Ripples from the Zambezi – Economic Development from the Bottom Up

This post is the first in a series of book reviews designed to share some of my better finds with readers (and motivate me to reflect on some of the books I have read and to read the ones that have been languishing on my book shelf!). I bought Ripples from the Zambezi thinking it would be about development in Africa. It’s not.
In Ripples from the Zambezi, the author, Ernesto Sirolli, turns the top down model of grand economic development on its head. Instead, his focus is on nurturing the passion and creativity of individuals.

 

The title comes from Sirolli’s early experiments in economic development in rural Africa, where he worked as a foreign aid worker for the Italian government. The beginning of the book details his experiences in Africa and the ideas that those failed experiments planted in his mind.

 

From that experience, he learned firsthand the damage traditional top down development models could do and made it his life’s work to find a better way to build local economies. He later discovered that the ideas that germinated in Africa applied to Western economies too.

 

Sirolli’s approach builds on the theories of E.F. Schumacher, A.H. Maslow, Carl Rogers and others. The fundamental concepts underpinning Sirolli’s work include:

• A belief in the intrinsic goodness of human nature.
• If people don’t ask for help, leave them alone.
• There is no good or bad technology to carry out a task – only an appropriate or inappropriate one. Something big, modern, and expensive is not necessarily best; it all depends on the circumstances.

 

 

 

However, this is not just a book of theory. Sirolli goes on to tell stories about the enterprises he ‘facilitated’ under austere economic conditions. Sirolli’s first success came in a small rural community called Esperance in Western Australia. In Esperance, Sirolli helped fishermen sell fish to the Japanese sushi market for six times what the local cannery was paying for their catch. Another business was started smoking the fish for gourmet markets. Another new business made quality sandals from local kangaroo hides. Sheep farmers developed a processing business that turned worthless old ewes into valuable hides, wool and mutton kebabs.

 

In rural Minnesota, Sirolli was hired to work in one of the poorest counties in the state with a workforce of only 3,000. Within four years, his effort had resulted in 30 new businesses, assisted 127 existing ones, retained 55 jobs and created 71 new ones.

 

In rural South Dakota, a penniless cattleman developed a welding repair business in a small town. Within two years, it employed 27 people who processed $90,000 worth of orders a month.

 

The success of Sirolli’s model depends upon empowering people rather planners and policy makers. “The future of every community,” Sirolli writes, “lies in capturing the energy, imagination, intelligence, and passion of its people.”

 

 For more information on Sirolli’s methods, check out the Sirolli Institute’s website at http://www.sirolli.com/.

 

Change of Address!

Please note CharityLawyer Blog is moving to a new address: www.charitylawyerblog.com . Hope to see you there!

Best,

Ellis

Nonprofit Law Urban Legends

I recently contacted Gene Takagi, a noted California nonprofit lawyer, to confirm or deny an assertion regarding California nonprofit law that was made to one of our clients. He was kind enough to clarify the matter. We discussed that there are many such “nonprofit law urban legends” and he suggested that would be a good topic for a blog post! So, here is my list of popular “nonprofit law urban legends.” Please feel free to add a few of your own.

1.   Nonprofits Can’t Make Money. I covered this surprisingly persistent legend in a related post, but it bears repeating. The designation of an organization as “non-profit” or “tax-exempt” does not mean that the organization can’t have money left over in its bank accounts at the end of the year. Money that is not required to meet current expenses should be used to further the organization’s mission or can be set-aside as a reserve to cover future expenses.

2.   Nonprofits Can’t Lobby. This legend is actively harming the sector. Most nonprofits can actively lobby. While there are some restrictions on 501(c)(3)’s lobbying activities, only private foundations are prohibited from lobbying. Public charities may lobby within limits that can be quite generous. For excellent resources on this topic, visit http://www.afj.org/.

3.   Grant makers Can’t Fund Organizations That Lobby. Another harmful legend. Grant makers that are private foundations cannot earmark funds for lobbying. Grant makers that are public charities may make grants specifically to fund lobbying so long as they count such grants within their own lobbying limits. There are specific steps both types of grant makers may take to protect themselves from having a grantee's lobbying activities attributed to them. Grants from either type of grant maker are not flatly prohibited merely because the grantee is engaged in lobbying activities.

4.   Nonprofits Must Follow Roberts Rules of Order. Not only is following Roberts Rules of Order, Sturgis, or any other parliamentary procedure not legally required, its a bad idea to require Roberts Rules of Order in the organization’s governing documents. See Jack Siegal’s blog post on his Good Governance blog. Enough said.

5.   Nonprofit Staff Can’t Participate In Political Campaigns. Everyone, even a staff member or even a CEO or founder of a nonprofit has a first amendment right to engage in political speech in his or her individual capacity. Staff of 501(c)(3)s should, however, take care to restrict campaign activities to their personal time and avoid any impression of organizational support.

6.   Nonprofits Have To Make Their Books, Financial Statements, Board Minutes, etc. Public. In most states, nonprofits do not need to make documents other than their Form 1023, Application for Exemption and past three Forms 990, 990-EZ, and/or 990-T available for public inspection. There is an exception for organizations with voting members. Voting members may have broader state law rights to examine the organization’s books and records.

7.   Nonprofits Must Adopt All the Governance Policies Mentioned on the New Form 990. This is a fast growing legend. The IRS has indicated their belief that weak governance is a strong indicator of weak tax-compliance. None, I repeat, none, of the policies are legally required to be adopted, although many could be said to be a good idea for most nonprofits. Our approach is to recommend a conflict of interest, whistleblower, and document retention and destruction policy for nearly every tax-exempt client. We consider the necessity of the other policies on a case by case basis.

