handbook for charity nonprofit

Nonprofit Board Members and Senior Management:

The Office of Attorney General recognizes the vital

service that you provide to your community through

your work as a board member or senior manager of a

charitable nonprofit organization. Your willingness to

volunteer your time and expertise is deeply appreciated.

The purpose of this guide is to provide you with some

basic information about matters which affect charitable

nonprofit organizations because those entities fall

within the Attorney General’s jurisdiction. The Attorney

General has a duty to protect the public’s interest in the charitable assets held by

nonprofit corporations.

In response to the many difficult questions confronting the boards of charitable

organizations today, the Attorney General’s office is offering this guide to assist

you in your efforts to better serve your organizations. This guide presents general

information and is not intended to direct the exact manner in which a

Pennsylvania nonprofit board must operate.

To obtain additional information regarding your fiduciary duties as a manager or

board member or the rules and regulations for the creation, operation and

dissolution of nonprofit charitable organizations please consult the Nonprofit

Corporation Law of 1988, as amended, 15 Pa. C.S.A. §§ 5101 – 6146 (Nonprofit

Law). This guide is not a substitute for legal advice. If you have questions, seek

qualified legal counsel to ensure that you and your board’s actions are in

compliance with Pennsylvania law.

This handbook and many other resources are also available on our website at

www.attorneygeneral.gov. Thank you for your hard work and dedication to public

service. Our Commonwealth is a better place because of your volunteer efforts.

INTRODUCTION

This guide is intended to provide senior management

and board members with general information relating to

the operation of charitable nonprofit organizations. If

you have any questions regarding these organizations,

please contact the Office of Attorney General at:

Commonwealth of Pennsylvania

Office of Attorney General

Charitable Trusts and Organizations Section

Floor, Strawberry Square

Harrisburg, Pennsylvania 17120

Telephone: (717) 783-2853

Facsimile: (717) 787-1190

www.attorneygeneral.gov

QUESTIONS YOU SHOULD ASK BEFORE JOINING A

BOARD

What is the charitable purpose of the organization?

“Charitable purposes” is defined by the Nonprofit Law

as “[t]he relief of poverty, the advancement and

provision of education, including postsecondary

education, the advancement of religion, the prevention

and treatment of disease or injury, including mental

retardation and mental disorders, governmental or

municipal purposes and any other purpose the

accomplishment of which is recognized as important and

beneficial to the public.” Obtain as much information as

possible about the organization. Review the Articles of

Incorporation, bylaws, internal operating manuals,

minutes of prior board meetings and annual reports.

What is the financial status of the organization?

As a board member or senior manager you are

responsible for ensuring that the assets committed to a

charitable purpose are used for the charitable purpose for

which they were intended. Review the nonprofit

organization’s financial statements and tax returns. Talk

with the executive director, staff and current board

members if you have any questions about the finances of

the organization.

What are my responsibilities as a board member?

Meet with the officers and executive staff of the charity

to discuss your expected duties and responsibilities as a

board member. Determine how much time you will be

asked to commit to these duties. Ask about board

committees, organizational structure, financial

responsibility and conflict of interest policies.

OFFICERS AND DIRECTORS

Every nonprofit corporation must have a president, a

secretary and a treasurer. Although it is not necessary to

use the above titles, every nonprofit corporation must

have an individual who fulfills each of those roles and

the same individual may fill multiple roles. In order to

avoid the appearance of impropriety, it is best not to give

one individual too much control over the corporation.

Instead, power should be distributed among different

officers or board members. A corporation may have as

many officers with as many different titles as it deems

necessary.

The bylaws may set forth the qualifications for the

positions and the manner in which officers and directors

will be elected. The length of the term that each officer

or director will serve should be set forth in the bylaws.

In the absence of a bylaw dictating term length, the

Nonprofit Law provides that each officer or director will

serve a one year term. Committees may be established to

handle some aspects of the organization’s governance.

At any time, an officer or director may resign by giving

written notice to the corporation.

FIDUCIARY RESPONSIBILITIES OF BOARD

MEMBERS AND SENIOR MANAGEMENT

1. DUTY OF CARE

Board Members, senior management and members of

committees must perform their duties in a manner they

reasonably believe to be in the best interests of the

corporation using the same degree of care, skill, caution

and diligence that a person of ordinary prudence would

use under similar circumstances. Decision-makers are

required to make reasonable inquiries when analyzing

contracts, investments, business dealings, and other

matters. An individual who is acting in conformance

with this standard will:

• attend and participate in board meetings on a regular

basis;

• attend and participate in committee meetings when

the individual is a member of the committee;

• diligently read, review, and inquire about material

that affects the corporation;

• keep abreast of the affairs and finances of the

corporation; and

• use independent judgment when analyzing matters

that affect the corporation.

