Sunsetting is a strategic decision that requires transparency, honesty, and planning. The often emotionally charged task of bringing sunsetting into strategic conversations can be difficult for organizational leadership to confront. With that in mind, how can you and your organization prepare to confront the possibility of closure with a clear mind and intentional, empathetic decision making?

Why Sunset?

There are many reasons an organization might consider sunsetting, including:

• Accomplished mission
• Changes in external environment (demographics of community served, change in need for services, other organizations better suited for the work)
• Funding challenges, financial instability, or structural deficits
• Departure of a key leader or founder who is the reason the organization exists
• A combination of some or all of the above

You may be considering a sunset because your mission has been fulfilled, and you feel closing would allow for resources and energy to be redistributed elsewhere to better serve your community. This was the case for Project 515, a nonprofit that spearheaded the push for marriage equality in the state of Minnesota, when marriage equality became legalized officially in 2013. Project 515 closed shortly after in order to clear the way for other organizations continuing the work for LGBTQ rights in the state. Project 515 co-founder and board chair at the time, John Larsen, said, “I remember sitting in the attic of our house and saying, ‘we want to go out of business.’.” Founding board member Susan Cogger-Williams said in their final report, “To have been able to accomplish our ambitious mission and sunset our organization is such a privilege and honor. You can’t argue with success!”

You may also be considering sunsetting because something in your business model is not working anymore. For example, in 2018, Patrick’s Cabaret closed after realizing their cash flow projections indicated they could not financially sustain the work they did. Scott Artley, former executive artistic director, wrote about their sunset, describing the decision a painful one for him personally, but noting “This is… about disrupting the mythology that has us avoid even confronting the possibility of closure because we conflate personal failure with admitting that an operation is unsustainable.”

No matter the reason, deciding to sunset is a strategic decision that requires strategic thinking both during the decision itself and throughout its execution. It is easy to get lost in the checklist of legal requirements and financial to-dos, but being intentional and methodical about the process throughout can help to ensure your organization can have a celebratory farewell even if it’s bittersweet for the reasons listed above.

It is also important to acknowledge that sunsetting takes time. It is at least a six-month process, but depending on the size of your organization, it’s likely the process will be longer. Approaching this time intentionally will allow for the endurance needed to see the process through to the end.

What questions should you ask of yourself and your organization when considering a sunset?

• Does the mission of our organization still address a relevant issue? Are we effectively meeting the need our community is asking from us
• Are we currently operating in a way that honors our mission and our community?
• What role could sunsetting play in accomplishing our mission?
• What would the community lose if we are not here? Are there other organizations doing this work that can fill that need?
• Are there any programs that are succeeding that would continue to serve your community if continued by another organization? Who could be successors to continue this work? (See more on program transfers below.)
• Are we the right people doing this work at this time? Does sunsetting create more space and resources in the sector for other voices and organizations better suited for the work?
• Are the other options available to us conducive to sustainable success for the organization and those who support it, or are they short-term solutions that kick the can down the road? Will these options create more stressors that will strain employee capacity and ability to fulfill the mission?

After reflecting on these questions, you may decide sunsetting is not the route you and your organization need to take – that there’s another way to restructure or reimagine your organization.
However, if your leadership does decide sunsetting is the best way to honor your organization’s mission and the community you serve, trust that your team made the best decision you could with the information you had and the expertise you bring.

Sunsetting or Dissolution

So now what? You’ve made the decision to dissolve, but what logistical steps and strategic considerations are required to carry you to the finish line? Here we offer a path through as we see it, but know this process is not linear. You may jump from section to section as you respond and adapt to the needs of your team and your community during the closure.

Identify Leadership

Because this is a long process, it is important to identify key transition leadership early on. This task force or special committee can be a mix of staff members and board leadership, and once identified, this team will need to invest a significant amount of time and attention to winding the organization down. Sunsetting is a heavy lift for leadership, but there are several decisions big and small that must be made, so it is important to bring people with different skillsets and perspectives to this group. It might also be worth considering giving this group a formal container (ex: committee, task force), to make space for the level of commitment and capacity this process will require.

Role of the Board

The board is an integral part of the sunsetting process, both legally and strategically. They must be involved in early discussions and throughout the dissolution as a part of the transition team. Board members will also go through their own process of transitioning and letting go, including the mourning and celebration that comes along with difficult decisions. Take pauses throughout the sunset to check-in and make space for that processing.

• The board is core to the strategic thinking and decision making around sunsetting. Sunsetting takes time. Board members should plan to be engaged throughout to provide guidance and support.
• Board must vote to dissolve the organization. This includes approving a “plan of dissolution”. This vote must be documented in meeting minutes.
• Plan of dissolution is a written document describing a nonprofit’s plans for distribution of remaining assets and how it will address remaining liabilities.
• Board will submit necessary paperwork (see below).
• The board chair and treasurer will have ongoing IRS reporting responsibilities for several years after the formal shut down.

Outside Advisors

Though there are some clear steps when it comes to sunsetting, we acknowledge each organization is unique in its business model, community served, funding streams, staff needs, and strategic considerations. We highly recommend relying on additional expertise when and if you need it to guide and support you through the sunsetting process. This may include an accountant, a nonprofit attorney, and communications and/or strategy consultants. Some of these skillsets may already exist on your board, but having an outside perspective to keep the process moving and identify areas that need more attention can be incredibly useful.

