Basic Legal / Financial Boundaries for a Nonprofit

by on March 27, 2012

This is part 2 in a guest series of posts on Nonprofit financial management from Cindy Lauren of Lauren Associates – non profit consulting.
Part 1: The Basics: Why is there a NonProfit Tax Status?

Legal and Financial boundaries for non profit organizationsYour organization is doing good work, and has an important message to offer your community. But do-gooding is not enough for your local governments and tax boards: there are strict rules that must be followed:

  • Comply with your states’ corporate formalities: you must have a Board of Directors, you may have employees.
  • You need to keep and have accessible your article s of incorporation, by laws, exemption letter.
  • You must keep records of your board meetings: dates, times, attendance and decisions made actions taken.
  • You must invest the time to create and keep good financial records. Doing this will pay huge dividends. For this, get help if necessary. This is HUGE.

Some of the things you CAN’T do:

  • Cannot make monetary contributions to any political campaign– initiative, referendum or candidate.
  • Cannot distribute profits to directors, officers, or members -nonprofits are not allowed to offer financial benefit any directors, officers, or members. However, directors, officers or staff may receive a reasonable and fair salary and/or be entitled to expenses.
  • Cannot avoid paying taxes on profits unrelated to their mission – non-profit corporations are only exempt from income taxes on profits that are related to the non-profit corporation’s charitable activities. But if the organization if receives revenue from unrelated activity, it must pay income taxes on that profit. Don’t mess with the state franchise board, they can hold up your other activities.
  • Cannot receive substantial profits from unrelated activity - If you plan on having your non-profit corporation participate in activities not related to your firm’s purpose that could involve a substantial amount of time or generate substantial income, do contact an attorney. For instance, if your organization is seeking to cure cancer, you can’t run a car wash.
  • Cannot Keep the Money — you must distribute the assets of the organization to another tax-exempt group should your organization decide to dissolve. Unlike regular corporations, a non-profit corporation cannot simply be sold; this means that any property that is donated to a non-profit corporation cannot later be sold or distributed to a director or a member.

Good, basic, logical and common-sensible business behaviors will only help your organization function more smoothly, being aware of some of the pitfalls can keep you out of trouble. Rather than fixing something, arrrggggh, some of potholes can be avoided. A little due diligence never hurt anyone.

Cindy Lauren - Lauren Associates - non profit consultingCindy Lauren is the Principal at Lauren Associates – non profit consulting

As well as advising Executives and Boards on all aspects of nonprofit management, the firm specializes in developing fundraising solutions for all sizes of organizations.

Connect with Cindy: Twitter, Linkedin, Quora

Image Credit: dwispart5.pl by labanex on Flickr

{ 2 comments }

TaxMama June 19, 2013 at 2:41 pm

It depends on the organization, their charter, and their employee contracts, etc.

Organizations that can afford it, generally do provide those benefits.
In fact, due to the Affordable Care Act, ever more businesses and orgs are facing the need to cover their employees.

Generally, they only provide insurance coverage, not medical expense reimbursement, though.
How much are we talking about?
And do all employees get this, or only the executive director?

mndail June 19, 2013 at 2:11 pm

I am doing tax work for a non-profit 501c3 organization. It is customary or even appropriate for the organization to pay for the medical expenses of an employee?

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