Decision-makers may rely on information provided by

their employees, committees, attorneys, public

accountants and qualified professionals as long as the

decision-maker reasonably believes that the information

provided is reliable. Decision-makers must use their

own independent judgment when evaluating

information. Individuals who fail to meet the prescribed

standard may be personally liable to the corporation if

their actions cause financial harm.

Board members, trustees and senior management have a

fiduciary responsibility when handling finances and

investments. That simply means, they must exercise the

degree of care, caution and diligence that prudent

persons would exercise in handling their own personal

investments and finances. Individuals who have or claim

to have special knowledge or skills in the area of

investment will be held to a higher standard. Fiduciaries

who carelessly or negligently invest funds may be

personally liable for any losses sustained.

2. DUTY OF LOYALTY

Board members and senior management must always

perform their duties in good faith with the best interests

of the organization in mind. This means that they must

not seek to derive private gain from business transactions

that involve the nonprofit corporation or advance their

own interests at the expense of the corporation. Acts of

self-dealing constitute a breach of fiduciary duty which

may result in personal liability to the nonprofit

organization. Board members, trustees, and senior

management should avoid conflicts of interest and even

the appearance of impropriety. Individuals who take

advantage of corporate opportunities to make profits for

themselves at the expense of the corporation may be

liable for the profits they received at the organization’s

expense.

CONFLICT OF INTEREST

Board members and senior management have a duty to

avoid potential or apparent conflicts of interest. To avoid

the appearance of impropriety, it is important for

individuals to be open and honest with their fellow

managers and board members at all times. It is

particularly important for board members to disclose the

following facts:

• whether they have a potential conflict of interest

with respect to any transaction, business decision

or other matter in which the organization is

involved;

• whether they have a financial, business or personal

interest in an entity with which the nonprofit

organization is or will be doing business;

• whether individuals related to them have a

financial, business or personal interest in an entity

with which the nonprofit organization is or will be

doing business; or

• whether they serve as a director, member or

employee of either a competitor of the corporation

or a corporation with which the nonprofit

organization is or will be doing business.

The board should proceed with caution when any of the

above facts are present because there may be a conflict

of interest. An individual who has a potential conflict

with respect to a particular transaction should disclose it

to fellow managers and board members and abstain from

participating in the negotiations and decisions

surrounding that transaction. To avoid the appearance of

impropriety, the individual who has the conflict of

interest should not be present in the room during any

discussions that relate to the transaction.

COMPENSATION FOR BOARD MEMBERS AND

SENIOR MANAGEMENT

Board members and senior managers of nonprofit

organizations are not always paid for their services and

the bylaws should state whether any individual will be

compensated. Individuals are not entitled to

compensation unless a clear compensation agreement

has been reached. The determination of whether or not

to compensate individuals for their services is generally

made by the board unless the bylaws provide otherwise.

In the event that compensation is received, the amount

must be reasonable based upon the value of the services

rendered; it must not be excessive. Compensation

includes all salaries, commissions, bonuses, pensions,

benefits, gifts, living expenses and all other perquisites

and items of value of any kind. The level of

compensation that is to be paid to each individual should

be determined independently by the board of directors or

a committee vested with the authority to set

compensation. Individual employees should not be

involved in setting their own compensation. In

determining whether compensation is reasonable, the

salary ranges of similarly situated individuals in similar

nonprofit organizations should be examined.

A nonprofit organization may not compensate

individuals who are not providing services to the

organization. An organization’s status as a nonprofit

entity may be threatened if its employees receive

excessive compensation or if individuals receive

compensation without rendering services.

RIGHTS OF BOARD MEMBERS

• Board members have the right to receive all

information that is necessary and relevant to assist

them in performing their duties.

• Board members have the right to call special

meetings by submitting written requests and once

requested, a meeting must be held within the 60

days following the organization’s receipt of the

written request.

• Board members may bring court actions to contest

activities that affect their rights and duties.

• Board members have the right to disagree with

actions taken at meetings and may ask to have their

disagreement noted in the minutes of the meeting

at which the action was taken. Otherwise, they

may submit a written dissent to the secretary of the

corporation immediately following the meeting.

However, board members may not dissent if they

voted in favor of the action that was taken. It is

important to note that board members who fail to

note their dissent either in writing or in the minutes

will be assumed to have assented to the board’s

action.

RIGHTS OF GENERAL MEMBERS

• The rights of general members of the nonprofit

organization are governed by the organization’s

bylaws and the extent of the members’ interest in

the organization. For example, members who are

entitled to cast at least 10% of the total membership

votes are entitled to call special meetings by means

of a written request. Once the written request is

received, the meeting must be held within 60 days.

