The New York Nonprofit Board Handbook

A nonprofit belongs to no one. There are no shareholders, no owners, nobody who can sell it or take its profits home. In place of owners, the law puts a board: a group of people who hold the organization in trust for the public and for the mission it was formed to serve. That is what you are when you become a director. Not a helper, not an honored guest, not a donor with a title. A steward.

Stewardship has a job description, and in New York it comes down to three duties that every director owes. The duty of care means paying attention: reading the materials, coming to meetings, asking questions, and deciding things the way a reasonably careful person would in your position. The duty of loyalty means putting the organization ahead of yourself: no steering contracts to your company, no taking opportunities that belonged to the charity, and disclosing it when your interests and the organization’s might diverge. The duty of obedience means keeping the organization faithful to its mission and within the law: the purposes in its founding document, the strings attached to its grants, the rules that come with being tax-exempt.

Every board failure we have seen fits inside one of those three duties. A board that did not read the financials failed the duty of care. A director who leased the charity his building at a price nobody checked failed the duty of loyalty. An organization that quietly drifted from the purpose its donors gave to failed the duty of obedience. Once you see the three, governance stops being a vague word and becomes a short list.

One more idea belongs here, because it shapes everything else. The board governs; it does not manage. Your job is to set direction, choose and support the person who runs the organization day to day, watch the money, and make sure the rules are followed. It is not to approve the newsletter or pick the caterer. Boards that manage exhaust themselves and their staff. Boards that govern get the important things right.

Before you accept a board seat, or if you already have and nobody explained, here is what you are actually taking on.

Time. A working board meets four to six times a year, usually for two hours, with materials to read beforehand and a committee that meets in between. Count on a few hours a month. If the organization is going through something (a leadership change, a financial crisis, a building), count on more.

Money. Most boards expect every director to give personally, every year, at a level that is meaningful to them, and to help the organization raise money from others. Some set a specific figure. Ask. A board that cannot say “every director gives” to a funder is at a disadvantage, and you should know the expectation before you sit down.

Responsibility. Directors can, in principle, be personally liable for what the board does or fails to do. In practice New York gives an uncompensated director of a charity a defense against claims brought by someone other than the organization itself, for conduct in the role, unless the conduct was grossly negligent or intended to cause harm. The statute has its own exceptions, it does not cover everything, and it is not a substitute for insurance: a well-run organization carries directors’ and officers’ insurance for the defense costs and damages the statute leaves behind. Ask whether the organization has that insurance and when it was last renewed. If it does not, that is the first thing to fix.

Exposure. Your name will be on the organization’s public tax return, on its state filings, and on its website. When the organization is praised, you share in it. When it is criticised, you do too. Join boards whose work you would be content to defend at a dinner party.

Most boards begin as whoever said yes: a friend of the founder, a former colleague, someone’s accountant. That is fine as a beginning. It stops being fine two or three years later, when the organization has grown and the board has not, and meetings are updates rather than decisions.

New York requires at least three directors. A working board is usually five to nine: large enough to divide the work and survive a resignation, small enough that everyone can speak at a meeting. Who they should be is best answered with a simple grid: the seats down one side, the things the organization needs across the top (someone who can read a balance sheet, someone with fundraising reach, someone with legal or compliance sense, someone who knows the field, someone from the community served), and honest ticks in the boxes. The gaps tell you whom to recruit next.

A few of New York’s rules shape the board’s structure. Directors serve terms of one to five years, set in the bylaws, and can be re-elected. An employee of the organization may serve as chair of the board only if the entire board approves by a two-thirds vote and writes down, at the time, why it did; without that, the answer is no. Even with it, the employee does not count as an independent director for the rules that require one. Certain roles, in particular oversight of the auditor at larger organizations, must be held by directors who are independent, meaning they are not employees, are not paid by the organization beyond their expenses, and have no significant financial relationship with it. And the board can create committees to do the detailed work between meetings, which is where most of the real work happens.

