Because nonprofit organizations serve the public good, nonprofit boards must continually work to earn the public’s trust. State and federal governments’ nonprofit laws hold them accountable, as they get tax breaks for providing public services.
Like their for-profit counterparts, nonprofit entities must file a statement of corporate purpose with the proper state governing body, pay a fee, create articles of incorporation, hold regular meetings, and comply with various other obligations to achieve and maintain the proper legal status.
As their name suggests, nonprofit organizations may not exist to generate a profit. In addition, a nonprofit organization may not personally benefit any individual. For-profit corporations exist for the benefit of shareholders and, to some extent, the public. Unlike for-profit corporations, nonprofit organizations cannot allocate income to shareholders without risking their nonprofit status.
Not to say that nonprofit organizations can’t invest money or maintain excess funds. It means they must use their funds to pay reasonable salaries and expenses and support the organization’s activities. Basic salaries aren’t considered personal benefits because they’re necessary for the operation of the nonprofit. Nonprofits are also allowed to charge a fee for their products and services. An unwarranted or extraordinarily high salary raises a red flag about whether a nonprofit truly deserves nonprofit status.
Basic Legal Information About Nonprofit Organizations
The classification for nonprofit organizations encompasses a broad list of definitions. Common terms include charities, nonprofits, non-governmental organizations, private voluntary organizations, and civil society organizations. Typically, nonprofits must exist exclusively for religious, charitable, scientific, public safety, literary or educational purposes. Examples of qualified nonprofits are churches, homeless services, charities, political associations, college organizations, sports leagues, colleges and universities, hospitals, political groups, museums, and public television stations.
Nonprofit regulations require that the Internal Revenue Service (IRS) approve all nonprofit organizations for tax-exempt purposes except churches.
The primary laws for nonprofit organizations rest with the states, although nonprofit founders should also be aware of any federal or local laws the nonprofit must abide by.
The purpose of nonprofit organizations is to conduct business for the benefit of the general public without regard for shareholders or profitability. The major benefit for qualified nonprofits is that they are exempt from paying income taxes.
Nonprofit regulations allow citizens who make donations to nonprofit organizations to deduct them from their annual tax returns.
Checklist for Nonprofit Laws for Board Members
In the beginning, board members must do a lot of work to set up a nonprofit organization. Nonprofit board members should also be aware that it’s their responsibility to ensure that the organization complies with all nonprofit regulations and any changes to them.
Here’s a checklist of actions for boards of all nonprofit organizations:
1. Ensure all board directors are familiar with local, state, and federal nonprofit laws.
2. Make sure your organization fits the legal definition of a tax-exempt, nonprofit organization.
3. Make sure your nonprofit is acquainted with and uses the proper 990 form.
4. Gather and submit all the proper founding documents, including the Articles of Incorporation, bylaws, and statement of purpose or mission.
5. Develop basic policies for conflict of interest, whistleblower, acceptance of gifts, and retention and destruction of documents.
6. Make sure the board understands its fiduciary duties and legal liabilities.
7. Purchase a director and officers insurance policy to protect board directors from liability issues.
8. Identify a source for legal consultations.
9. Evaluate whether employee salaries are reasonable for the job and necessary for operational support.
The Importance of Understanding Nonprofit Laws
Being a founder or board director of a nonprofit organization brings many crucial responsibilities. While founders and directors may have the best intentions, sometimes they make mistakes. Even when mistakes are unintentional, board directors may be held accountable and liable.
The most important consideration that board directors should be aware of regarding nonprofit laws is that they have fiduciary duties, including the Duty of Care, the Duty of Loyalty, and the Duty of Obedience.
Duty of Care means that board members should carry out their duties and make decisions on behalf of the organization as any reasonable and prudent person would.
Duty of Loyalty means that board directors should place the interests of the organization above their own.
Duty of Obedience means that the board of directors must run the organization according to its mission (and position structure) and remain in compliance with the law.
These are legal responsibilities, and board directors can be held legally liable if they act negligently. This is the most critical reason for board directors to purchase directors’ and officers’ insurance at their earliest opportunity.
Resources for Training Your Board on Nonprofit Laws
Upon request, your nonprofit board may need to produce copies of your three most recently filed annual tax returns, including IRS Form 990. Donors may also ask for them as a matter of transparency. Does every member of your board know where to find them?
To make accessing these documents easier, you might consider posting a link to them on your website.
Any of the following resources would make for good board member training sessions or as items for discussion on your board meeting agendas:
- Public Disclosure and Availability of Exempt Organizations Returns and Applications: Documents Subject to Public Disclosure by the IRS — An article that explains which documents are subject to public disclosure.
- What’s Public, What’s Private, an infographic by BoardSource — A snapshot of the documents and information your board is entitled to share and those they are entitled to keep private.
- A sample public reporting and transparency policy by the Montana Nonprofit Association.
- An online tutorial created by the IRS about required disclosures and how nonprofits can stay tax-exempt.
Accessing your Form 990 is easy when you use BoardEffect’s board management solution. All board members must do is log into the platform and retrieve them electronically. Your board management system is also a place where you can easily create online board handbooks, meeting minutes, and all the documents your board needs to run a productive board meeting.
With the proper knowledge and the correct documents, your board members will have the necessary confidence to represent your nonprofit.