Running Your Nonprofit Corporation 12

Nonprofit corporations are organized very much like regular corporations; however, running a nonprofit corporation means complying with a few special rules. Here’s what you need to know.

Organizational structure of nonprofit corporations
Like any corporation, a nonprofit has a board of directors to make important policy decisions, officers (president, treasurer and secretary) to oversee and manage the day-to-day operations of the organization, and possibly employees to do the work.

Unlike regular corporations, however, nonprofit corporations do not have shareholders or owners. (Nonprofits are owned by no one person or group of persons and cannot be sold. In the event the directors of a nonprofit want to dissolve the corporation, they must distribute all of its assets to another nonprofit corporation.)

Although a nonprofit corporation can choose to have members who have voting rights, many nonprofit corporations decide not to adopt a membership structure and, in the interests of efficiency, leave the decision making up to the directors. If a nonprofit does opt for a membership structure, the members participate in major corporate decisions. Specifically, the members have the exclusive right to elect directors, amend articles and bylaws and vote on a merger or dissolution of the corporation.

Corporate records
All nonprofit corporations must keep good corporate records. These records help to preserve directors’ limited personal liability and protect your organization’s tax-exempt status. Good recordkeeping means preparing minutes of directors’ and members’ meetings and documenting important corporate decisions.

You’ll want to organize these materials in a corporate records book, which should also contain a copy of your articles of incorporation, bylaws and tax exemption determination letters from the IRS and your state tax agency, if applicable.

Keeping financial records
In addition to keeping records of important decisions, your nonprofit corporation must record any financial transactions in a double-entry bookkeeping system and keep other financial records in order to file an annual corporate tax return. For more, see Earning income as a nonprofit corporation.

Limits on nonprofit activities
In addition to keeping corporate records, nonprofit corporations must follow some additional rules and abide by certain prohibitions in order to retain their tax-exempt status:

  • Nonprofit corporations cannot contribute money to political campaigns. Nonprofit corporations with a 501(c)(3) tax exemption (the most common) are not allowed to participate in political campaigns or contribute money to them. If they do, the IRS can revoke their nonprofit status, and can assess a special excise tax against the organization and its managers.
  • Nonprofit corporations can engage in only limited lobbying activities. Tax-exempt 501(c)(3) nonprofits that influence legislation to any “substantial degree” face the loss of their nonprofit status. However, for tax-exempt nonprofits that want to participate in lobbying, the IRS simply sets a limit on the money they can spend on political activities.
  • Nonprofit corporations must not distribute profits to members, officers or directors. A nonprofit corporation cannot be organized to financially benefit its members, officers or directors. However, reasonable salaries and expense reimbursements are permitted.
  • Nonprofit corporations must pay taxes on income from “unrelated activities.” Sometimes, a nonprofit organization will earn income through activities that aren’t directly related to its nonprofit purpose; for example, the directors of an organization dedicated to preserving open space may collect a consulting fee for advising other nonprofits. The IRS requires nonprofits to pay corporate income taxes on such unrelated income over $1,000, whether or not the group uses that money to fund its tax-exempt activities. For more information on unrelated activities, see Earning income as a nonprofit corporation.
  • Nonprofit corporations cannot make substantial profits from unrelated activities. If a nonprofit spends too much time on unrelated activities, or if the unrelated activities generate “substantial” income, the group’s nonprofit status may be jeopardized. Nonprofit corporations that plan to engage in activities that aren’t related to their tax-exempt purpose should consult a lawyer or tax expert with experience in nonprofit law. For more information on unrelated activities, see Earning income as a nonprofit corporation.
  • When a nonprofit corporation dissolves, its assets must be distributed to another tax-exempt group. Since tax-exempt organizations and their assets cannot be owned, they can never be sold. If the directors of a nonprofit decide to disband the organization, they must donate its assets to another nonprofit group. This also means that once property goes into a nonprofit corporation, it cannot later be distributed to a member or director.

Copyright © Nolo

About the Author Nolo's mission is to make the legal system work for everyone -- not just lawyers. What we do: To help people handle their own everyday legal matters -- or learn enough about them to make working with a lawyer a more satisfying experience -- we publish reliable, plain-English books, software, forms and this website. Some… Read more »

RATE THIS ARTICLE 1 Star2 Stars3 Stars4 Stars5 Stars
Loading...Loading...

How LivePlan makes your business more successful

LivePlan: Online Business Planning Software

If you're writing a business plan, you're in luck. Online business planning software makes it easier than ever before to put together a business plan for your business.

As you'll see in a moment, LivePlan is more than just business plan software, though. It's a knowledgable guide combined with a professional designer coupled with a financial wizard. It'll help you get over the three most common business hurdles with ease.

Let's take a look at those common hurdles, and see how producing a top-notch business plan sets your business up for success.

Click to continue
  • http://www.extremeresponse.org Michael Bishop

    We are a non-profit humanitarian aid organization. We send short-term workers (1 month to 2 years) to foreign countries to work. Can we pay them per diem and not have to do W2 or 1099 for wages? How long can we pay a person per diem?

  • John Molster

    Can an already established non-profit sports organization get another non-profit number status / tax i.d. under it. Or do they have to break away and establish a new non-profit corporation

    Thanks !

  • Flewellen

    We want to open a Christian fellowship home, ran on donations. How do you get a 501(c)(3)numbers for tax donation purposes.
    Thank you for any information provided.

  • nfpmom

    Start with the IRS website –
    http://www.irs.gov/pub/irs-pdf/p4220.pdf
    http://www.irs.gov/charities/charitable/index.html
    http://www.irs.gov/pub/irs-pdf/p1828.pdf

    Then do a lot of “look before you leap”. Read as much as you can. Understand what you are going to do BEFORE you do it. Find another non profit which provides similar services and talk to them. (always better to learn from other people’s mistakes!) Find an attorney and/or cpa who has set up similar organizations. Don’t forget insurance! Make sure you have people who have some business savvy who are involved in the day to day operations. It’s great to have a noble purpose, but remember that if you fail on the business end of things, good intentions will not keep you afloat. Don’t mean to be a stick in the mud, but too many charities run into problems because they are so intent on their “mission”, that they forget that first and foremost, they are running a business.

  • Pingback: How to Start a New Business as a Nonprofit Corporation - Business Plan Help & Small Business Articles - Bplans.com

  • Angela Thompson

    I have a friend in MN who is in the early stages of starting a Non Profit and has already Incorporated, They also will be applying for 501(c)(3) status. Temporarily the business will be run out of the home until they aquire enough funds to move into a facility. The organization is religious based. My question is related to donations. Once donations come in can those funds be used to offset some of the expenses of the home. For example, in a home based business you can allocate a certain percentage towards non direct expenses such as utilities, mortgage, etc.

  • Bob 75838

    Can one 501 (c) 3 make a gift to a nonprofit group that does not have official IRS status if they have similar goals and purpose?

    • Mike

      Yes

  • Micah

    If I have reason to believe that a non profit organization is embezzling money, who would I contact? The IRS?

  • http://www.mbaapplicants.com mba student

    You can see the stats of different charities on this site:

    http://www.charitynavigator.org/index.cfm?bay=search.summary&orgid=4509

    Susan Koman does $300 mil revenue!

  • Pingback: Business non profit

  • Ambriel

    If a paid dues member with voting rights submits a proposal that is implemented by the Association. Should the member receive credit for the idea?

  • Philip

    If a non profit group disband were do the funds go if some member would like there money back or others would rather donate

    • Mike

      It has to go to another non profit