Program Transfer

If you have identified programs you’d like to see continue with a new home organization, there are a few key things to consider in a program transfer.

Strategic Considerations

Identify partners that will honor the program’s intent. When VSA Arts sunsetted, they transferred many of their programs to organizations with similar missions. Craig Dunn, VSA’s former executive director, said, “We obviously can’t specify how they’re going to implement the programs going forward, but we want to be sure the expectations are clear, that there’s a formal commitment to the program intent.”

Get a clear picture of true program costs and the impact of allocations and overhead. This information will be key when looking for potential partners to take on the program.

Financial Considerations

When transferring programs, you must also consider the transfer of program-specific funding, assets and/or equipment required to continue the work. The program itself might have an inherent value, especially if it is a successful one.

Identify any trademark registrations, other intellectual property or intangible assets that need to be legally transferred.

If there are individual and/or institutional donors associated with this specific program, assist in connecting these donors to the new organization. The donor can decide if they want to stick with the program or not but be sure to communicate that you trust the commitment and capacity of the organization the program is being transferred to.

Communications

Communicating with your board and staff

• Be transparent about the strategic, operational, and financial situation of the organization and the ways in which sunsetting addresses those issues.
• Continue to have honest and intentional conversations with staff and board throughout the sunsetting process.
• Be sure to name and honor successes of the organization and those who committed their energy to it. Find ways throughout the process to celebrate those successes and the legacy of your work.
• When possible, help guide board members, staff members, and volunteers to new places to transfer their energy once the organization is officially dissolved.

Communicating with funders and stakeholders

• You should be the first to tell your donors about the sunset, rather than them finding out with the rest of the community. Make a plan for the sequence and roles for outreach. Frequently, organizations communicate first to major financial partners with a personal communication (leadership circles, major donors, and funders), then to your broader donor base, supporters , and finally to the general public.
• Communicating with clients needs attention and a careful plan based on the type of relationship and connection. For some kinds of services there are legal or contractual requirements for this notice.
• Convey gratitude – your donors supported you through it all. Include a summation of their impact, lift-up what they achieved with you, and celebrate the legacy of the organization they fostered. Strive for a balanced tone focused on positive impact.
• Point to other organizations that are doing great work in the field where donors can redirect their energy and resources. If capacity allows, facilitate those connections so people feel they are in good hands.

Communicating with your community

• Identify agreed-upon talking points with your board to balance confidentiality and transparency.
• A balanced tone is critical. Honor the legacy of your work publicly and share ways in which the community can celebrate that work with you.
• If there are other organizations serving your community well, use this opportunity to hold their work up. When applicable, offer next steps for the constituents you serve to connect to these services.

Human Resources

When sunsetting, your organization is also eliminating jobs and ending employment of a staff who have committed their time and energy to the mission. Each staff member will be going through their own sunsetting process as they begin to identify what is next for them. It is critical to be transparent and intentional with communication and next steps.

You must also follow the same process as you would if you were ending employment for any other reason. This may vary by state. (You can find more information for the state of Minnesota here.) This process will include providing a W-2, paying out accrued wages, and paying out benefits. This process may also vary based on your HR policies – it is critical that you refer to and follow your own established rules and practices. In some cases, offering severance or bonuses for staff to stay on through the conclusion of the work can be an important strategy to leverage as well to ensure you have the staff needed to close down and that people feel supported until the end. This is a place where outside legal advice is helpful.

It can be easy to get lost in the technical side of any major transition but remember that at its core a sunset is impacting people. Provide your staff with the references they will need to find their next step and make connections when able. Plan to make space in conversations for concerns and ideas from staff, so they feel heard and supported in the transition. Celebrate the work you all have accomplished together. Allow the same space and grace to yourself as a leader in this transition.

Financial and Legal Logistics

While there are some clear required legal steps when sunsetting, we recommend seeking legal consultation to ensure the steps reflect what your specific organization needs.

Financial

• Inventory assets: Identify what needs to be sold or transferred. Once the 45-day waiting period with the Attorney General’s office has past, you may begin selling, transferring, or disposing of assets.
  • By law, sunsetting organizations must distribute remaining assets to other tax-exempt organizations or to the government, not individuals of any kind. Refer to your own articles of incorporation here, as some are very specific to the organization
  • Identify any trademark registrations or other intangible assets that need to be transferred.
  • Ensure transfers are compliant with federal and state law, your organization’s bylaws, and the plan of dissolution.
  • Some kinds of assets will take longer to sell or transfer, such as buildings or specialized equipment. This all belongs in the sunsetting plan and schedule.
  • If you have any specialized assets, you may require some special considerations or advice (for example: historical buildings, a collection, etc.).
  • Document all transfers and sales for reporting.
• Review contracts: Review ongoing contracts to understand logistics, process, and cost of terminating.
• Notify creditors: Directly notify all known creditors that your nonprofit is going out of business. Once they are notified, they have 90 days to submit any claims against your organization.
• Make plan to pay off current debts and terminate future/recurring liabilities:
  • What can be covered by existing cash? What needs to be sold to free up cash to cover debts?
  • If you cannot satisfy debts, make a plan to contact vendors and creditors to negotiate payment. If necessary, bankruptcy is an option.
• Close all accounts: This may include bank accounts, web platforms, online giving portals, apps, etc.
• Insurance: Stay in touch with your insurance agent/broker to identify what coverage you have and what coverage needs to continue. Some policies will need to be maintained, and paid for, to cover any claims that may come up after closure.
• Other Obligations
  • Refer to any outstanding donor agreements and obligations to ensure they have been met. This may include rooms, buildings, or programs named after corporate sponsors or major donors.
  • Close out any reporting commitments from funders, granters, or other stakeholders.

