate law into the for-profit corporate lawn we’re going to call it zero par Value stock that gets issued so Kansas nonprofit law is a little bit more strange a little less straightforward than Missouri is because you’re in this

(09:18) inside of a for-profit law so if you are someone who’s interested in forming a Kansas nonprofit I absolutely suggest that you not try to do that on your own only because there are so many nuances in Kansas non-profit law because it’s mashed into the for-profit law that makes it a little less straightforward um so both of them are under corporate profit law or Corporation law um the main thing we do is what we we file Articles of Incorporation with the secretary of state to set up a non-profit Corporation now the nonprofit

(09:54) corporation form on the Secretary of State’s websites um they have gotten so many people who form non-profits and don’t actually know what they’re doing that they have put the language in the instructions of the PDFs of those that has all the language that the Internal Revenue Service requires for your non-profit to be considered eligible for tax-exempt status now that’s the next misconception that people have is that there is a non-profit Corporation and then there is tax exempt status and these are two separate things

(10:35) you could have a non-profit corporation that is not tax exempt you can have a tax exempt entity that is not a non-profit Corporation so most people when they tell me they want to start a non-profit what they actually mean what they’re colloquially referring to is a charitable non-profit corporation that is eligible for tax exempt status under 501c3 of the IRS code so the IRS requires specific language in your Articles of Incorporation and in your bylaws for you to be eligible to apply for tax-exempt status

(11:17) so if upon forming your non-profit Corporation you fail to put that language in whatever attorney you meet with is going to have to tell you that we’re going to have to amend your Articles of Incorporation and amend your bylaws before we can even apply for tax-exempt status so it’s really important if you are not aware of what that language needs to be in the Articles of Incorporation go look at the instructions on the Secretary of State’s website for those the PDF of those forms it’s right there the

(11:49) language is right there um or ask someone try to find out what the language is supposed to be because that going back and having to amend that that sets off a whole series of processes that delays your application for tax exempt status [Music] um so you know we’re always trying to make sure that you know if you’re going to do things on your own you’re we’re giving you the best start you’re trying to you know get as many things squared away properly to begin with [Music] um so once you’ve set up your Articles of

(12:21) Incorporation Missouri and Kansas have different requirements for the number of board members Missouri requires that you have three board members at all times Kansas requires one um both require that you have a president a secretary and a Treasurer and those can be three individuals that throw that fill those roles or it can be one individual filling all three roles like the trinity and so normally the persons who are filling those roles are members of the board of directors but they don’t have to be they could be

(12:53) outside persons that are not on the board of directors that does create a level of complication that I don’t most attorneys would not recommend that but it’s not illegal to do it that way um so what happens if you have less than three board of directors in Missouri or what happens if you have less than one Board of director in Kansas that means that technically you’re not in compliance with Missouri or Kansas statute which means that your limited liability under that non-profit Corporation no longer exists

(13:29) so what that means is if you’re a Missouri non-profit operating with only two board members instead of three your board members and your executive director are now personally liable for anything that happens yes exactly so it is very important that you understand in whatever state you’re formed what the requirements are to maintain your non-profit Corporation as well um one of those is the board of directors but then the other thing is that Missouri and Kansas both for non-profit corporations require an annual report uh

(14:04) with the secretary of state if you fail to file that annual report they will administratively dissolve your nonprofit corporation and then you’re back to individual personal liability for everyone affiliated with the organization so once you’ve done that you’ve got your thing set up you’ve solicited your board of directors now you need bylaws and now you need a conflict of interest policy and your bylaws are the best way I can describe bylaws is they are a contract between the board of directors and the non-profit

(14:38) organization as to how the non-profit organization is going to be administered and so the bylaws are describing like here’s how often we’re going to have board meetings and here’s how we’re going to elect people and here’s how we’re going to remove people if we need to and here’s how we feel if someone just leaves or or whatever and it’s a whole layer of things two hints about bylaws number one non-profit corporations that are tax exempt um have a higher level of required disclosure than a privately held