Two committees matter more than the rest. A finance committee (often doubling as the audit committee) reviews the monthly numbers, works with staff on the budget, oversees the annual audit or review, and brings the board a picture rather than a spreadsheet. A governance committee (sometimes called nominating) owns the board itself: recruiting against the grid, running onboarding, keeping the bylaws and policies current, running an annual self-assessment, and having the kind conversation with a director who has stopped showing up. Most young organizations lack the second one, and it is the one whose absence you feel most.

A board exists in its meetings. Between them, individual directors have no authority; the board acts only when it meets, or when every director agrees in writing. So the quality of the meetings is the quality of the governance.

The mechanics that separate a board that decides from a board that listens are simple. Materials go out a week ahead, so the meeting is spent deciding rather than reading. The agenda leads with decisions and ends with updates, not the other way round. A quorum (by default a majority of the directors, though the bylaws can set it lower) has to be present to act. Directors can attend by video and count toward the quorum, as long as everyone can hear everyone. And there is a written record.

One New York rule about acting outside a meeting catches boards constantly. If the board wants to decide something without meeting, by email or by circulating a document, every single director must sign the written consent. Not a majority. Everyone. If one director has not signed, the decision has not been made, however clear the agreement on the thread. Boards that treat an email majority as a decision discover the gap later, when someone with a reason to challenge the decision reads the bylaws.

The minutes deserve their own paragraph, because they are the organization’s memory and, in a dispute, its evidence. Good minutes record who was present, what was decided, the text of any resolution, who disclosed a conflict and left the room for which item, and what information the board relied on for significant decisions such as executive pay. They do not transcribe who said what. Minutes written within a week are minutes. Minutes reconstructed at year end are a reconstruction, and they read like one.

A conflict of interest is not wrongdoing. It is simply a situation where someone who decides things for the organization also has a personal stake in the outcome: owning the company that wants the contract, being related to the candidate for the job, sitting on the board of the organization across the table. The well-connected people who make good directors have conflicts all the time. The problem is never the conflict. The problem is a conflict nobody disclosed, that influenced a decision, and that came to light later.

New York requires every nonprofit to have a written conflict of interest policy with specific contents: a definition of conflict broad enough to include family members and businesses a director is involved with; a procedure for disclosing one in writing; a rule that the interested person is not present for the discussion or the vote; a rule against their improperly influencing the people who are; a requirement that the whole thing be recorded in the minutes; and procedures for disclosing, addressing and documenting deals with insiders, which the statute calls related-party transactions. That is six things the policy must say. The annual disclosure form is a seventh requirement, and a separate one: every director signs a statement before first taking the seat and every year after, listing the organizations they are involved with and any transactions in which they might have an interest. The interested director may give the board background before leaving the room, and it is the board or its committee, not the director, that decides whether a conflict exists.

The category that carries real risk is the related-party transaction: any deal between the organization and a director, officer, key employee, or their family or business. Leasing space from a board member. Hiring the executive director’s spouse. Buying services from a director’s company. New York does not forbid these. It requires the board to decide, before the deal is done and with the interested person out of the room, that it is fair, reasonable and in the organization’s best interest; where the organization is a charity and the insider has a substantial financial stake, to consider alternatives and approve by at least a majority of the directors present; and to record in the minutes both the basis for the approval and the alternatives considered. The Attorney General can unwind a deal that was not handled this way and recover the money.

In a board with good habits, a conflict is undramatic. A director says, at the start of the item, “I should note that my firm has a relationship with this vendor.” The chair thanks them and asks them to step out. The board discusses, considers whether another vendor could do the job, votes. The minutes record all of it. The director returns for the next item. Four minutes added, and an undocumented conflict is the thing you no longer have.

You do not need to be an accountant to sit on a board. You do need to be able to look at the financial report and know whether the organization is healthy, and to notice when it is not. Every director owes this, not only the treasurer.

Three documents do most of the work. The budget, approved by the board before the year begins, is the plan. The regular financial statement (monthly or quarterly) compares what has actually happened to the plan: income against budget, expenses against budget, and cash in the bank. The annual financial statements, prepared or examined by an outside accountant, are the year’s final account. The question to ask of each is the same: is anything moving in a direction I do not understand, and has someone explained it?