When distribution is complete, financial statements should reflect no remaining liabilities.

Legal

• It’s worth considering, for ease of process, that the Board formally dissolve before the end of the current fiscal year, as it streamlines the filing process detailed below.
• File 990 including Schedule N with the IRS within 4 months and 15 days after the last day of your organization’s most recently completed fiscal year.
• File Notice of Intent to Dissolve with the Secretary of State of Minnesota. Note: Once the intent to dissolve is submitted, all programming must stop. All work and resources left after submitting must be working toward the closure.
• File terminating report with Charities Division of the Minnesota Attorney General’s office, including a plan of distribution of remaining assets. The Attorney General’s Office has 45 days to respond to the notice, or they can request an additional 30 days.
• Once assets are transferred, the Board must provide a list of how the assets were distributed to the Attorney General’s office.
• Finally, file Articles of Dissolution with the Secretary of State when assets are distributed and closure is complete.
• We recommend looking at the Guide for the Voluntary Dissolution of Minnesota Nonprofit Corporations created by our friends at LegalCORPS for additional support.

Other considerations

• Where do we store paperwork and legal documents?
  • First identify what needs to be kept. Council of Nonprofits Document Retention Policy is a great place to start. Some documents have very specific legal commitments, such as confidential client, student, or legal records, and it is important to find out what those are before disposing of or making a storage plan.
  • For documents you can dispose of, you can find local shredding services near you.
• Where can we store historical documents and assets?
  • Take time to document what your nonprofit has done and any knowledge gained in its lifetime. This can be given to a library or historical society. You can learn more about what the Minnesota Historical Society accepts here.
• Where can we sell equipment and furniture?
  • If you’re in the Twin Cities, Furnish Office and Home accepts donations of gently used or new office furniture.

Celebrate!

As we’ve mentioned, sunsetting can take an emotional toll. Making space for grief throughout your process while celebrating your organization’s achievements will allow for a greater sense of closure.

Whether it culminates in a final event, a collection of stories, a physical memorial, or something else entirely – create a way honor the work and its
legacy.

For example, Patrick’s Cabaret threw a FUNeral, a final performance celebrating Patrick’s Cabaret’s legacy. Artley described it as:

…a final chance to say goodbye in a flurry of color, glitter, humor, and togetherness. Featuring performances and a dance party, the event was both a parody of funereal traditions and a very real ritual to help the vast community of artists and audiences mourn, grieve, and ultimately accept the finality of an organization that had been an artistic home to many hundreds of performers over its three-decade lifespan.

Whatever way you choose to celebrate, we hope you center the incredible work of your team and the legacy that work will leave in your community. Allow space for some rest and reflection. Honor the bravery and strategic smarts it took to get here. Then once this chapter is closed, and when you’re ready, you can start imagining what’s next.

Resources

• LegalCORPS: https://legalcorps.org/
• Guide for the Voluntary Dissolution of Minnesota Nonprofit Corporations
• Council of Nonprofits: Dissolving a Nonprofit Corporation
• Blue Avocado: Closing Down the Right Way
• Blue Avocado: Thinking the Unthinkable: Maybe We Should Shut Down
• Hurwit & Associates: Nonprofit Mergers, Affiliations and Re-Organizations
• The M Word: A Board Member’s Guide to Mergers
• Nonprofit AF: We must all think about sunsetting, not just foundations
• Nonprofit Dissolution: What Do You Need To Know

Case Studies

• Patrick’s Cabaret: The Final Act
• MPR News: Declaring Same Sex Marriage Battle Won, Project 515 Ends
• Project 515: Leaving a Legacy
• Propel Nonprofits: VSA Minnesota Case Study

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Your mission and values should be guiding all of your decisions and how you stay in relationship with each other. It’s especially important that equity and inclusion remain priorities; even when making quick decisions, ask who will be impacted and who needs to help inform them.

2. Prioritize the health and safety of the people

This includes your staff, clients, volunteers, and fellow board members. Discuss how the organization is tending to not just your team’s physical health, but emotional, mental, and spiritual health, as well.

3. Continue governing, but know that it will be different

No matter the circumstance, boards still need to play a clear, governing role. However, be adaptive when it comes to structure, processes, and roles. Learn new ways to conduct board business such as virtual meetings and online voting. Activate existing or new ad hoc committees to take on different roles.

4. Engage the board chair as key partner

The partnership between CEO and board chair is more important now than ever. Make sure as chair you’re connecting regularly with the CEO and asking how you can be of help, while at the same time being a leader for the board. Provide a listening ear and serve as a thought partner to help the CEO weigh options and evaluate scenarios.

5. Support the CEO/Executive Director

Pay attention and respond. If you get a high priority email, reply right away. Check in periodically. Stay curious and engaged but know that the boundary between management and governance still exists. Ask “what do you need from the board?” Be mindful to listen and seek understanding first before jumping-in to provide quick solutions driven by your desire to help.