(15:11) for-profit Corporation that means that as a taxpayer in the state of Missouri I can ask any existing non-profit for a copy of their bylaws or a copy of their Articles of Incorporation or a copy of their recent tax returns with the IRS or copies of their most recent board minutes and they have to provide them to me so one of the things that I tell people who are trying to figure out how to set up buy-loses I’m like find a big organization that does something similar to you and requests a copy of their bylaws because now you

(15:47) know they’ve paid an attorney to look at them and now you can kind of see how they structured stuff that doesn’t mean you have to structure everything the way they did but it gives you some insight into right well how do I want to do some of this stuff the biggest thing that happens that I see client the biggest mistakes I see with bylaws is the bylaws are drafted and don’t account for proxies or electronic participation in meetings yes um so you know if you’re by less don’t contain that you technically can’t have

(16:21) a zoom board meeting you technically can’t have a teleconference board meeting you technically can’t have someone vote on behalf of somebody else and so making sure that those are included in new bylaws if you’re drafting is very important in this day and age to make sure that electronic communication proxy all of that stuff is in there um the second most common mistake I see with people with bylaws is they don’t follow them so yikes yes so whatever your bylaws say you have to do I would say that the most

(16:59) common question I get from existing non-profits is they’ll say can we do X and my most common response is what do your bylaws say and if they’re bylaws say they can do X they can do X if their bylaws are silent on that or say they can’t do X they probably can’t do X and so you know being familiar with your bylaws and knowing what you can and can’t do and then abiding by them is very important I find that I have to go back because it’s not something I think that you easily memorize I’ll speak to myself

(17:38) it’s not something I keep top of mind because you’re busy doing your mission if though it isn’t in your bylaws and you want it in your bylaws can you amend them and how difficult is that to do so yes you can um even if you’re bylaws do not have a stated Amendment policy most bylaws do but for some reason if they are silent on the amendment there is never a situation in which you cannot amend a document um so let’s pretend it’s silent the default rule is that you can amend it as long as a majority of the board of

(18:19) members agree to amend it in writing so those are the key things a majority and in writing they can amend the bylaws now if you have a membership-based organization that’s a little different if it is a membership based organization and let me be clear there’s a difference between membership for marketing versus membership in a legal structure membership for marketing is like I’m a friend of the zoo and I get a couple of zoo passes but I don’t get to have any power to vote in the board of directors that’s a market membership

(18:54) legal membership is I have a membership based organization like um a homeowners association or a country club or a social league and the members get to vote in the board of directors so if you have a legal structure that has members then amending your bylaws will also require the members the majority of the members to approve in writing the amendment to the bylaws um and then you call a meeting you present all the Amendments people vote bam your bylaws are amended the most common amendments that I’ve done in the

(19:33) last you know I’ve been an attorney for about 20 years now the most common amendments I do is adding proxy and electronic communication like electronic meeting that’s the most common um occasionally we’ve done some things where we’ve either added in term limits or removed term limits but for the most part the most common thing is is changing the way that voting and meeting structures happen because especially organizations that were formed you know early odds or before electronic meetings and electronic communication just was

(20:05) not something that was regularly included in bylaws something at this point again that you would recommend that you go ahead and do I mean we’re in this world of zoom and teams and everything else and I know for us for example during the pandemic we had to I mean you couldn’t gather unless you decided you’re gonna go stand on a driveway and you could all vote and and do that I don’t think any of us probably did that um so tax exemption status you really need to be clear about you really need to

(20:38) know your bylaws you really need to know your articles what are those big you know step in the mud kind of things that you see non-profits kind of just either don’t pay attention to or aren’t you know what are those big mistakes we make um so I see a few um non-profit boards tend to have a decent amount of turnover and so in that turnover if there is not someone who is The Keeper of the records sometimes records just get lost in the turnover um one of the ways that I suggest nonprofits can help avoid that

