The non-profit governance structure works well for many types of organizations that don’t need or want to have profits as part of their purpose and mission. Non-profit structures work well for organizations that advocate for special interests and causes like the arts, education, health, conservation, or religious activities.
Receiving non-profit status gives organizations tax-exempt status, which means they get to keep more money for their cause. Tax-exempt status also allows them to seek and secure funds from government grants and private foundations to assist in their work. Because many non-profit organizations enlist the help of large amounts of volunteers, the government designed non-profit governance structures to shelter boards of directors from corporate debts and other financial responsibilities. This advantage makes it easier for non-profit organizations to attract quality workers without fear of negative impact on the leaders’ personal finances.
Tax Rules and Advantages
Most non-profit organizations are exempt from paying state and federal taxes. As another benefit, members and others who donate to their organizations get to deduct donations from their personal tax returns annually. Churches and religious bodies are automatically considered tax-exempt and don’t require IRS filings.
Starting Up a Non-Profit Organization
The actual steps to start up a non-profit organization are fairly easy. It’s usually best to consult with a tax attorney to make sure that the founders cover all the legal and compliance issues right from the start.
The founding members need to write a set of Articles of Incorporation for the organization and file them with the appropriate state body. The documents go to the Secretary of State in most states. The next step is to file applications for tax-exempt status with federal and state agencies.
Once the founders complete and file the initial documents with the proper authorities, the founders need to get to work creating the corporate bylaws which serve as the organization’s operating rules. About the same time, the founders need to elect the initial board of directors and set up their first organizational meeting.
Basic Rules for Non-Profit Organizations
Non-profit organizations are considered corporations and they have many of the same rules and formalities as their corporate partners. Non-profit entities must keep good records. They must record meetings of minutes and set up a separate bank account. All profits must be used in the organization’s work and non-profit organizations are not allowed to distribute profits to members for any reason.
Special Rules Regarding Political Activities
Our government strategically set up different rules for political activities for different types of non-profit organizations so that non-profits cannot unduly affect the outcome of a political election. In general, non-profit organizations have more leeway for direct lobbying than grassroots lobbying. Direct lobbying refers to lobbying about a specific issue that affects organizational regulations. Grassroots lobbying refers to building a network of organizations for general lobbying on many issues.
Non-profit organizations are not allowed to campaign to support or oppose candidates running for public office.
Here are some specific rules for different types of non-profit organizations.
Social Welfare Organizations and Labor Unions
Social welfare organizations and labor unions have more leeway with lobbying than other types of non-profit organizations. They are registered under the IRS code 501(c)(4), and lobbying can be their primary activity. While they have the ability to lobby for issues that affect their causes, they are not allowed to work to elect public officials. They are also required to report to their members the percentage of dues that they spend on lobbying.
Charitable organizations file their charters under the IRS code 501(c)(3). This is the most common type of non-profit governance structure. Charitable organizations can participate in lobbying as long as it isn’t a substantial part of their activities. This helps charitable organizations have some say in new laws that affect the populations they serve. The phrase “substantial part of their activities” is a subjective term and the law is not clear on its meaning.
Charitable organizations that choose the 501(h) designation can spend more on lobbying, but they also have more rules about reporting their finances to the IRS.
Private foundations usually exist for philanthropic purposes. Wealthy people come together to donate funds to charities and other causes. Private foundations are not allowed to participate in legislative lobbying unless the issue has a direct effect on the regulations for all private foundations. This prevents the wealthy from influencing elections.
Churches and Religious Affiliations
Churches and religious affiliations don’t have to formerly file for tax-exempt status or file reports to the IRS at all unless they choose to. They are automatically considered tax-exempt. Many of today’s churches have social service programs to benefit the homeless, hungry, and needy. This is one reason that churches may opt to register with the IRS as a non-profit organization. They would then need to file reports to the IRS. The benefit of this is that the church could then be able to apply for foundation funding and governmental grants because it would be registered as an official 501(c)(3).
Penalty for Breaking Non-Profit Organization Rules
Non-profit organizations that break the rules for lobbying or reporting can get a stiff penalty, including losing their tax-exempt status. Tax attorneys and tax consultants can help non-profit organizations stay up-to-date on new rules and laws that affect their organization and help them avoid penalties and public embarrassment.
Special Rules for Dissolving a Non-Profit Organization
Unlike for-profit corporations, non-profit organizations aren’t owned by the founders, members, or stakeholders. Since they aren’t owned by anyone, they cannot be sold to anyone, so the government had to design rules for a non-profit that wants to end its charter.
Non-profit organizations that want to dissolve have to pay off all of their debts and obligations. They can then distribute any remaining assets to another tax-exempt non-profit organization. For example, if there are two affiliate non-profit organizations in neighboring geographical areas and one of them lost so many members that they can’t conduct business, they can pay off their debts and turn over their assets to a stronger, neighboring affiliate of the same organization.
Some Final Thoughts on Rules for Non-Profit Organizations
The government did a lot of things right when setting up board and governance structures for non-profit organizations. The rules are designed to help each type of organization meet the needs of those they intend to serve without imposing hardships on them caused by excessive taxes. These tax advantages are what helps our communities to help themselves.
At the same time, non-profit governmental structures built in some allowances for non-profit entities to protect their structures from laws that would prevent them from carrying on their duties without seriously affecting the outcomes of political elections.
Overall, non-profit governance structures have a unique design that benefits organizations that work for the common good.