Reinier advises national and international companies
reinier.russell@russell.nl +31 20 301 55 55Jesper specialises in corporate litigation and governance
jesper.nooij@russell.nl +31 20 301 55 55Managing a nonprofit organization requires not only idealism and dedication, but also a sensible approach to legal opportunities and risks. This ensures that the charity is future-proof. What are the important issues that need to be properly addressed?
Nonprofit organizations – including foundations and associations – often operate with idealism, passion, and social impact. In order to operate sustainably, grow, and be accountable, a solid legal foundation is crucial. Without clear governance, transparency, and clear contracts, even non-commercial organizations can be vulnerable. In this blog, we discuss five risks that nonprofits need to take into account and provide practical recommendations for proactively minimizing these risks.
A nonprofit organization is created out of a desire to contribute to society. This contribution can take many forms, such as raising or donating money, but also going out into the community and helping people in concrete ways. In order to achieve its goal, a nonprofit must choose the most suitable legal form. The founders have the choice between a foundation or an association. This choice determines not only the structure of the nonprofit, but also how control and liability are regulated.
An association is an organization of members. It can exist with or without legal personality. The association has two important bodies, the board and the general meeting of members. The latter appoints the board and can amend the articles of association. Associations are often used for interest groups, sports clubs, or community initiatives. An association may not distribute profits, but may spend the profits for the benefit of its activities.
The vast majority of nonprofit organizations have the legal form of a foundation. A foundation is a legal entity, whereby the founders have a great deal of freedom to organize the foundation according to their wishes. A foundation has no members and, in principle, a board is the only body of the foundation. The board therefore has a lot of power within the foundation. It is possible to add other bodies, such as a supervisory board or advisory board, to the foundation. These other bodies may then be given the right to appoint directors or approve important decisions.
The foundation is ideally suited for fundraising, asset management, and philanthropy. When the legislation on foundations was introduced, the foundation was described as a special-purpose fund: assets that must be used to achieve a specific goal. This has also led to the inclusion in the law that foundations may not distribute profits to directors, founders, or employees. On the other hand, a foundation may make a profit, but it must then spend that profit on its purpose.
It is therefore important to carefully consider in advance the activities that the institution will carry out and which form is best suited to this. It is also possible to consider in advance the desired structure of the organization, as the legal form will often be subordinate to this.
Nonprofits rely heavily on volunteers, which makes a good governance structure all the more important. In a foundation, there is often only the board. It is therefore important to establish who appoints and dismisses the board. This can be the board itself, but also another body. In addition, it is important to lay down the tasks, responsibilities, and terms of office of the directors in the board regulations. How long can a director remain in office and what tasks/responsibilities do the various directors have?
By establishing clear rules right from the start, future problems can be prevented. Transparency is crucial in this regard. Nonprofit organizations are often dependent on subsidies and donations. When people give money, they expect the organization to be well structured so that the money is spent appropriately and does not end up lining the pockets of those in charge. It is therefore important to invest in a good structure right from the start, so that the organization can then focus largely on achieving its goals.
Nonprofits often collect personal data from donors, volunteers, and partners in order to achieve their goals. They must therefore comply with applicable privacy legislation. Failure to comply with privacy legislation (GDPR) can result in fines, reputational damage, and loss of trust. This is obviously not conducive to achieving the organization’s goals. To prevent the organization from encountering problems as a result of non-compliance with privacy legislation, it is important to draw up a number of key documents/statements.
First of all, the institution will need to draw up a proper privacy statement. This is a document that states what data is collected and why it is collected. The privacy statement also explains how long the collected data will be stored and who has access to it.
Furthermore, careful consideration must be given to processing agreements. A processing agreement is a contract between two parties, the organization that collects personal data (the controller) and a company that processes this data on behalf of that organization (the processor). An example of this is a school that engages a software company to manage student data. A processing agreement specifies, among other things:
In addition, it is advisable to also arrange for a number of non-legal points, such as good security measures and access restrictions. By securing the data properly and making good backups, you can prevent data from easily becoming public. This also enables the institution to comply with the rights of data subjects; donors and volunteers must be able to easily access their data or have it deleted after submitting a request. Under future legislation (the Transparency and Countering Subversion by Social Organizations Act (Wtmo)), nonprofit institutions will be required to retain donor data.
Nonprofits work with many different actors: volunteers, donors, social partners, or governments. It is therefore important to clearly define who does what and who is responsible for it. After all, every contact involves risks. Important agreements to be laid down in contracts are:
It is also advisable for the directors of an institution to take out insurance. Directors’ and officers’ liability insurance (also known as D&O insurance) can protect directors against personal liability. If a director is held liable, the (legal) costs incurred by the director will be reimbursed by the insurer. This prevents directors from being personally liable in the event of mismanagement or if the nonprofit fails to fulfil its contracts. Naturally, in the event of fraud or deception, no claim can be made under the insurance policy.
Nonprofit organizations will need money to achieve their objectives. Much of this money will come from donors or subsidies from the government or other charities. These cash flows require extra attention from the institution, particularly due to strict anti-money laundering legislation and the Wtmo. Banks, the government, and donors may request the organization to provide insight into its cash flows.
Financial reporting is essential in order to comply with these requests. Institutions must therefore produce transparent annual accounts and reports for donors. This is even a prerequisite for obtaining ANBI status, while the Wtmo requires financial documents to be filed with the commercial register.
Furthermore, an institution may engage in commercial activities to obtain sufficient funds. However, it is important to note that the line between nonprofit and commercial enterprise (too commercial activities) is a grey area. If organizations test this line and even cross it, this can have an impact on their tax position and lead to the loss of ANBI status.
For nonprofit organizations, legal structures are not a “nice-to-have,” but essential for stability, trust, and growth. A solid legal foundation – with the right legal form, clear governance, robust contracts, and transparent financial processes – makes the difference between a mission that struggles to grow and an organization that is professional, resilient, and socially credible. Doing good must be done well.
Russell Advocaten has extensive experience in assisting nonprofit organizations. We help foundations and associations establish a solid legal foundation: from articles of association to contracts, from management structure to financial compliance. Would you like to know more about our services for nonprofits or are you looking for legal advice and assistance for your organization? Please contact us:
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