Dear Nonprofiteer, How can I restructure to be the nonprofit I was supposed to be to begin with?

Dear Nonprofiteer,

You’ve helped me in the past and your blog is invaluable. Thank you!

Here’s my question: In analyzing requirements for a recent grant application, I’ve determined that our music group was founded on a corporate rather than a nonprofit model. I assumed that the lawyer who helped us form the corporation (our first board chair) knew what he was doing since he was also chair of a successful major nonprofit in our area. Of course, when we started, I had no clue.

The articles of incorporation set up a board with a president and vice-president who manage the corporation. They are also voting members of the board. We had a huge upheaval last fall when my co-founder (the president) resigned without explanation, taking much of the original board with him. We ended up with a president who has (on paper) the qualifications we need but is only a figurehead. So the board made me CEO and created a COO, both voting board members.  At this point, I receive no salary and the COO is paid by contract for his teaching only.   As our funding increases, this will change.

Grantmakers don’t like paid staff on the board. We need to switch to a model with an executive director not on the board. How do we do that and what are the ramifications?  Thanks!

Signed, Wearing Too Many Hats

Dear Hats,

You’ve outlined not one but a cluster of difficulties:

  • You’re not properly formed as a nonprofit, which could jeopardize your status as a recipient of tax-deductible donations;
  • You’re not properly organized so the Board can decide what needs to be done and the staff can do it;
  • You have the wrong configuration of personnel to accomplish your goals; and
  • You don’t have any money.

A veritable quadri-fecta, if there can be such a thing.  For the moment, at least, the fact that “grantmakers don’t like paid staff on the Board” is the least of your problems.  Let’s take it one step at a time: first correct your bylaws, which involves reshaping the staff as well as the Board; then expand and strengthen your Board; then put the Board to work raising the money you need.

(You’ve demonstrated, by the way, the wisdom of one of the Nonprofiteer’s least-heeded pieces of advice: don’t put a lawyer on your Board with the idea that s/he’ll be able to handle your legal needs.  Law practice is so specialized now that the chances s/he’ll have the expertise for the particular problem you’re facing are very small.  Put lawyers on your Board if you want them for other reasons–we’re smart, we have money, we work hard–but take your legal problems to a lawyer whom you actually pay, or who will serve as your lawyer pro bono without expecting to be compensated in governing power.)

You need to rewrite your bylaws, and if you can’t at this moment pay a lawyer, try to get free or low-cost legal services from someone who’s NOT on your Board.  In some cities (Chicago is one) there are organizations of lawyers who provide such services to arts groups and other nonprofits.  If there’s no such organization near you, call the local bar association and explain your problem–they certainly have a lawyer-referral system and may have a committee that connects nonprofits with the pro-bono or low-cost legal help they need.

If all else fails, search “model nonprofit bylaws” on Google and you’ll find half a dozen examples from which you can pick and choose appropriate provisions.  The only essential provisions, in the Nonprofiteer’s judgment, are that the boilerplate tax language be included; that the Board be self-perpetuating with staggered terms; and that the organization be operated by an Executive Director who sits on the Board purely ex officio (that is, in his/her official capacity only and without a vote); but you may find other provisions essential to your particular circumstances.

(You should, for instance, sit down with your COO and figure out what his job actually is.  Is he the Artistic Director, responsible for music programming, while you’re the Managing Director, responsible for all non-musical aspects of the agency’s operations?  If so, you’ll report jointly to the Board.  Or is he the Program Director, responsible for music programming, while you’re the Executive Director, responsible for leading the entire agency?  If so, he’ll report to you and you’ll report to the Board.  Incorporate whatever decision you make into the bylaws you’re drafting.)

Take a proposed revision of the bylaws to your Board and explain that the original bylaws don’t actually conform to what the Internal Revenue Code requires to enable you to keep your 501(c)(3) designation, and that loss of that designation would cost you all your donated revenue.   That should produce instant obedience.  Explain further to the Board that it’s not considered good practice for staff to serve on the Board: it blurs the lines between governors and managers.  The Board has to be able to see the good of the whole agency, while inevitably a staff member will see the good of the agency through his/her personal lens.

Based on these arguments, get the Board to adopt a new set of bylaws for the agency (and have the Board Secretary find out what State office has to be notified of this fact).  Then resign from the Board along with your erstwhile COO, asking that the Board make one or both of you welcome at Board meetings in your official capacities.

Ramifications: as soon as you’re off the Board, you can be excluded from Board meetings if someone decides they should take place “in executive session;” but I doubt your current figurehead  Board president would be able, let alone willing, to operate without you.

Step 2, as aforementioned, is to look at your current Board (now that it’s been reduced by you and the COO) and figure out what’s missing: energetic fundraisers, people who know about human resources, people who know about marketing the arts, people who are connected to the wider music and educational communities.  Any model set of bylaws will require the Board to have a Nominating Committee, so urge the President to appoint three Board members to this new committee and to instruct them to identify and recruit at least two new Board members immediately, to take your place, and as many others as you think you need.  (Make sure the new bylaws call for a Board significantly bigger than you have now, to give yourselves room to grow.)

Once the new Board members are in place, conduct an orientation session with all Board members–new and veteran alike–with heavy emphasis on asking for individual gifts.  (Remind Board members: they don’t have to ask their own friends for money.  They just have to ask each other’s friends for money!)  Soon you’ll have the money to pay lawyers when you need them–and to pay yourself and the Artistic/Program Director the salaries you deserve, or at least a small fraction thereof.

Ramifications: again, you’re creating a strong Board.  That always produces the risk of conflict, and even the risk that your Executive Directorial decisions will be overruled.  But trust me: it’s a price worth paying to have a properly organized agency with a functioning Board and staff.


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3 Responses to “Dear Nonprofiteer, How can I restructure to be the nonprofit I was supposed to be to begin with?”

  1. Ed Says:

    I’m curious about your take on a recent situation with a non-profit arts organization here in Chicago- American Theater Company. I’m not personally involved, but I also belong to an arts organization with a similar structure and in which similar tensions have occasionally (though fortunately to a much lesser degree!) developed between ensemble members and our artistic director. In our case the board intervened to mediate and we wound up altering some of our procedures in a compromise of sorts. The link to an article on the ATC situation is below:

    Not a pretty situation. One of the solutions people have suggested is the ensemble members of the company should have retained a presence on the board, or made sure that the bylaws of the organization ensured them more oversight and involvement. But you seem to suggest that staff (which often, though admittedly not always, includes ensemble members) should *not* be on the board, or if they are they ought not to have any real governing power. How does an ensemble of a non-profit theatre company prevent a company from essentially being hijacked out from under them in those circumstances, though? Does one just hope for the best and pray that ensemble-board-staff relations never get that toxic? Is the ensemble formation of many theatre companies (especially in Chicago) inherently incompatible with the non-profit structure? I’d love to hear your take on this.

    • Nonprofiteer Says:

      The short answer is that ensemble members are different from staff members, and that a structure needs to be created to represent the ensemble on and to the Board. The long answer will appear next Thursday when your comment becomes the featured “Dear Nonprofiteer” letter on the site, by which time I will have had the opportunity to think about the situation more and address it fully. Fair enough?

  2. Vero Says:

    Very Good information, this is what I was looking for. Thank you a lot.

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