(21:27) is um having or non-profit organization pay for a business Dropbox or business OneDrive or a business box or whatever Google whatever file system you like to use whatever you know one is your favorite they’re all these are like they’re all apples right it’s just like whether you like Galas or Pink Ladies or honey crispy they all have the same security they all have the same functionality it’s whatever one you prefer setting up something like that paying for the business subscription so you don’t have to worry about

(22:07) you know we’ve run out of room or whatever right and then every person who is a member of the board has a login to that business you know online file system that way when Susie Smith leaves the board we just deactivate her from OneDrive but all the stuff that she ever put in there is already up there so the next person who comes in your place can go in and be like oh we’ll hear all the minutes and here is the bylaws and here all the amendments to the biologic here are all the tax returns and all of that

(22:43) type of stuff so having some measure of internal controls in terms of document retention and things like that that makes your life so much easier and digitizing we have so much readily available technology to digitize that stuff at this point and the more you can digitize it the easier it is to keep everybody on the same page and to have everybody have access to the same thing so um that’s one thing I see happen a lot like especially organizations that were formed prior to the pandemic but I’ll have organizations that come in

(23:21) that they were formed in the 90s and they’re like we know we have bylaws but no one can find a copy where are they so we pretty much have to start over and draft new bios because nobody can find a copy of the original bylaws and we have no idea what they are um and so that’s one of the things that happens a lot um the next thing that I see happen a lot is uh just general internal control issues with um um one person having control of the social media accounts and then that one person for whatever reason right being

(23:56) not a good person and yeah uh or one person having access to the bank accounts or one person who controls all the funds and nobody’s really overseeing that or you know anything that could potentially have an adverse negative effect on the organization ideally should have a point person and an overseer and those should be two different persons um so you know for your social media accounts you have two people manage it you have two administrators for it one person might be the one who’s doing 99 of the posts and the other person’s just

(24:38) there if something goes wrong but you have two people same with your bank account you’ll have two people every time you know for the Kansas City volunteer lawyers and accounts for the Arts for example I am the executive director I’m the one writing all the checks I’m the one charging all the things on the credit card Etc but we have a Treasurer who every month is looking at all of my transactions and every time I write a check he sees an image of it every time I cash a check he sees an image of it and if

(25:08) something doesn’t line up or something I didn’t like make enough of a note to make it clear what it is he will email me and he’ll be like this 21.25 in miscellaneous what is that for and then I’ll be like oh yeah sorry okay yeah I did our annual report with the Missouri Secretary of State and I didn’t notate that when I put it in there but he’s you know just over there kind of making sure he’s like hey let’s you know where’d you spend that money and and I it’s not particularly onerous

(25:37) for me and it’s not particularly onerous for him and I’m not really interested in embezzling but it’s a way to have that check in Balance to kind of make sure that that doesn’t happen um so those are a couple of things that I see a lot um and then the other thing that I see a lot is people just um failing to file annual reports failing to file tax returns with the IRS missing deadlines and things like that um the IRS if you are granted tax exempt status if you fail to file your 990 return for three consecutive years so

(26:17) three years in a row they’ll revoke your tax exempt status and getting that reinstated most of the time means you start over I and so you know having I have on my personal Google Calendar for example reminders like every March 1st it pops up and it’s like file the 990. you know and so something like that so that somebody is making sure that all of those you know T’s across your eyes are dotted um because we want to maintain that tax it’s upset us that that was what a lot of the nonprofits have really worked for

(26:55) because they’re soliciting grants they’re soliciting donations or corporate sponsorships and the way that they are able to obtain those things is by having a tax exempt status with the federal government so maintaining those things is very important and it’s really easy to let those slip through the cracks and and and nobody’s meaning to and it just happens right so having a process for that is important crisis is always important we’re just about out of time but I wanted you to share that

