Nonprofit Legal Framework: Understanding Applicable Laws And Regulations

Non-profit laws vary depending on the country and state in which the organization operates. In the United States, non-profit laws relate to taxation, the unique problems of an organization that does not have profit as its primary motivation, and the prevention of charitable fraud. Non-profit organizations are generally exempt from federal taxes as long as they adhere to certain guidelines. These organizations are also subject to state laws and regulations, which can include incorporation and maintenance, charitable fundraising, and accreditation requirements such as licenses and permits. Non-profit boards are responsible for ensuring the organization remains true to its mission, safeguards its assets, and operates in the public interest. They are also the first line of defense against fraud and abuse.

Non-profit corporations

At the state level, non-profit corporations are subject to state corporation laws. Some states have adopted the Revised Model Nonprofit Corporation Act (1986) and some have adopted the Uniform Unincorporated Nonprofit Association Act. State laws vary widely and non-profit organisations must comply with the laws of their own state and any other states in which they operate, including when seeking out-of-state donations.

Tax exemption

Non-profit organisations are exempt from federal taxes as long as they adhere to certain guidelines. To qualify for tax-exempt status, the organisation's charter, trust instrument, or articles of association must specify that no part of its assets shall benefit any members, directors, officers or agents. Additionally, the organisation must have a legal, charitable purpose, i.e. it must be created to support educational, religious, or charitable activities.

Non-profit organisations can accumulate profits, but they cannot distribute them to the founders or owners, or use them to increase employee salaries beyond the norm. They must spend their surplus on the charitable or public purpose for which they were organised.

To obtain federal tax-exempt status, non-profits must meet the requirements set by the Internal Revenue Service (IRS) and apply to the IRS. If the non-profit's purpose is described in §501(c)(3) of the Internal Revenue Code, it may apply for a ruling that donations to it are tax-deductible for the persons or business entities who make them. The organisation itself will be exempt from taxation as long as it does not engage in unrelated business activities. Such organisations are then required to file Form 990.

At the state level, non-profit organisations must meet the requirements set by the relevant state government to obtain tax-exempt status. Some states exempt non-profit organisations from state tax and state employment programs such as unemployment compensation contributions.

Charitable fraud

Non-profit organizations are subject to various laws and regulations, and one key area of focus is the prevention of charitable fraud. Charity fraud is a serious offense that undermines public trust in the philanthropic sector and deprives those in need of vital resources. It involves deceptive practices aimed at misleading donors, misappropriating funds, or falsely representing charitable activities for personal or organizational gain. This type of fraud can take many forms and have significant consequences, both for the individuals involved and the wider charitable sector.

Charity fraud can occur when individuals or groups present false information, claiming to be a charity or associated with one, and then solicit contributions for a non-existent cause. This type of deception not only encompasses fictitious charities but also includes deceptive business practices, where donations are accepted without being used for their intended charitable purposes. Fraudulent activities can also involve dishonest or inflated claims about fundraising amounts or the impact of donations on a particular cause.

Some common methods used by perpetrators of charity fraud include pretending to be a legitimate charity or falsely claiming an affiliation with one to solicit donations. They may also divert funds raised for charitable causes to their personal use, falsify receipts or documents to conceal the fraud, or inflate the value of donated items or services. Tampering with financial records is another tactic employed by fraudsters.

Charity fraud is a crime that can result in severe penalties, including incarceration, significant fines, and restitution. In some cases, civil penalties such as the forfeiture of assets may also apply. The specific penalties depend on the jurisdiction, the severity of the offense, and any aggravating factors. Federal statutes that may be used to prosecute charity fraud include mail fraud, wire fraud, tax evasion, bank fraud, identity theft, and money laundering.

The consequences of charity fraud extend beyond legal penalties. It erodes trust in the charitable sector, making it more difficult for legitimate organizations to raise funds in the future. To maintain their integrity and assure donors, non-profit organizations must be vigilant in preventing and addressing fraudulent activities. This includes complying with relevant laws and regulations, as well as being transparent and accountable in their financial practices and charitable activities.

Bylaws

• Seek Expert Assistance: When drafting or amending bylaws, it is advisable to consult an expert with experience in nonprofit matters, such as an attorney or a professional services firm. It is important to ensure that the attorney has a thorough understanding of nonprofit issues.
• Stick to the Basics: Bylaws should focus on high-level governing issues rather than getting bogged down in minutiae. This includes organisational purpose, board structure, officer position descriptions and responsibilities, terms of board service, officer/board member succession and removal, official meeting requirements, membership provisions, voting rights, conflict-of-interest policy, and any other essential provisions deemed necessary by the governing body.
• Understand the Bylaws: As a board member, it is your duty to comprehend the meaning and implications of each provision in the bylaws. If there are any ambiguities or unclear sections, don't hesitate to seek clarification from fellow board members or consult a professional.
• Adhere Religiously: Understanding the bylaws is not enough; you are legally accountable for following them. This is a non-negotiable aspect of your role. In any dispute, a court of law will side with the bylaws over individual board members, employees, volunteers, or recipients of services.
• Keep Bylaws Relevant: Bylaws should be living documents that evolve with changing times and circumstances. If amendments are necessary to reflect current realities, it is crucial to make those changes. Ensure that amendments are carefully considered and follow the established procedures.
• Separate Policies and Procedures: Avoid including day-to-day policies and procedures in the bylaws. Create a separate policy manual for management purposes. Think of the bylaws as the "Constitution" and the policies and procedures as the "US Code" or laws.
• Consider Future Boards: Include provisions in the bylaws that will guide and constrain future boards. Carefully think through the potential long-term consequences of each provision to avoid unintended difficulties in amending them down the line.
• Regularly Review Bylaws: At least annually, all board members should familiarise themselves with the bylaws to prevent costly errors. Providing new board members with a copy of the bylaws upon their installation is a recommended practice.

By following these guidelines and treating bylaws with the seriousness they deserve, nonprofit organisations can establish a solid foundation for effective governance and avoid the pitfalls of willy-nilly guesswork.

Employment laws

Non-profit organisations are subject to many of the same laws as for-profit businesses. These include minimum wage laws and, in most states, the requirement to obtain workers' compensation insurance.

In the US, non-profits are generally organised under state law, and each state defines a non-profit differently. Some states distinguish between organisations with and without charitable goals, and grant different legal privileges accordingly. For federal tax purposes, an organisation is exempt from taxation if it is organised and operated exclusively for religious, charitable, scientific, public safety, literary, educational, or other specific purposes.

Non-profit corporations are required to have at least three directors, one president, and one secretary. Officers and directors must be natural persons, but may be known by other titles. Any corporation may pay reasonable compensation for services rendered, but non-profits cannot use profits to increase employee salaries beyond the norm.

Non-profit organisations must comply with the same laws that would apply to for-profit businesses with some exceptions related to the First Amendment. For example, churches and religious non-profits are exempt from certain employment laws.

Non-profit bylaws are considered a legal document that dictates how the organisation must be governed. Board members have a duty to understand and are legally accountable for following the bylaws.

Frequently asked questions