6. Communicate, communicate, communicate

Over-communication in the time of crisis is essentially non-existent; things are evolving rapidly, so frequent, open communication is key in both directions. Use whatever communication channels necessary, whether email, Slack, online meetings, etc., to stay in touch with each other and leadership. Ask staff for key messages so you can remain ambassadors of the organization while still being consistent with the overall communication strategy. Think about scheduling a standing check-in meeting. If the need for increased communication becomes a burden for an already stretched CEO, consider appointing a board member to coordinate board communication.

7. Flex and adapt with board roles and boundaries

Navigating through a crisis will call on a variety of skill sets, which is another reason having a diversity of perspectives and backgrounds on your board all the time is a good thing. For example, maybe you’re revisiting bylaws, where a legal mind will be helpful, or you need to call upon HR or communication expertise. Or, insight maybe is needed to lend perspective on behalf of the community the organization works with.

If you don’t have the necessary skill sets on your board, you may need to tap into your professional networks to fill gaps. At the same time, some board members may have limited availability, given their own capacity and circumstances. Again, practice open communication and be clear about when you need to play a governing role or where you can support as a volunteer given the current needs.

8. Activate a finance committee or task force

As you’re assessing your risks and possible next actions, think about activating a finance committee if you don’t already have one, or a dedicated group to think through financial plans, scenarios, and short-and long-term considerations. Be mindful of your governance role and leave management decisions to staff. Engage in open communication with the CFO/Finance Director in a true partnership relationship.

9. Learn and adapt as you go

A crisis is a time for learning, grace, adaptability, and empathy. It’s not a time to be perfect, but to iterate; you will need to take action based on the best information you have available. You will need to be simultaneously responding to short-, medium-, and long-term questions, and because things will keep changing and new information will emerge, you will likely make mistakes. The more you can keep a spirit of learning, the better. Priorities will need to change; be clear when that’s the case.

10. Anticipate a changed future for the organization and the board

Wherever this crisis is leading us, the future will inevitably be different. Be intentional about how you’re making decisions and as new possibilities emerge or systems start to develop and take notes of what you’re noticing. Use what you learn to inform generative conversations about how the organization will move forward.  How can you use what you learn to help the board work better in the future? “Different” may very well lead to a better version of working together long-term.

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Before You Start Recruiting & Onboarding New Board Members

Do you have a clear strategic direction and priorities?

Be clear on where you’re going as an organization and what strategies potential board members will be asked to help inform. What are your top strategic goals? What skillsets and perspectives do you need to get there? Using a board profile matrix can be a helpful tool; find a sample board profile matrix at PropelNonprofits.org.

Are you prepared to invest time in effectively onramping new members? Do you have a process?

Avoid welcoming new board members in the midst of preparing for your annual gala or anytime you won’t have capacity to introduce them to their role, the rest of the board, and where the organization is at. Charge someone – or a board committee – to formalize a board recruitment and on-ramping process; there’s no need to reinvent the wheel every year. Typical governance committee responsibilities include analyzing board composition to find gaps, equipping the board with board recruitment processes and tools, championing policy review, and leading board self-assessments.

What are your expectations for board service? And are they realistic for your desired pool of board candidates?

As your organization evolves, what you’ll need from your board will evolve, both in terms of time commitment and the nature of the work. As a board, clarify the job description of a board member so new people know what’s expected of them. This list should include desired skills, meeting location, frequency of meetings, expected time commitment per month, whether members are expected to sit on a committee or make financial contributions, your annual budget (including top sources of funding), strategic direction, fundraising expectation, length of board term, and whether you carry liability insurance.

Be realistic. If your top recruits are also working parents of young children, a 20-hour-a-month time commitment will be a barrier. If making your board more accessible is important, consider providing child care, for example, or investing more effort in other accommodations folks might need.

Also, know that recruiting officers can be challenging. We recommend onboarding new people as board members and develop them for officer roles once they are more familiar with the organization and board responsibilities.

Is your board prepared to incorporate diverse perspectives and experiences?

If your board is actively looking for better representation from the communities it’s working with or to be more inclusive of people of a different race, culture, sexual orientation, or ability, be sure you’re prepared to fully engage new people and perspectives. This may mean changing the structure of your meetings, time or place you meet, and how decisions are made.

Where to Recruit Board Members

Leverage your current community engagement channels.

People join boards of nonprofits they are already familiar with and engaged in. Consider outreach to people who have attended your events, benefitted from your services, or already contributing financially to your organization. Think about hosting an open board meeting, setting up one-on-one meetings between board/staff, or other volunteer engagements. In addition to recruiting new board members from your existing pool of already-engaged people, consider viewing your current contacts as ambassadors to help you find new recruits. For example, you could establish a nominating committee, where the group meets once to recommend names of people they know who could be potential board members.

Engage your existing board members.

The number one reason people join boards is because they were asked. Board members are responsible for helping to generate ideas of who could be good for the board. Remember: the most important criteria is someone invested in your mission and who has time to commit. We can teach the technical skills needed to be a treasurer or board chair, but we can’t make them love your organization or clear space in their calendars.

Develop a leadership pipeline to board service.

Create multiple opportunities for clients and community members to convert from being a stranger to being an advocate for your organization. From this pool of advocates, create a structure that allows for more limited involvement in volunteerism so both you and the potential member can be sure it’s a good fit. This could include asking potential candidates to volunteer at an event or asking them to serve on a committee for a year.

