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I belong to a 501(c)(4) community association that has a separate 501(c)(3) charitable foundation to support our charitable programs.  We are being told that the boards must be separate with either no overlapping members or a small percentage of overlap.  I cannot find anything that addresses this. Can you help?

I suspect that the reason you can’t find anything on this is because it isn’t true.  Unless there is something in the rules of the national organization to which you belong, there is no legal requirement that the boards of a civic association and its foundation be entirely separate.  The concern for being separate probably comes from concern about “piercing the corporate veil” if the operating organization incurs a significant liability and the claimant wants to argue that the funds of the foundation are available to make the payment. Having different individuals on the boards of the organizations helps prove their separateness. But even an entirely overlapping board does not per se mean that the organizations are one. (See Ready Reference Page:  “How to Prevent Piercing the Corporate Veil”)

The (c)(4) probably wants to control the (c)(3) so the structure should provide that it has the power to appoint -- and remove -- the directors of the (c)(3).

Comments from our Readers

While I'm all in favor of transparency, board members of a 501(c)3 that champions a locally unpopular cause (Gay Rights, Abortion, etc.) might not want the publicity.  This could be especially true in small communities. --P.W. via e-mail

Don - From a legal standpoint I agree there is no requirement to maintain seperate boards.  However, from a fiduciary point of view, and from the view point of the public interest, it makes sense to have seperate boards to protect the assets of the Foundation.  Having the same board members in both entities can often lead to erosion of the Foundation's assets if the civic or other NPO struggles financially or finds itself overwhelmed with debt.

Also, if these people are being told that they need to maintain seperate boards, I suspect it could be a GAAP issue with respect to their financial statements.  If the organizations have the same board members and share the same management, they are treated as one entity and should likely be consolidated for financial statement purposes.  I'm not sure if they have any sort of attest services performed, but this may be the reason they are being told that. --B.R. via e-mail

4/7/2010