Nonprofit money has one feature that has no equivalent in business, and boards must understand it: restriction. When a donor gives for a specific purpose (the scholarship fund, the new roof, the program in the Bronx), the organization may spend that money only on that purpose. Restricted gifts are enforceable obligations that outlast the people who accepted them. The financial statements should show restricted funds separately, and the board should be able to say, at any moment, that restricted money has not quietly become general revenue. Spending it as such, even in a cash crunch, is one of the fastest routes to an Attorney General inquiry.

Depending on size, New York requires the annual statements to be looked at by an independent accountant. The test runs on gross revenue and support. As of this writing, an organization above $1 million needs a full audit, one between $250,000 and $1 million needs a review (a lighter examination), and one below that needs neither. Needing neither is not the same as having nothing to file: the annual report to the Charities Bureau is due either way. The thresholds move from time to time, and crossing one is a legal event: an organization that lands a large grant and passes the million-dollar line owes an audit for that year, which is a different engagement, at a different cost, that needs to be arranged early.

Two more things belong to the board on the money side. Pay for the executive director and any other insider should be approved by independent directors, in advance, based on what comparable organizations pay, with the reasoning written down; do this and the IRS presumes the pay is reasonable, skip it and the burden is on you. And once the organization has twenty or more employees and more than $1 million in revenue in the prior fiscal year, New York requires a whistleblower policy that lets staff report wrongdoing without fear of reprisal.

When a nonprofit loses its tax exemption, or receives a letter from the Attorney General, or fails a funder’s due diligence, the cause is almost never a scandal. It is a deadline: a return not filed, a registration that lapsed, a policy adopted years ago and never looked at. These are not failures of good faith. They are failures of calendar, and the fix is a written list, owned by one named person, reviewed briefly at every board meeting.

Two filings matter most, and they fall on the same day. The federal annual return (a version of the Form 990: the postcard for the smallest organizations, the short form for mid-sized ones, the full form above that) is due four and a half months after the fiscal year ends, with an easy six-month extension. Miss a required filing three years running and the IRS revokes the organization’s exemption automatically, without a hearing. Getting it back means applying to the IRS again: organizations that qualify can use a streamlined procedure, others file a full application with a reasonable-cause explanation, and either way there is a gap to explain to every funder. The New York annual report to the Attorney General’s Charities Bureau is due on the same schedule, with the federal return attached and, above the thresholds in the previous chapter, the accountant’s review or audit.

Registration comes before any of it. Most New York charities must be registered with the Charities Bureau before asking anyone in the state for money, and most organizations that hold charitable assets must register within six months of doing so even if they never solicit. Some categories are exempt from one or both, so check the Bureau’s current exemption list against your own facts. Founders assume that once they have incorporated and applied to the IRS they can start fundraising. Under New York law, the Charities Bureau registration comes first, and the Bureau has become noticeably more attentive to organizations that solicit without it.

Beyond those, a handful of obligations recur: tax forms for staff and contractors early each year, the annual harassment prevention training New York requires of every employer, insurance renewals, registration in any other state where the organization actively fundraises, a license before any raffle or game of chance, registration with the state ethics commission if lobbying spending passes a modest threshold, and filing the contract of any outside fundraiser with the Charities Bureau before the work begins. The board does not do these. The board makes sure someone does, and asks at every meeting what is due before the next one.

Fundraising is where a nonprofit meets the public, and the law around it is mostly about honesty: registering so the state knows who is asking, telling donors the truth, thanking them in the form the tax rules require, and keeping the promises that came with the money.

Two acknowledgement rules matter for every gift. A donor who gives two hundred and fifty dollars or more in a single gift cannot deduct it without a written acknowledgement from the organization that states the amount and says whether anything was given in return. And when a donor pays more than seventy-five dollars for something that is partly a purchase and partly a gift (the gala ticket, the auction item), the organization must tell them in writing how much of the payment is deductible. Most organizations send these as gifts arrive; the board’s interest is that nobody is missed, because donors start asking in February and the penalties for the second rule fall on the organization.

Restricted gifts were covered in the money chapter and bear repeating here from the fundraising side: the moment the organization accepts money for a stated purpose, it has made a promise it must keep. A gift acceptance policy, adopted by the board, lets staff decline a gift whose strings the organization cannot honor, and gives them the language to redirect a generous donor toward a restriction the organization can live with.