What are the institutional and virtual pathways that make the most sense to connect with your target market?

If you have a broad mission, cast a wide net with your ‘external’ posting virtually through:

• Propel Nonprofits’ Board Connector: If your organization has at least one paid staff, has been operating as a nonprofit for at least a year, has a board in place with regular board meetings, has active participation by board members, has board officers in place, and is relatively stable organizationally and financially, email boardconnector@propelnonprofits.org for more information about finding new board members through Board Connector.
• HandsOn Twin Cities
• Minnesota Council of Nonprofits and Pollen’s jobs & opportunities boards
• Social media, including LinkedIn

The more targeted your recruitment needs or mission, the more effective other strategies might be.

In either case, staying connected with your community partners is critical to having the network you need to find new people who are passionate about your mission. Don’t be afraid to get creative and use this opportunity to step outside your existing networks. Board recruitment is an ongoing process and part of the responsibility of all board members as ambassadors of your nonprofit.

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This listing is a summary of the requirements to get you started. It’s helpful to set calendar reminders for these reports and add them to the list of responsibilities for the staff or board member who oversees the finances for the organization. There are many more details to these requirements that may apply to your organization. We encourage you to research the specific requirements further with each of these agencies.

Note: The information here is not legal advice and is for educational/informational purposes only.

Maintaining your legal status as a nonprofit: Required annual reports and filings

Federal Requirements to Maintain 501(c)(3) Status

As a tax-exempt organization, you are required to file an annual information return report with the IRS, even if your revenue is $0; this filing is generally referred to as a “990.” There are various types of 990 forms. There is no IRS fee to file a 990. If your fiscal year ends on December 31 each year, then your IRS 990 must be filed by May 15 of the following year. If you have a different fiscal year, then the IRS 990 is due on the 15th day of the fifth month following the end of your fiscal year. You can find more information on Form 990s here.

Which IRS 990 form to file:

• Form 990-N: Organizations with revenues less than or equal to $50,000/year can file an Electronic Notice (“e-Postcard”), found here.
• Form 990-EZ: Organizations with annual revenues between $50,000-$200,000 and total assets under $500,000
• Form 990: Organizations with annual revenues over $200,000 or total assets over $500,000

Failure to file your annual Form 990 may result in penalties, and failure to file it for three consecutive years will result in the loss of your tax-exempt status. Note: This is one of the commonly overlooked requirements, especially for small organizations. Having an organization’s 501(c)(3) status revoked is disruptive and puts the organization at risk.

State of Minnesota Requirements

Minnesota Attorney General:

If your organization pays staff or contractors (or professional fundraisers) to carry out its mission, raises more than $25,000 in a year, or holds more than $25,000 in charitable assets, it must register with the Minnesota Attorney General’s office and file an annual report (online or by mail); there is a filing fee of $25. The form can be found here.

Information from the Attorney General regarding the legal requirements and reporting obligations of a nonprofit organization can be found here.

Minnesota Secretary of State:

If the organization is a Minnesota Corporation, your organization’s registration with the Minnesota Secretary of State must be renewed by December 31 each year, regardless of your fiscal year-end. The renewal is free and can be completed online; search for your organization’s name at the Secretary of State’s website.

Failing to file your renewal may result in the involuntary dissolution of your organization.

Other Annual Requirements

• In Minnesota, legally you need to have at least three board members, including a Chair and Treasurer, that hold a minimum of one meeting per year. While the state requires one meeting per year, we recommend you meet at least quarterly or according to the frequency listed in your bylaws. Also, be sure to keep minutes at these meetings.
• Publicly disclose your nonprofit’s three most recent Form 990s and provide them on request. This can mean posting them to your website or making sure your GuideStar profile is updated with your annual returns.
• It’s good practice to have your staff and board complete a conflict of interest form annually to disclose existing conflicts and to remind them to disclose any that arise throughout the year.
• Boards of directors should do an annual performance review of the executive director and approve the director’s compensation and benefits.
• Create a budget for your upcoming fiscal year and have it approved by your board.
• Be sure you’ve thanked all donors; know that donors who have contributed $250 or more need written acknowledgment in order to claim a tax deduction. The best practice is to thank them as close to the timing of the gift as possible.

One-Time Tax Exemptions

Exemption from sales tax or property taxes is not automatic for nonprofit organizations. Note that these are not annual requirements, but rather one-time applications that are still good to be sure you have on record.

Sales Tax

In Minnesota, a 501(c)(3) organization organized for charitable, religious, and/or educational purposes, may request an exemption from paying Minnesota sales tax on its purchases. Not all 501(c)(3) organizations qualify. This request is made to the Minnesota Department of Revenue using Form ST16, available at www.revenue.state.mn.us. There is no fee to apply and this exemption does not expire; however, you will need to provide the form to each vendor or store you’re seeking an exemption from for their records.

Property Tax

Nonprofits that own real estate may be eligible for exemption from property taxes. This exemption is granted by the county where the property is located and is based on criteria and procedures established by the county or city assessor. Minnesota Council of Nonprofits offers a guide to seeking property tax exemption.

