Many people believe they understand all the ins and outs of becoming and managing a nonprofit organization, and often that knowledge is incomplete or incorrect. Most of the time it isn?t? a huge deal, until it is. It may not be the sexiest or fun part of managing your organization, but it is utterly worth the time to review and know where to look, should you need to know.

Not following the rules and not understanding why something is disallowed can cause lots of heartache you simply don’t need. 

Internal Revenue Service: 501 (c) 3, Tax- Exempt, Nonprofit Organization  

A 501(c)(3) organization must have one or more of the following purposes :

?        religious,

?        charitable,

?        scientific,

?        testing for public safety,

?        literary, or educational purposes,

?        foster national or international amateur sports competition

?        the prevention of cruelty to children or animals.

Do You Pass the Organizational Test? 

A 501(c)(3) organization must be operated primarily for one or more exempt purposes. If it is operated for other purposes (e.g., to conduct an unrelated business), such activities must be insubstantial in relation to the exempt function activities.

If your nonprofit does other business to raise funds, they will be taxed according to your state law. These are called UBIT, Unrelated Business Income Tax.

So if you sell cupcakes to raise funds for your health advocacy organization, you may be required to report and pay taxes on them. Check this out before you start selling stuff. 

There is a Private Benefit Prohibition

A 501(c)(3) organization may not provide to any person any benefit that is more than incidental, either quantitatively and qualitatively, as part of the delivery of its mission.

In other words, no one is to profit or receive extraordinary benefits, including money, access to individuals or events, or influence as part of being in the nonprofit.

Reasonable compensation and salaries for necessary services is not considered an excess benefit; but over-payment But any significant over-payment to any individual or entity is a violation of the private benefit. And someone will be mad, guaranteed.

 Careful of theseExcess Benefits

Be careful with no- or low-interest loans to insiders, excessive compensation, and other beneficial compensation, including bonuses, for past services for which you may have no obligation to pay. Whether compensation is reasonable or excessive depends on all the facts and circumstances, including the size of the charity.

And sometimes, that reasonableness may, in certain circumstances, be extremely generous (e.g., college football coaches).

Can We Lobby?  ( No, not really) 

A 501(c)(3) public charity may engage in lobbying activities, but there are certain limitations. Lobbying cannot be a substantial part of your overall activities, and you cannot make statements that endorse or oppose a candidate for public office.

You may offer facts about the issues, but cannot suggest or tell someone how they should vote for candidates or pro or con on measures, initiatives and referendums.  

Who Can See What? 

These documents are to be made public, if requested, you need to provide them:

?        Form 1023; the application to become a recognized tax-exempt organization

?        Form 990; annual information returns, for the past three years.

 Are They Legit? Check with the IRS

Exempt Organizations Select Check is a valuable online tool for checking whether a nonprofit organization is exempt under 501(c)(3) regulations. It is updated regularly and the best way to verify whether an organization is currently exempt; simply requesting a copy of the exemption letter may not guarantee current status.

 State Corporate Laws

Articles of Incorporation and By Laws: 

The articles of incorporation and bylaws are the main governing documents of a nonprofit corporation. A corporation must act consistently with the provisions in its governing documents. These documents will spell out how many board members, the lengths of terms, committee obligations and other structural aspects of your organization.

The Board of Directors:

A nonprofit corporation is governed by its board of directors. While the board may delegate management to the corporation’s officers, committees, employees, or management companythe board is ultimately responsible for all of the activities and affairs of the organization and for the exercise of all corporate powers. 

What are Fiduciary Duties & Obligations? 

DEFINITION of ‘Fiduciary‘ : A person legally appointed and authorized to hold assets in trust for another person. The fiduciary manages the assets for the benefit of the other person rather than for his or her own profit. The job of a board director is to perform the fiduciary responsibility for the nonprofit.

Each director owes fiduciary duties of care and loyalty to the organization. Generally, the duty of care requires each director to act with reasonable care:

?        governing the corporation,

?        providing financial and programmatic oversight,

?        taking steps to ensure compliance with external laws and

?        internal policies (duty of obedience),

?        protecting charitable assets from misuse or waste, and

?        determining the future course of the corporation.

The duty of loyalty requires each director to act in good faith in the best interests of the corporation, including where the director has a conflict of interest in a particular matter or is exposed to confidential information. 

Conflict of Interest: 

A director may be prohibited under state corporate laws to enter into a transaction with the corporation where that director has a material financial interest (except under certain conditions or circumstances). Generally, a majority of the directors (not including the vote of the interested director) must approve any transaction once the disclosure of the director’s interest is known.

The board must have considered and in good faith determined after consideration and investigation that, under the specific circumstances, your nonprofit could not have received a more advantageous or better arrangement with another provider.

State Charitable Trust Laws:

 Mission Limitations

Generally, a charitable nonprofit corporation may not use its assets inconsistent with its stated charitable purpose and mission. Do what you say you will be doing.

Accordingly, if a corporation’s mission is restricted to arts education in California, it cannot use its assets to provide food and shelter to rescued animals.

Changing the Mission

A charitable nonprofit can change its mission by amending its governing documents, and submitting to the IRS.

 This doesn’t mean that its previously acquired funds can be used for the new mission; previously raised funds should be applied to the mission for which the dollars were raised. 

For instance, if a nonprofit changed its mission from supporting arts education in California to proving support services for animals, it must raise those funds separately and clearly for that purpose.

 Restricted Gifts: Use this for this

If your nonprofit accepts a gift that is restricted to a specific use by the donor, the organization is required to apply those funds in the manner the donor directs.

Therefore, if a gift is restricted to use in California for an arts program, the corporation cannot use the gift to fund programs elsewhere or to fund its general administrative costs outside of California.

Nonprofits have been successfully sued for violating the restrictions of a gift or changing the application of those funds to another purpose.

 Fundraising: The Biggest Deal to Many

A nonprofit must comply with applicable fundraising laws when seeking charitable donations, gifts and sponsorships; including registering with the state charity official (typically, the Attorney General) when required, and ensuring the truthfulness of communications by or on behalf of the nonprofit.

For the laws for your state, click below

 Charitable solicitations in a state other than that in which you created your nonprofit  may, and mostly do,  require registration in such state, but the enforcement of such laws may be uneven and lax, because they are inconsistent and don’t really address internet fundraising. But if you plan to be energetic in one state, do investigate their requirements before you begin to raise money. Better safe than sorry with a big fine. 

What?s the Takeaway?

If you don?t know your structure, obligations and privileges under the law, you will inevitably run into problems at some point. It is only smart to sit down and make sure you understand the basics and the law, before there is an issue.

Yes, you have a most worthy cause and will make a positive difference in the universe, but you do have to follow the rules.

Need a guide for all of this stuff? Let us make it easy for you, call today. 310 828 6979 


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