by Robert C. Harris
Who authorizes an association to exist? From where does the board get its authority to act? How did the founders envision perpetuity as a nonprofit, exempt organization?
Some say authority comes from “the membership.” Others suggest a “parent association” has provided a memorandum of understanding.
Freedom of Association
Partial credit belongs to the U.S. Constitution. When it was amended in 1791, the founders provided for “freedom of association.” The concept allows persons with mutual interests to belong to a group.
The Constitution grants associations the right to petition government (lobbying), the opportunity to hold meetings (freedom of assembly), and the right to speak their opinions (freedom of speech).
Beyond the Constitution, a board should know its relationship and requirements with the state and federal government. Both entities authorize and regulate the association.
The board gets authority from state government. Most associations are registered with an agency such as the Division of Corporations as a not-for-profit corporation. Nonprofit is casual for the legal designation.
It is incumbent that an executive director monitors changes to the state corporate statute where the association is registered. Legislatures are known to make amendments without giving notice to the associations. The articles of incorporation should align with the nonprofit act.
Suzanne M. Gebel, CAE, executive director at the Iowa Funeral Directors Association said the board hired an attorney to review of the IFDA bylaws and compare them against Iowa’s not-for-profit laws. “It is essential that we remain compliant with the state’s requirements.”
“On a side note, we also reviewed the association’s bylaws and policies so that they would be in compliance with Sarbanes-Oxley requirements.” Sarbanes-Oxley is associated with the policy questions on IRS Form 990.
Most states require annual filing of a report, including names of officers of the association. Failure to file can result in “involuntary dissolution” of the corporation.
Associations apply to the US Department of Treasury, IRS, seeking designation under the 501(c) tax code. The common assignment for associations is a 501(c)6 business league.
The IRS requires an annual report, filed on Form 990 – Information Return, or a similar form for smaller organizations.
Form 990 is about 25 pages, revealing much about the organization. It requests the names of the governing body and reaffirms the statement of purpose each year.
Amendments to governing documents need to be reported with the submission of Form 990. The IRS queries about conflicts of interest, whistle blower policy, financial audits, and public records. The last three years of Form 990 are public records.
The IRS expects and asks if the governing body has reviewed Form 990 before submission? A resource for understanding the nuances of the form is available from the IRS as a 100-page guide titled “Instructions for Form 990 Return of Organization Exempt from Income Tax.”
To search your state and federal requirements, use the internet, and your CPA. IRS.gov provides a listing of all organizations that are designated as exempt, and those that have lost their exemption.
Guidestar.org and similar platforms have a listing of all exempt organizations and copies of Form 990 reports. Most services are free.
States allow a search of all corporations, and a view of the latest corporate filing. The current not-for-profit corporate statute can be found on state government websites.
In summary, executive directors and officers should know from where the board receives its authority to act. State corporate law provides for not-for-profit status and the IRS designates exempt status from federal income tax.