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The Roles & Responsibilities of Nonprofit Boards

As a first step, learn more about the purpose and roles of the board of directors for a nonprofit. When you join a board, you will be agreeing to an important volunteer position that also has some legal requirements and obligations. For a good overview, read Board Roles and Responsibilities or register for a Propel Nonprofits training or webinar on the topic.

Your Nonprofit Board Service Journey

There a few key questions to consider as you look for the right board to join:

• What causes or types of nonprofit work do I care about?
• What skills do I want to offer as a volunteer board member? What skills do I want to develop?
• Am I more interested in being a part of a board that is very hands-on in running the organization? Or would a board that operates with a more strategic governance role be a better fit for me?
• How much time could I devote to board service, including board meetings, committees, and other volunteer activities? Do I have limitations on the schedule or frequency of meetings?
• How important is the location of the organization, and of the meetings?
• Am I willing and able to make a financial contribution to a nonprofit?
• And, importantly, what will excite me about serving on a nonprofit board?

Finding a Board to Join

There are several paths for exploring opportunities to join a board:

• Use your network of colleagues and friends; talk with people you know who are involved with nonprofits about their experiences and organizations where they’ve been involved. Many boards search for board members by asking their volunteers and current board members to recommend candidates. Update your LinkedIn profile to mention your interest in board service.
• Review your previous volunteering or donations to nonprofits. Many board members have been volunteers or supporters of an organization before joining the board. If you are particularly passionate and interested in certain nonprofits in your community, add them to your list to research further.
• If you’re in the Minneapolis-Saint Paul metro area, review Propel Nonprofits’ Board Connector opportunities. You can submit your information through the online application; continue to monitor listings for opportunities for open board positions that intrigue you and let us know which one aligns with your interests: https://www.propelnonprofits.org/join-a-board/

Some Guidance and Tips for Your Search

There are many nonprofit organizations in the community, ranging from large to medium to small, working in health care, arts, social services, childcare, housing, animal rescue, and social justice. Some nonprofits have many employees and large boards, while many others operate with all volunteers. Each of these nonprofits has a board of directors and they have all developed a process to recruit, elect, and work with their boards. There is no single path to board service.

The board of directors is a legal role and is elected by either the current board or by the members, if it’s a membership organization. There are generally several steps for the process of joining a board and it may take some time.

If you are interested in a specific nonprofit, especially if it’s a well known and prominent organization, consider volunteering as a way to get to know the organization and the staff before seeking a board role. These organizations often have many candidates for board service and will consider your past support and relationship with the organization.

Research the Organization

Once you’ve identified some nonprofits that interest you, do some research to learn more about it; reviewing its website, annual reports, or other publications, along with stories or videos about the impact of its programs. Are its core values in alignment with yours? Does the organization serve a community that you deeply care about?

Board members work closely with the organization’s leadership and oversee finances and accountability to the community. Review the information about the current board members, leadership staff, and primary program areas. If its available, review the organization’s financial information and any description of its sources of revenue.

Questions for the Organization

Once you are in conversation with a nonprofit to explore a board position, you’ll probably want to learn more details about the programs, plans, and activities that support the mission. As you talk with the executive director, board chair/president, or a governance committee member, here are some other questions to ask:

• What are the highest priority goals and strategies for the organization for the next few years?
• What role does the board play in strategic discussions and vision?
• What are the challenges that the organization is managing right now?
• What kind of skills or perspectives are needed on the board for the next few years, how will I add value?
• What is the expectation for board members to make a personal financial contribution? Are board members expected to be involved in fundraising, and how?
• What is the expectation for board members to volunteer or offer pro bono services in addition to participation on the board?

And some nuts and bolts questions:

• When and where are the board meetings? Does the board have committees, and are all board members expected to join a committee?
• What is the average time commitment for board members?
• What is your board recruitment and orientation process?
• Do you have Directors’ and Officers’ insurance?

You could also ask to talk with a board member about their experience, or to attend a board meeting as an observer.

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Fiscal Sponsorship Overview

As fiscal sponsorship continues to become a more widely used tool for charitable impact, it is important that 501(c)(3) organizations acting as a fiscal sponsor are doing it right. Board members of sponsoring organizations must fully understand the role the organization is playing, its legal responsibilities and possible risks, and how to be a good steward and partner to its sponsored projects.

What is fiscal sponsorship?

Fiscal sponsorship, at its core, is when a nonprofit organization extends its tax-exempt status to select groups engaged in activities related to the organization’s mission. Most often, fiscal sponsorship is used by organizations, individuals, or collaborations who are doing charitable work but who want an alternative to becoming a 501(c)(3) organization with the IRS. In a fiscal sponsorship arrangement, the sponsor accepts tax deductible donations and grants on behalf of the sponsored project/organization. The sponsor accepts responsibility for the use of those funds and ensures their application toward charitable purposes, along with any additional donor restrictions. To ensure this is not merely a pass-through of charitable dollars from the 501(c)(3) to the project, the IRS requires that the sponsor have “complete discretion and control” over the funds.

Fiscal sponsors often offer additional services and supports to their sponsored projects; the range of services provided varies by sponsor. Most fiscal sponsors charge sponsored projects a fee to offset the additional cost. Generally, that fee is somewhere between 5%-10% of all funds held on behalf of the sponsored group.