Finally, if the organization hires an outside firm or consultant to raise money, New York regulates the relationship: the fundraiser must be registered, the fundraiser must file the contract with the Charities Bureau within ten days of signing it, a professional fundraiser cannot start work until the Bureau acknowledges it or it has been on file for fifteen days, and the organization remains responsible for what is said in its name.

Most nonprofits are public charities: they raise money from the public and spend it on programs. A private foundation is different. It is typically funded by one family or one company, it usually makes grants rather than running programs, and because it is controlled by a small group with no public accountability, federal law surrounds it with rules that public charities do not face. If your organization is a private foundation, everything in this handbook still applies, and this chapter applies on top.

The most important of the extra rules concerns self-dealing. Federal law taxes almost any financial transaction between a private foundation and the people closest to it (the donors, the directors and officers, their families, and the businesses they control, together called disqualified persons), and here is the part that surprises every new family board: the fairness of the deal is generally not a defense. A director who sells the foundation a building at an appraised price, lends it money at no interest, or rents it office space at half the market rate has done something generous, and in most cases something the law treats as self-dealing anyway. The rule is structural. It exists so that nobody has to litigate whether an insider deal was fair.

The acts the rule reaches are broad: selling, exchanging or leasing property between the foundation and an insider; lending money in either direction; providing goods, services or facilities; paying an insider compensation (with a narrow exception for reasonable pay for necessary personal services, set and documented in advance); and using foundation assets or income for an insider’s benefit, which includes a grant that pays off a donor’s personal pledge or an event held mainly to raise a family member’s profile. The tax falls on the individual, not the foundation, it runs every year until the transaction is undone, and it escalates sharply if it is not corrected.

The shape of most self-dealing problems is that there is a lawful way to do the generous thing, and it is rarely the way the family would have papered it. A founder who wants the foundation to have an office in her building cannot lease it to the foundation, even for a dollar a year. She can simply let the foundation use the space, free, with no lease and no obligation. The economics are nearly identical. The legal character is not. This is why a family foundation routes any transaction involving an insider to counsel before it is agreed, not after.

Two other rules round out the picture. A private foundation must distribute a minimum amount for charitable purposes every year or face a tax on the shortfall. The commonly quoted five percent is a useful sense of scale, not the calculation: the real figure starts from the value of the assets not used for charitable purposes and is then adjusted for debt, cash held for operations, certain taxes, and distributions carried over from earlier years. Have the accountant run it rather than estimating. And it files a different, more detailed annual return (the Form 990-PF) that lists every grant and every insider, and is public.

Every board eventually faces a difficult moment. The executive director is not performing. A director has a conflict they did not disclose. A staff member raises a concern about money. A letter arrives from the Attorney General. A filing was missed and nobody noticed for two years. The founder does not agree with the board. None of these is rare, and none is fatal to an organization that handles it well.

The pattern for handling them is the same. Slow down. Find out what actually happened before deciding anything. Make sure the right people are in the room and the wrong ones are out of it (a director with an interest in the matter recuses; the executive director leaves for a discussion of the executive director). Get advice early rather than late. Write down what the board decided and why. And remember who the client is: the organization, whose interests may not be the same as those of the person who brought the problem.

Some decisions are too large for the board alone. Under New York law, selling or transferring all or substantially all of the organization’s assets, merging with another organization, or dissolving requires the approval of the Attorney General or a court, and often both. These are processes that take months and must be started early, not filings to make at the end. Real estate transactions and any significant change of purpose deserve the same caution.

A word on lawyers, because boards use them badly in both directions. Some call for nothing, and discover the missed filing from a letter. Others call for everything, and spend money they did not have. The useful middle is standing counsel who owns the compliance calendar, reviews the minutes, is in the room for the conflict and the pay decision, and can say plainly what is outside the engagement (litigation, an investigation, a property transaction needing state approval, a tax dispute) so that the board is not surprised in a crisis. The measure of that relationship is boring: the filings are made, the minutes are current, the policy is followed rather than filed, and nobody on the board is learning about an obligation from a letter.