• Unless the members of a nonprofit organization

have modified the bylaws to provide otherwise,

each member is entitled to one vote.

• Members of nonprofit corporations do not have the

right to sell their votes.

• Whenever a member makes a proper request, the

organization’s books or records of membership

must be made available at either a regular meeting

or a special meeting of the nonprofit corporation.

• A voting member may bring a court action to

contest activities of a nonprofit organization that

affect the member’s rights or duties.

ARTICLES OF INCORPORATION

In Pennsylvania, the format and contents of Articles of

Incorporation are governed by the Nonprofit Law which

sets forth the specific provisions or requirements that

must be met. When forming a nonprofit corporation, it is

advisable to engage an attorney to review the law and

assist in drafting the Articles. Articles of Incorporation

must be filed with the Department of State. Generally,

Articles of Incorporation must contain information

including, but not limited to, the following:

• the name and registered address of the

corporation;

• the purpose for which the organization was

formed;

• a statement that the corporation is a not-for-profit

corporation incorporated under the Nonprofit

Corporation Law;

• the voting rights of members;

• the name and address of each individual

incorporator;

• the effective date of the Articles; and

• whether or not the corporation is organized on a

nonstock or a stock share basis.

BYLAWS

The bylaws of a nonprofit organization should be written

carefully and clearly. Bylaws provide the framework for

governance and management of the nonprofit

organization. Bylaws regulate the conduct of all

members of the nonprofit organization. Generally,

bylaws dictate:

• the scope of the authority that has been granted to

board members and members of senior

management;

• the number of meetings that the organization must

hold, the time period within which these meetings

must occur (e.g., monthly, yearly, etc.), and the

provisions for calling special meetings.

In certain instances, individuals or entities who do

business with a nonprofit corporation and are aware of

provisions within its bylaws may be subject to those

provisions. Bylaws which are in clear opposition to

Pennsylvania law will not be upheld.

SHARES OF STOCK IN A NONPROFIT CORPORATION

A nonprofit corporation may elect to have shareholders.

If a nonprofit corporation chooses to have shareholders,

the fact that the corporation is organized on a stock share

basis must be clearly denoted in its Articles of

Incorporation. The bylaws should describe the

denominations in which shares will be issued and the

shares should be evidenced by share certificates. The

face of each share certificate must contain a conspicuous

statement that the corporation for which it is issued is a

nonprofit corporation.

Unless the bylaws state otherwise, holders are entitled to

one vote per share. Similarly, unless the bylaws state

otherwise, shares are nontransferable and may not be

transferred by any method including operation of law.

Shareholders are not entitled to and may not receive

direct or indirect dividends on any shares. Further,

shareholders of a charitable nonprofit corporation are not

entitled to and may not receive any portion of the

corporate earnings or corporate assets under any

circumstance including its dissolution.

As long as the bylaws of a nonprofit corporation are

lawful and reasonable, a shareholder who fails to comply

with those bylaws may have their shares canceled by the

nonprofit corporation and may be excluded from future

membership.

CHARITABLE ASSETS

Property committed to charitable purposes has special

protection under the law because it relieves the public

burden by advancing one or more general or specific

charitable causes. As soon as money or property is

donated or committed to a charitable purpose, the

Attorney General acts on behalf of the public’s interest

to ensure it is duly administered; including the assets

held by nonprofit organizations formed for charitable

purposes.

In Pennsylvania, the Orphans’ Court has jurisdiction

over property committed to charitable purposes under

Rule 2156 of the Pennsylvania Rules of Judicial

Administration, Pa. R.J.A. No. 2156, and under Section

711(21) of the Probate, Estates, and Fiduciaries Code

(PEF Code), 20 Pa. C.S.A. § 711(21). The Nonprofit

Law provides that charitable assets may not be diverted

from the purposes for which they were donated, granted,

devised or otherwise vested in the corporation without

obtaining an order from the Orphans’ Court specifying

the disposition of the assets, 15 Pa. C.S.A. § 5547(b).

Under Rule 4.4(a) of the Pennsylvania Orphans’ Court

Rules, the Attorney General must receive notice of any

Orphans’ Court proceeding involving or affecting

charitable assets. Under the Commonwealth Attorneys

Act, the Attorney General may intervene in any action

involving charitable bequests or trusts, 71 P.S. § 732-

204(c). The termination of charitable trusts of $100,000

or less may be accomplished without an Orphans’ Court

proceeding if the Attorney General consents to it, 20 Pa.

C.S.A. § 7740.3(d).

