Serving as a Fiduciary vs. Having Fiduciary Duty: What’s the Difference?
By Accounting Resources
June 29, 2022
We hear the term “fiduciary” used often in the nonprofit arena. The term can have different meanings based on the situation. Most often, there is confusion between being a fiduciary and having a fiduciary duty.
First, a few definitions so we’re all on the same page. When we refer to a “nonprofit,” we mean an entity that is organized for a nonprofit purpose. By virtue of the term nonprofit, none of the entity’s earnings goes to an individual or a private shareholder. 501(c)(3) denotes a nonprofit organization that has been recognized by the IRS as being tax-exempt by virtue of its charitable programs.
Fiduciary Definition
The common definition of a fiduciary applies to any situation where a person or agency places confidence and trust in someone else and seeks that person’s help or advice in some matter.
What is Fiduciary Duty?
When someone has a fiduciary duty to someone else, for example, a Board member, that individual must act in a way that will benefit someone else.
Serving as a Fiduciary for a Non-Profit
A nonprofit organization can serve as a fiduciary for another nonprofit or another business.
There are several reasons an agency may need a fiduciary. In some cases, the agency is operational but may not have yet received its 501(c)(3) status. If so, the agency may seek out another nonprofit to serve as a fiduciary until it receives its nonprofit status. In other cases, the agency may not have the resources to properly staff “back office” operations and will enlist a fiduciary to support these non-core activities.
Let’s say nonprofit Alpha agrees to serve as a fiduciary for the entity Beta. The arrangement will be somewhat like a business within a business – Beta is under Alpha’s umbrella and Alpha is responsible for the operations of Beta.
Alpha can accept donations and make payments on behalf of Beta and donors can take a tax deduction for their contributions to Beta. The important thing to understand is that, with this arrangement, Alpha is responsible for overseeing Beta’s reporting and ensuring Beta is conducting its operations in accordance with 501(c)(3) regulations.
As part of the fiscal arrangement, Alpha can charge an administration fee of 5-10 percent of donations made to Beta for overseeing Beta’s operations. Beta’s fiscal activity is recorded below Alpha’s operating income line and, therefore, is completely separate from Alpha’s financial reporting.
If a nonprofit is acting as a fiduciary for another entity, it is important that it has strong financial controls and robust monitoring in place so that it does not jeopardize its own 501(c)(3) status. It is also crucial that it understands the mission of the entity it is serving. Generally, both the fiduciary and the entity served will have similar missions.
Board Members Have a Fiduciary Duty
If you are a member of a nonprofit’s Board of Directors, you have a fiduciary responsibility to oversee the operations of the organization and to hold the nonprofit’s executive director and his or her team members accountable.
Some states have laws governing the responsibilities of nonprofit board members.
In general, a fiduciary has three responsibilities:
- To oversee the organization’s financial and operational activities. To understand the entity’s mission, programs and structure, make informed decisions, and consult outside experts when necessary.
- To act in the best interests of the nonprofit and not act for personal gain.
- To act in accordance with the organization’s mission, charter, and bylaws, and ensure compliance with state or federal laws.
In many cases, Board members are not accountants and some have a limited financial background, so it is important for members to gather a basic understanding of the agency’s finances, budgets and fiscal standing.
How ARI Can Help
Nonprofit accounting can be complicated. When a nonprofit organization enlists our accounting services, our experts walk their Board members through the basics of nonprofit financial reporting.
Financial Bootcamp
Typically, when we onboard a nonprofit client, we will review the financials with Board members and explain what they should be looking for and why certain line items are important. We highlight vital trends and ratios and discuss the strengths and weaknesses of the agency. We also provide crucial guidance that enables Board members to be better prepared to fulfill their fiduciary duty.
Financial Stewardship
At ARI, we see our role as the stewards of the agency’s financial information and as a conduit to the Board. We work closely with managers and provide a comprehensive monthly financial package. We attend many Board meetings to present financials, provide in-depth analyses and answer any questions Board members may have.
Fiduciary Assurance
If our clients are serving as a fiduciary, we provide separate financial tracking to ensure that, as a fiduciary, they are meeting their financial reporting obligations. This is essential to safeguard their 501(c)(3) status.
In the last three decades, our team has worked with hundreds of nonprofit organizations in multiple sectors. Contact us to determine if we might be the right firm to take the accounting burden off your shoulders and help you free up more time to devote to your organization’s core mission.
In the meantime, have a look at all of the accounting tasks we manage for you.
