Corporate Law: Nonprofit Edition?

Non-profit organisations are generally understood to be those that are not driven by profit motives. However, the laws that govern them are not so clear-cut. Non-profits are subject to local, state, and federal laws, and while they are exempt from some taxes, they must still comply with most laws that apply to for-profit businesses. Non-profits are beholden to corporate law, which is structured around the pursuit of profit. This creates a power imbalance that disadvantages non-profits and favours their for-profit counterparts.

Nonprofit corporations and tax exemption

Nonprofit corporations are created according to state law and are exempt from income taxes if they operate solely for the benefit of the general public. Nonprofit organisations are regulated by local, state, and federal laws. They are exempt from paying income tax on income generated from activities related to their purpose. However, they must pay federal corporate income tax on unrelated business income.

To be tax-exempt, nonprofits must be incorporated as such under state law and apply for recognition of exemption from the Internal Revenue Service (IRS). The IRS will issue a ruling or determination letter recognising the tax exemption. The requirements for federal income tax exemption are more stringent than those for nonprofit status, and there are a few organisations that are nonprofits but do not qualify for exemption from federal income tax.

Nonprofit corporations are different from profit-focused corporations in several ways. The most simple difference is that nonprofit corporations cannot operate for profit. They cannot distribute profits to individuals controlling the organisation, nor can they issue stocks. The funds acquired by nonprofits must stay within the corporate accounts to pay for reasonable salaries, expenses, and activities. Salaries are not considered personal benefits, but an unwarranted salary may cause a corporation to lose its nonprofit status.

State laws on corporations vary, but generally, states give tax breaks and exemptions to nonprofits that are structured and operated exclusively for a religious, charitable, scientific, public safety, literary, or educational purpose. Nonprofits may charge money for their services, and donations to tax-exempt nonprofits are tax-deductible.

Nonprofits are monitored and regulated by private watchdog groups, state charity regulators, and a division of the IRS, which ensures compliance with the requirements for tax-exempt status.

Nonprofit governance and board responsibilities

Board Composition and Selection:

Nonprofit boards typically consist of individuals with varying skills and connections, passionate about the organisation's mission. The selection process should focus on finding dedicated and competent individuals who align with the organisation's values and can contribute their expertise and networks to drive the mission forward. Board members should ideally have high emotional aptitude, adaptability, and subtle thinking skills to navigate different situations and find creative solutions to complex problems.

Board Roles and Responsibilities:

The board of directors of a nonprofit has three primary legal duties: the duty of care, the duty of loyalty, and the duty of obedience. The duty of care entails ensuring prudent use of all assets, including facilities, people, and goodwill. The duty of loyalty requires board members to act in the best interest of the nonprofit, recognising and disclosing any conflicts of interest. The duty of obedience mandates compliance with applicable laws, regulations, and the nonprofit's bylaws, ensuring adherence to its stated corporate purposes and mission.

Executive Director Selection and Evaluation:

The board is responsible for selecting and evaluating the executive director or CEO, who runs the day-to-day management activities. The board should conduct an organisational assessment, develop a comprehensive job description, and undertake a careful search to find the most qualified individual. Annual evaluations of the executive director should include quantitative and qualitative metrics to ensure they fulfil their obligations and effectively lead the organisation.

Financial Oversight and Resource Provision:

Board members are responsible for providing financial oversight, ensuring proper management of revenue, and approving major financial decisions. They should understand financial statements, review and approve budgets, and monitor financial activities to ensure alignment with the organisation's mission. Additionally, board members are expected to participate in fundraising activities, leveraging their connections and networks to generate revenue and secure resources necessary for the organisation's operations and growth.

Legal and Ethical Compliance:

Nonprofit boards must ensure the organisation fulfils its legal obligations, complying with federal, state, and local laws specific to nonprofits. This includes awareness of tax regulations, such as filing the IRS Form 990, and understanding repercussions for non-compliance. Boards should also establish conflict-of-interest policies and ethical guidelines to maintain the integrity of the organisation and protect its reputation.

Strategic Planning and Public Standing:

Nonprofit boards are responsible for effective organisational planning, creating comprehensive plans that align with the community's needs and the organisation's mission. This includes strategic planning, program development, supporter development, and financial projections. Boards should also advocate for the organisation, enhancing its public standing and credibility within the community. They should utilise their networks and publicly support special events to demonstrate their commitment and engage a broader audience.

Committee Formation and Governance:

Nonprofit boards often establish committees to facilitate specific functions, such as governance, internal affairs, and external affairs. These committees enable efficient decision-making and streamline tasks related to nominations, finances, risk management, executive decisions, communications, marketing, and fundraising.

Board Meeting Attendance and Participation:

Board members are expected to actively participate in board meetings, contributing their insights and ideas. Regular attendance and preparation for meetings are crucial for effective decision-making and ensuring the organisation's progress. Board members should also be willing to serve on committees that align with their interests, staying engaged and motivated to contribute to the organisation's various initiatives.