Property committed to charitable purposes may be

deemed to be held in trust regardless of whether a formal

trust instrument has been prepared. If a trust instrument

has been prepared, that document will govern investment

and use of the assets or funds.

When a nonprofit organization is dissolved, the Orphans’

Court must review the dissolution and approve the

distribution of the assets.

A nonprofit corporation with responsibility for charitable

assets acts as the trustee of those assets. Trustees are

accountable for charitable assets and as such are

responsible for ensuring that funds and assets are

protected and invested wisely. A trustee which allows

charitable assets to be squandered, diverted or otherwise

dissipated may be individually liable for the loss of those

assets regardless of whether the assets were administered

through a corporation.

CHARITABLE SOLICITATIONS

Most states, including Pennsylvania regulate

solicitations of charitable contributions. In

Pennsylvania, charitable organizations and professional

fundraisers are regulated by the Solicitation of Funds for

Charitable Purposes Act, 10 P.S. §§162.1 162.23

(Charities Act), and the Unfair Trade Practices and

Consumer Protection Law, 73 P.S. §§201-1 - 201-9.3

(Consumer Protection Law). In addition, certain

fundraising activities such as bingo and small games of

chance are regulated at the state, local and county levels.

Most charitable organizations and their fundraisers

requesting donations within Pennsylvania are required to

Charitable Organizations, prior to beginning any

fundraising activities. Certain public service

organizations and charitable organizations raising less

than $25,000 annually are not required to register if they

do not pay anyone to raise funds on their behalf. Even

though a charitable organization may not be required to

solicitations must still comply with all other provisions

of the Charities Act and the Consumer Protection Law.

The Charities Act requires that all charitable

organizations “must establish and exercise control over

fundraising activities conducted for its benefit, including

approval of all written contracts and agreements, and

must assure that fundraising activities are conducted

without coercion.” 10 P. S. §162.13(e).

Board members should also be aware that the Charities

Act specifically states the standard of care that they must

utilize in their treatment of property received as a result

of a charitable solicitation. Section 21 holds that “every

person soliciting, collecting or expending contributions

for charitable purposes and every officer, director,

trustee and employee of any such person concerned with

the solicitation, collection, or expenditure of such

contribution shall be deemed to be a fiduciary and acting

in a fiduciary capacity.” 10 P. S. §162.21, (emphasis

added).

To obtain registration forms and other information about

registering a charitable organization or professional

fundraiser contact the:

Pennsylvania Department of State

Bureau of Corporations and Charitable Organizations:

Charities Section

207 North Office Building

Harrisburg, PA 17120

(717) 783-1720

1(800) 732-0999

www.dos.pa.gov/BusinessCharities/Charities

FUNDAMENTAL CHANGE TRANSACTIONS

The duties of the board of directors of a charitable

nonprofit organization extend to all property committed

to a charitable purpose. The Nonprofit Law provides that

property committed to charitable purposes shall not “be

diverted from the object to which it was donated, granted

or devised, unless and until the board of directors or

other body obtains from the Court an order specifying

the disposition of the property.” 15 Pa. C.S.A. § 5547(b).

The PEF Code has a similar requirement.

Whenever a nonprofit, charitable organization enters

into a transaction effecting a fundamental corporate

change which involves a transfer of ownership or control

of all or substantially all of its charitable assets, the

Office of Attorney General is obliged to review each

transaction to ensure that the public interest is fully

protected. These transactions may take various forms

and include sales, mergers, consolidations, leases,

options, conveyances, exchanges, transfers, joint

ventures, affiliations, management agreements or

collaboration arrangements, or other methods of

disposition. The Office of Attorney General reviews

such transactions regardless of whether the other party or

parties to the transaction are nonprofit, mutual benefit or

for-profit entities. Certain transactions which are in the

usual and regular course of a nonprofit’s activities will

not be reviewed.

In December 1997, the Attorney General issued a

Review Protocol For Fundamental Change Transactions

Affecting Health Care Nonprofits to facilitate the review

of nonprofit healthcare transactions. The Protocol was

developed to be used as a guide by attorneys and staff in

the Charitable Trusts & Organizations Section, and its

outside experts, in reviewing fundamental change

transactions affecting nonprofit, charitable health care

entities. The principles underlying this protocol,

however are also applicable to non-health care-related

nonprofit corporations planning to undertake a

fundamental change transaction.

To obtain a copy of the Protocol, please contact the

Attorney General’s Charitable Trusts & Organizations

Section at the address on the back cover of this booklet,

or online at www.attorneygeneral.gov.

Office of Attorney General

Charitable Trusts & Organizations Section

14th Floor, Strawberry Square

Harrisburg, PA 17120

Telephone: 717-783-2853

www.attorneygeneral.gov

January 2018