8.   They IRS Won’t Really Levy Penalties on Nonprofits. “I know our Form 990 is a year late and we didn’t extend it, but we only have a budget of 1.2 million and a staff of 12? They won’t really charge us a $50,000 late fee will they?” They will if you don’t have reasonable cause for being late. Being a nonprofit is not reasonable cause.

9.  Nonprofits Can Hold Meetings and Vote by E-mail. Many states, including Arizona, require meetings to occur in a format where all parties can simultaneously hear each other. This means telephonic meetings are okay, but e-mail meetings are not. An alternative is to vote by written consent resolution and have each board member reply to the consent resolution by e-mail using a digital signature.  This will work in states where electronic signatures are accepted. However, in most states board votes by consent resolution must be unanimous to be effective. For more information regarding e-mail votes, see http://is.gd/4L9zf.

Even with the wealth of information floating around on the Internet, there are and always will be urban legends that laypersons (and even some lawyers!) will insist must be adhered to, often in support of an agenda. Be prepared to do your due diligence to find out what is required, what is a best practice, and what is just plain made-up.

Arizona Corporation Commission Changes Impacting Nonprofit Corporations - Good News and Bad News

First, the Bad News
 
Recent reductions in the Arizona Corporation Commission's budget are impacting nonprofit corporations doing business in Arizona in the following ways:

Increased Turn-around Time. The turn-around time for filings will likely increase over the next six to twelve months, with regular filings taking as much as 250 days to be processed and expedited filings taking as much as 50 days to process. While there may be some consideration given when a document needs to be filed on an emergency basis (for example, to complete a transaction), the Arizona Corporation Commission will likely not be staffed to handle "emergency" filings on a regular basis.

No Notice of Annual Reports. Nonprofit corporations doing business in Arizona are required to file an annual report with the Arizona Corporation Commission. In the past, the Arizona Corporation Commission sent postcards to corporations reminding them when their annual report was coming due. As of October 1, 2009, those postcards will no longer be sent. Each corporation is responsible for knowing when its annual report is due. If the annual report is not timely filed, the Arizona Corporation Commission may proceed with administrative dissolution of the corporation. Corporation's can check their due date for filing the annual return and obtain a copy of the form online.

Now for the Good News

Financial Statements.  As a result of legislation that passed last year, nonprofit corporations are no longer required to file a financial statement with the annual report. Annual reports will continue to be accepted if a financial statement is included, but nonprofit corporations do not need to expend the time or resources to complete a financial statement for the annual report.

Affidavits of Publication. As a result of legislation that passed earlier this year, affidavits of publication for any type of document are no longer required to be filed with the Arizona Corporation Commission. The Arizona Corporation Commission will accept an affidavit of publication for filing, but there will be no associated filing fee. Publication requirements remain unchanged and, therefore, corporations should continue to publish documents as necessary, obtain affidavits of publication and maintain the affidavits in their corporate records if they choose not to file them with the Arizona Corporation Commission.

Nonprofit Law Jargon Buster - Public Support Test

Today’s Nonprofit Law Jargon Buster is a doozy so keep your hat on.

In the last Nonprofit Law Jargon Buster, we looked at the difference between a private foundation and a public charity. The default rule is that all 501(c)(3) organizations are private foundations unless they qualify as public charities. Private foundations are subject to more restrictions than public charities and have to pay a tax on investment income so qualifying as a “public” charity is usually considered a pretty darn good thing.

We sometimes get panicked calls from public charities that have been informed that they have “failed their public support test” and must now operate as a private foundation. What does it mean when your lawyer or accountant says your organization has failed its “public support test”?

As discussed in last week's Nonprofit Law Jargon Buster, there are some organizations that are, by their very nature, considered “public.” These include churches, schools, and hospitals. Other types of charitable organizations must pass one of two mathematical tests calculated on a four year rolling average to qualify is public.

For ease of reference, I refer to the two alternative tests as the “donative charity test” and the “gross receipts charity test.”

Donative Charity Test. To satisfy this test, the charity must normally receive at least 1/3 of its total income from government grants, grants from other public charities, and from members of the public. However, there is a 2% limit on the amount of funding from any one donor, foundation, or corporate funder that can be counted in the numerator. Therefore, only 2% of a gift from any one donor, foundation, or corporate funder will be counted in the numerator while the entire amount of the gift will be included in the denominator, making it harder to pass the 1/3 test.

For charities trying to meet this test, the proportion of public support can drop as low as 10% if the charity meets a facts-and-circumstances test that indicates it is working to attract public support.

Gross Receipts Charity Test. A charity can pass this test if it normally receives at least 1/3 of its total income from government grants, grants from other public charities, from members of the public, or from revenues generated by activities within the organization’s exempt purpose. Charities relying on this test are also subject to a different limit on the amount of funding from any one individual, foundation, or corporate funder that can be counted in the numerator. For such charities, only the greater of 1% of the charity’s total income or $5,000, whichever is less, will be counted in the numerator while the entire amount of the gift will be included in the denominator.

This test also places a limit on the amount of investment income that the organization can earn. To meet this test, no more than 1/3 of the organization’s total income can come from investments.

Unusual Grant Exception. Under some circumstances, an unusually large and unexpected grant can be excluded from both the numerator and the denominator in calculating the public support tests. Unusual grants are essentially grants from disinterested persons that are unusual or unexpected and that, due to their size, would adversely impact the organization’s public support test.

These explanations do not begin to do the complexity of these tests justice. As with most tax law concepts, there are exceptions, exclusions, exceptions to the exceptions and so on. Upon careful analysis, we often find that contributions have been misclassified or that there are other strategies we can recommend to preserve the organization’s public charity status.