A nonprofit is generally governed by four sets of rules:
Of course a nonprofit is also governed by all the rules that may apply to whatever business activities it undertakes, the requirements of the programs it operates, and the contracts it enters into with landlords, funders, vendors and anyone else who may be involved. But there's usually nothing special about being a nonprofit in these elements of the organization's work. Sometimes, of course, outsiders will insist on treating a nonprofit differently just because it is a nonprofit. If that happens, it should be the subject of discussion; in general, there are no requirements about these sorts of business operations that apply differently to nonprofits.
Any specific requirements for Articles of Incorporation and other corporate charter documents will be found in the nonprofit corporation statute of the state of incorporation. Generally these requirements are pretty limited and place most of the responsibility for defining what the corporation will do, and how it will do it, on the people who draft each organization's documents. Not surprisingly, nonprofit corporation statutes usually prohibit the distribution of profits to owners, stockholders, or anyone else. (Payments for services rendered, and for anything used in the work, are of course allowed.) "Profit" is the surplus an organization has at the end of an accounting period. There is no prohibition on nonprofit corporations having profits. What can't happen is paying any part of such profits to owners or anyone else.
Every nonprofit's Articles of Incorporation will have to state the purposes for which the corporation is formed. It's common for the Articles to list some specific purposes and then to add a phrase like "and for any lawful purpose." This part of the drafting needs to be done with care—the advice of a knowledgeable attorney is usually very helpful—to be sure the corporation will qualify as exempt from federal corporate income taxes under the Internal Revenue Code. There's more about this topic below in the federal tax exemption section.
Any organization that wants to qualify for federal tax exemption will also need to take care in drafting the section of its Articles that addresses the question of what happens when or if it ceases operations. The basic point is that any assets that remain (money, furniture, buildings, etc.) when the organization is no longer operating for its "exempt purposes" must be distributed to another tax-exempt organization with similar purposes. The IRS will not recognize an organization that doesn't undertake to follow that rule, and any other disposition of assets at the time of dissolution is calling out for trouble with state or federal authorities. (See the article on Dissolution for more about this issue.)
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There may well be quirks of state law that have big consequences for organizations that don't pay attention when drafting charter documents. It can't be said too often that getting help from an attorney who is familiar with the local rules is important. Only with such advice can an organization be able pursue its mission most effectively, enjoy whatever privileges and exemptions are available, and avoid penalties for mistakes that could easily have been avoided.
Once organized, there are principles that affect the way the board of directors conducts the affairs of a nonprofit. These principles—often summarized as the "duty of care" and the "duty of loyalty"—give meaning to the idea that a nonprofit must be organized and operated exclusively for its stated purposes; those involved in its management and activities must not permit its resources to be diverted into undue benefits to anyone or to be wasted by inattention or sloppy management. Most of the time, responsibility for observing these standards falls to the members of the board of directors themselves. Only rarely will anyone outside the organization intervene in its affairs. Under most circumstances only the Attorney General of a state or a court of law can overrule the decisions of a board. (Those "duties" are also discussed in the section on Board Basics.)
A nonprofit which operates in more than one state will need to pay attention to the laws that affect its work in each jurisdiction. In most cases, those will affect the business operations of the organization, not its governance. Here too, though, there may be quirks that call out for attention and care needs to be taken – the advice to consult with a knowledgeable attorney applies again.
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One area of state law that may affect nonprofits even when they operate in only one state are the rules about charitable solicitations. Any organization with an active fundraising program that crosses state lines will very likely need to understand and comply with the rules about fundraising in each state where any requests for donations are being made. (Typically, charitable solicitations rules apply to the requests – it doesn't matter whether the asks are successful or not.)
There is an extensive summary of these charitable solicitations rules, and a summary of what each state requires, at the Multistate Filing website.
There is a list of the state officials who oversee charitable solicitation at the website of the National Association of State Charities Officials. Some yeas ago, NASCO adopted the Charleston Principles to outline general policies affecting fundraising on the Internet that reaches potential donors in multiple states.
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There are many kinds of exemption from federal corporate income taxes. The IRS offers an explanation on several webpages linked from http://www.irs.gov/charities/content/0,,id=96931,00.html
The most familiar of these types is exemption under section 501(c)(3) of the Internal Revenue Code. The IRS grants recognition of exemption under this section to entities that are "organized and operated exclusively for charitable purposes." In general, it is only to this sort of exempt organization that tax deductible gifts can be made by individuals, and it is only to this sort of organization that charitable foundations can make grants. (The word "entities" is used because not all 501(c)(3)s are formed as corporations.) There's more about charitable nonprofits (501(c)(3)s) below.
Other activities and purposes may qualify for tax-exempt status without the added benefit of being able to receive tax-deductible donations. Social clubs, business leagues, veterans associations, labor unions, political parties, advocacy organizations, and several other sorts of organizations may qualify. Special rules about permissible purposes and activities apply in each case; research on the IRS website (for example in the Instructions for Form 1024 (used to apply for these sorts of exemptions) is a good place to start investigating whether any of these possibilities would apply in a specific case.
Charitable nonprofits are divided into two broad categories by the Internal Revenue Code. "Private Foundations" is the category for organizations (primarily grant makers) that are supported by investment earnings or a small group of large donors (often a family or a corporation). The others are known as "Public Charities" – groups that are supported by program service income, grants and contracts from governments or foundations, and larger numbers of individual donors. Private foundations pay an excise tax on their investment earnings and are subject to stricter rules about their operations than public charities.
There are two things that public charities simply must not do:
"Inurement" is the technical term that's often used to describe a situation in which an insider simply takes money or other assets from the group without any justification. "Excessive compensation" is the phrase that's used to describe pay to an employee that is above the going market for the job or for deals in which a charity pays too much for goods or services it receives. The IRS can impose significant penalties or organizations where undue benefit occurs, including recovering the amount of the excess from the recipient, fining officers of the organization who allowed the undue benefit to occur, and imposing further penalties or taxes on everyone concerned. (There's a lot more information about this topic in the Wikipedia article on Intermediate Sanctions). In extreme cases, the tax-exempt status of the organization may be revoked as well.
There is one thing that public charities (but not private foundations) can do some, but not a lot:
The limits on lobbying are defined in terms of permitted levels of expenditures. The general rule is that "no substantial part" of an organizations expenditures can go to lobbying. Because that standard is not very precise, the Internal Revenue Code allows organizations to choose to operate under a more definite standard, described in Section 501(h). The IRS provides a detailed explanation of how to "elect" the 501(h) standard and the consequences of doing so on a webpage at http://www.irs.gov/charities/article/0,,id=163394,00.html.
It's important to note that under either standard, most organizations are unlikely to run into the upper limit of the amount of permitted lobbying. It's also important to note that "lobbying" is defined pretty narrowly in this context as working to secure passage—or defeat—of specific legislation. "Advocacy" for general public policy outcomes (like lower taxes or better public education) is not lobbying and there is no limit on public charities' freedom to speak out on issues in that way.
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