Identifying a fiscal sponsorship arrangement

If you have a discernible fiscal sponsorship program or line of work, it will be quite evident. But, sometimes nonprofits act as a fiscal sponsor without any stated intent of doing so. This is more common than you’d think. Nonprofits have relationships with people or organizations that have great ideas and develop projects that are closely aligned with an organization’s mission; since nonprofit leaders want to help in whatever way they can, they sometimes develop an ad hoc fiscal sponsorship arrangement. These fiscal sponsorship relationships are arranged and as time passes and staff change, it’s easy to lose track of the boundaries between the project and the sponsor. This is especially true if the sponsorship isn’t periodically renewed or revisited.

So how do you know if your organization is acting as a fiscal sponsor? If your organization is holding money separately from your operating funds for a program or organization whose director or leader has a considerable degree of autonomy, sometimes separate from your nonprofit’s organizational structure, it is likely you are acting as a fiscal sponsor. If you think this may the case, it is important you work with an expert to ensure you are following legal requirements and best practices.

Fiscal Sponsor Considerations

As fiscal sponsorship continues to become a more widely used tool for charitable impact, it is important that 501(c)(3) organizations acting as a fiscal sponsor are doing it right. Board members of sponsoring organizations must fully understand the role the organization is playing, its legal responsibilities and possible risks, and how to be a good steward and partner to its sponsored projects.

Risks: What Could Go Wrong?

• Liability – Fiscal sponsorship is putting your organization’s 501(c)(3) on the line in order to facilitate another project. This isn’t to say that it shouldn’t be done. Sponsorship can be an empowering tool that can help get projects off the ground that otherwise wouldn’t make it. But it does mean that the relationship needs to be carefully considered.
• Pass-through – If a fiscal sponsor does not institute proper oversight and control mechanisms, the relationship could be seen as nothing more than a pass-through or conduit, which will invalidate the role of the sponsor and can lead to loss of the sponsor’s tax-exempt status.
• Reputation – By connecting itself to a project over which the sponsoring organization might not have daily oversight, the sponsoring organization could be putting its reputation on the line. It’s important that both parties communicate openly and regularly to avoid the risk of the fiscally sponsored project engaging in work that is — to their knowledge or not — unethical, immoral, or illegal.
• Lobbying – Fiscally sponsored projects need to obey the same restrictions as any 501(c)(3). This means that they must be charitable in purpose, and not engaged substantially in any political activities, like lobbying for specific candidates or legislation.
• Mission misalignment – It’s possible that the fiscally sponsored group’s mission will shift. Always be knowledgeable of what activities your sponsored projects are undertaking to ensure ongoing mission alignment.
• Operational/administrative/financial – By acting as a sponsor you are putting additional responsibilities on your staff and systems. Your organization must be fully qualified to act on these additional responsibilities or you run the risk of improper, even illegal, financial and relationship management.

Questions to Ask

After ensuring you fully understand potential risks involved, ask yourself the following questions:

• Are we ok putting our organization’s 501(c)(3) status on the line to do this work? Is offering fiscal sponsorship truly aligned with the mission, vision, and values of our nonprofit or are we drifting away from our stated mission in order to sponsor a project/organization?
• Why are we doing this? Does it make sense to offer other forms of support instead (contract work, partnership, etc.)? Are we doing this for the right reasons?
• Do we have the capacity to take on the extra administrative work and to exercise discretion and control over funding?
• Do we have the expertise on staff to be a successful fiscal sponsor? Is our board and staff knowledgeable enough to ensure we’re operating our program according to IRS guidelines and best practices?
• What would happen to this project/organization if we decide not to be a sponsor? Are there already existing sponsors who could take on this role?
• What is our relationship with the sponsored project/organization’s funders or other involved parties?
• Do we have any conflicts of interest that need to be reviewed?
• Should our organization solicit donations for our fiscally sponsored project(s)?
• Do we know how to account for and be transparent with funds being held for our fiscally sponsored projects on our organization’s financials, both internal and external?
• Under what circumstances do we terminate a fiscal sponsorship relationship and are we comfortable doing so?
• Do we fully understand the requirements and implications of the model(s) of sponsorship we are offering?

Being a Sponsor

Any project/organization that you fiscally sponsor must be nonprofit/charitable in nature, not engaged in anything that would endanger your own 501(c)(3) status, and be doing work that is in line with your own mission statement. Beyond that, you can elect to sponsor based on viability, organizational capacity, or any additional factors you elect to consider. You’ll want to be very clear with potential projects what you’re basing your decision on and how their work fits into the organization as a whole.

When acting as a fiscal sponsor, it is important to understand what model of sponsorship you are providing. There are several models of fiscal sponsorship that an organization may follow. These models are outlined in Fiscal Sponsorship: 6 Ways to Do It Right by Gregory L. Colvin. Each model is administered differently so understanding and following best practices for your model is integral to being a sound fiscal sponsor. Too often, sponsors create hybrid models that are improper uses of fiscal sponsorship.

Contracts

A contract is key to making sure your fiscal sponsorship operates effectively and communication between sponsor and sponsee remains clear. This piece of the fiscal sponsorship relationship is absolutely critical. While specific elements will vary depending on the type of sponsorship put in place, all good contracts will spell out the nature and term of the relationship, including model of fiscal sponsorship, ownership of intellectual property and dispute/indemnification clauses, list any fees charged, and outline the process for holding and disbursing funds. It should also have an “out clause” stating under what conditions either party can end the relationship and how remaining funds will be handled should that occur. All contracts must be signed and countersigned by both parties.