(27:23) there’s an upcoming uh event in June that folks can try to participate in give us the the quick stick yeah so there we do annually um the UMKC School of Law who I represent um Stinson Law Firm which is one of the larger firms here in Kansas City and the American Association of corporate Council we put on an event annually as well as with Kansas legal aid and United Way a um event where we pair non-profit organizations with a team of both Stinson attorneys and American corporate Council attorneys to address

(28:06) some non-profit issues in a one-day clinic so the attorneys and the clients meet for two and a half ish hours and so whatever the issue is it needs to be something we can kind of wrap up in two and a half-ish hours um we um if you are an attorney that it has a limited license and you’re interested in doing some transactional work and you’re not a member of the American Association of corporate Council if you become a member you can participate if you’re a Stinson attorney listening you should participate

(28:37) um and then if you are a non-profit um there is the we’re actually at this point our applications we’ve actually I think we’ve exceeded the number of people that we can take this year but we will do it again next year so be on the lookout in like March April um an invitation will go out and you can apply and you if you have something like we need someone to review our bylaws and tell us how to amend them that’s a great project for this Tech clinic or um we’re thinking about hiring employees

(29:08) and we don’t know what we’re supposed to do like what are some tips with that great thing for this clinic so you know that’s some types of things that you’d be consider doing um it’s completely free um the legal services are free they give you lunch at the end um where’s the best place for people to go check so that maybe next year they can stay in the loop or you know in between they might be able to reach out so um this year and last year we have posted it on um non-profit connect they have kind of

(29:43) like a bulletin board sort of thing um it’s on nonprofit connect it’s also been on Stinson’s LinkedIn page and the American Association of corporate councils LinkedIn page as well as Stinson’s website Stinson markets it pretty heavily but if you’re not following Stinson you’re not going to necessarily run across it people can always contact me um and I can get them hooked up with that but then the other thing is is that if you are a non-profit and you have a legal issue please just reach out to me

(30:17) um I do non-profit issues through um KC’s school of law clinic and so there’s some stuff that I might be able to help you with through the UMKC School of Law I might be able to tell you to participate in this Clinic coming up in the summer with Stinson and the ACC or I might have other resources for you so um I’m pretty open to taking emails and answering people’s questions and at least trying to direct them to the right resources for them if I can’t personally help them through my clinic

(30:46) will you share how they can reach you I assume by email is the best yes um so um my per my direct email is Merrick my last name D.A the first two initials of Danielle at umkc.edu or the clinics email is e l s clinic at umkc.edu so the acronym for entrepreneurial Legal Services clinic at umkc.edu um you can call and leave a message I will eventually return your message but I tend to be in meetings a lot of the day um but the phone number is 816-235 -6341 um and that’s the best way to reach me and like I said I’m happy to answer

(31:39) questions direct to resources um I actually go and speak to non-profit boards on a somewhat regular basis so if you’re a non-profit and you’re like I’d like someone to come and talk to my board about board responsibilities support liabilities I’m like yeah I can come and do that so um I I speak to non-profit boards about legal issues as well just to give non-profit organizations a better understanding of everything that’s required of them Danielle thank you this has been great I feel like I just went to a mini Law

(32:08) class and and you didn’t charge me which was even better so thank you for sharing your expertise we’re really grateful for For All You’ve shared with us yeah you’re welcome thank you for joining us for KC cares Kansas City’s non-profit voice we’re produced by charitable Communications also a non-profit this KC care segment was brought to you by the Ewing Marion Kaufman Foundation www.koffman.

(32:34) org you can spread the love and find us on Facebook and Twitter at KC cares radio on Instagram at KC cares online and check out our website at www.kccaresonline.org you can find Danielle and all of our expert podcasts right there and don’t forget you can catch us Saturday mornings on ESPN 15 10 a.m and 94.5 FM 8 A.

(32:57) M thanks for joining us I’m KC cares [Music]

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