Nonprofit speech and political advocacy

Nonprofit advocacy is any set of actions or activities that raise awareness, draw public support, or get people involved in a cause or policy with the intention of making a difference. Nonprofits are restricted from speaking on political issues or doing any substantial advocacy without losing their tax-exempt status. However, nonprofits can engage in legislative advocacy and issue-related advocacy, as long as it follows certain rules and steers clear of political campaigning.

Nonprofit advocacy campaigns can focus on creating cultural or social change, working to change unfair practices at large businesses or private companies, and pushing for legislative change through grassroots activism.

• Social advocacy: Encourage people to support your cause publicly to exponentially expand your reach. Spotlight your most active supporters, create eye-catching graphics, and use relevant statistics.
• Connecting with a representative: Encourage supporters to contact their government representatives to share their concerns and speak up for your cause. Make contact information easily accessible, write a script for them to follow, and track how many connections were made.
• Signing a petition: Combine social advocacy and representative outreach. Make petitions available digitally, allow supporters to share them, and share how many signatures you've received.
• Volunteering: Provide hands-on experiences for volunteers to see their impact and fully understand the need. Give active volunteers a shout-out and provide opportunities for kids and teens to get involved.
• Educating others: Share your organization's history, facts and figures, and anecdotes. Provide educational resources supporters can share, such as PDFs, videos, and infographics.
• Advocacy events: Plan events with a clear goal or mission in mind. Create a slogan, and get legislators involved.
• Leveraging corporate philanthropy: Turn to companies to support your advocacy efforts. Search for matching gift opportunities, leverage employee volunteer programs, and identify alignment in values.

It's important to note that while nonprofits are restricted in their political advocacy, individuals associated with a nonprofit are entitled to voice their opinions and participate in political campaigns, as long as they are not speaking for the organization.

Nonprofit liability and workers' compensation

Nonprofit organisations are not exempt from workers' compensation insurance. In fact, workers' compensation is required by law in most states. Workers' compensation insurance covers medical costs and lost wages for work-related injuries and illnesses. It protects employees and nonprofit business owners. For example, it can cover an injured employee's medical expenses and part of the wages they might lose while recovering. It can also protect business owners if an employee decides to sue the business over an injury.

The amount a nonprofit pays for workers' compensation is based on a specific rate per $100 of its business's payroll. The premium is determined by the type of work done by employees, the organisation's claims history, and its payroll. Each state creates its own laws for workers' compensation requirements. For example, every nonprofit in Pennsylvania must carry workers' compensation insurance for its employees, even part-time workers. In Alabama, nonprofits are only required to carry workers' compensation if they have five or more employees.

Nonprofits can take on serious workplace risks, and each time a claim is filed, their insurance rate may increase. To create a safe work environment, nonprofits can provide protective gear to employees, fix uneven steps, and eliminate tripping hazards. By managing risks, nonprofits can decrease injuries and, as a result, insurance premiums.

Nonprofits can also take out other types of insurance to protect against common risks. For example, general liability insurance can cover expenses related to customer property damage and injuries. Directors and Officers insurance (D&O) can protect board members and officers against legal expenses if they are sued for misappropriation of funds or another decision that led to financial loss. Employment Practices Liability Insurance (EPLI) can cover legal costs if a nonprofit is sued by an employee over harassment, discrimination, or another violation of employee rights.

Nonprofit establishment and compliance

Establishing a nonprofit organisation is a complex process that requires compliance with various laws and regulations. Nonprofit organisations are generally formed to address civic, charitable, or other public purposes, and not for personal gain. They are often referred to as charities, NGOs, or civil society organisations, among other terms.

In the United States, nonprofit organisations are regulated by local, state, and federal laws. To achieve and maintain corporate status, nonprofits must comply with specific requirements, such as filing a statement of corporate purpose, creating articles of incorporation, holding regular meetings, and paying a fee. Nonprofit corporations are created according to state law, and while the specific requirements may vary, certain commonalities exist. For instance, nonprofits must not operate for profit and cannot allocate income to shareholders. Instead, funds acquired by nonprofits must be used to pay reasonable salaries, expenses, and activities related to the organisation's purpose.

To maintain tax-exempt status, nonprofits must conduct business solely for the benefit of the general public. State laws generally offer tax breaks and exemptions to nonprofits structured and operated for religious, charitable, scientific, public safety, literary, or educational purposes. Additionally, donations made to tax-exempt nonprofits are tax-deductible for the donors.

Nonprofits must also comply with the Corporate Transparency Act (CTA), which requires designated reporting companies to disclose beneficial ownership information. While most nonprofits are exempt from this requirement, those that have lost their tax-exempt status will be mandated to report.

To ensure compliance with the applicable laws and regulations, it is advisable for individuals or groups seeking to establish a nonprofit organisation to consult with legal professionals experienced in nonprofit law. They can provide guidance on the specific requirements and help navigate the complex process of establishing a compliant nonprofit entity.

Frequently asked questions