Having your contract reviewed by an attorney is an essential step for any organization acting as a fiscal sponsor.

Approving New Projects

Depending on whether you’re establishing one or a few individual sponsorships, or a formalized fiscal sponsorship program, your application and approval process will look different. Under all circumstances, though, the process for reviewing sponsorship applications should include an element of board participation. Those board members involved can report back to the full board on any new projects, concerns with the program, or questions that deserve full deliberation. You should also have clear criteria on when and why you would bring on a new project for sponsorship.

Finances

The most fundamental aspect of fiscal sponsorship is ensuring that you are holding the right amount of funds for the project and that those funds are readily available. It is ultimately the responsibility of the board of directors of the sponsoring organization to ensure these funds are being properly accounted for and are not being used to supplement the sponsoring organization’s cash flow. While this can be reflected on an organization’s financials in more than one way, our example here (see attached illustration) showcases that one of the simplest checks for this model that a board can exercise is ensuring that fiscally sponsored assets and liabilities zero out on the balance sheet. Additional best practices include holding all fiscally sponsored project funds in a separate banking account, keeping it separate from your programming and operations in your financials, and keeping clear operational records to supplement and support your financial documents.

It is also important to ensure you accurately reflect the fiscal sponsorship relationship on your audit and IRS Form 990. The best way to do this is to hire a Certified Public Accountant (CPA) or firm that has experience in fiscal sponsorship and knows which practical steps to take in order to adequately test and reflect the relationship. Whether you’ve got a full fiscal sponsorship program, an individual sponsee, or a handful of sponsored projects, the process of auditing them will be similar.

Conclusion

Fiscal sponsorship is an important and useful tool for the charitable community. As fiscal sponsorship becomes more prevalent, it is increasingly important that sponsoring organizations follow best practice guidelines. While this document provides a resource for organizations acting as fiscal sponsors, it is up to each organization to decide if they should act as a fiscal sponsor and, if so, do it right.

Resources

• Fiscal Sponsorship: 6 Ways to Do It Right is a must-read for any organization wanting to act as a fiscal sponsor. This book, written by Gregory L. Colvin, Senior Council at Adler & Colvin nonprofit law firm, describes 6 models of fiscal sponsorship that the IRS has approved and accepted.
• Fiscal Sponsorship: A Balanced Overview is a comprehensive article in Nonprofit Quarterly from 2016 that describes many of the concepts we’ve outlined here in greater depth.
• The National Network of Fiscal Sponsors (NNFS) is a membership organization that promotes the understanding and professional practice of fiscal sponsorship and has produced best practice guidelines for Model A and Model C fiscal sponsors.

Example balance sheet: Fiscal Sponsorship

The post A Board’s Guide to Fiscal Sponsorship appeared first on Propel Nonprofits.

This resource is intended to help nonprofit board members clarify your role so you can be effective in carrying out your nonprofit’s mission. For nonprofits in Minnesota, the Attorney General’s Office has a guide for board members that is a must-read related to your fiduciary duties and what you’re legally responsible for; check with your respective Secretary of State and Attorney General for regulations. This guide is intended to supplement those baseline requirements.

Lead Strategically

• Develop and communicate the organization’s direction, goals, and a plan to get there. This may be a strategic plan.
• If there isn’t a strategic plan in place that articulates the organization’s mission, role in society, and direction for the future, partner with staff to create one. As a board, monitor outcomes related to the plan and revise as needed.
• Have robust board meetings that cut through the complexity of the environment in which your nonprofit is operating in order to assist organizational leadership in anticipating and navigating change.

Ensure Financial Stability

• Understand the nonprofit’s business model and financial aspects.
• Ensure your organization has adequate infrastructure to create accurate and timely financials. Make sure your board is able to understand the nonprofit’s financial reports.
• Develop strategies to fund your mission that are realistic and that support your organization’s business model.
• Ensure financial reporting requirements are compliant with state regulations, including 990 filings, audits, and registration with the Secretary of State and Attorney General.

Be An Ambassador

• Cultivate relationships that are beneficial to the organization’s strategies.
• Participate in fund development efforts of your organization. Board members are often encouraged to donate personally in an amount meaningful to them.
• Listen to community members’ needs related to your mission.
• As an organization, share the impact of your nonprofit on the community and how the community has supported you (e.g., an annual report or letter).

Support & Supervise the Executive Director

• Recruit and hire the Executive Director or CEO to lead and manage the organization.
• Supervise and evaluate the performance of the Executive Director annually.
• Have an emergency and long-term succession plan for the Executive Director.
• Ask the Executive Director how they want to be supported. Different Executive Directors need different support from their boards; welcomed management for one might be unwelcomed management for another.

Ensure Healthy Governance

• Review bylaws and maintain compliance.
• Recruit and orient new board members.
• Develop a plan for board succession and officer leadership.
• Take responsibility for board business and create structures that align with getting that work done.
• Conduct a self-evaluation that allows board members to improve their governance practices.

How does your board define success for its role in contributing to your mission today? Have a conversation as a board about what the organization needs from the board given its current life-stage, strategic direction, and staff attention to operations. Use this resource as a tool to ensure board members and leadership are on the same page. Clear expectations can contribute to deeper and more productive board engagement and help avoid conflict.

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