From choosing your board to raising money, the ins and outs of establishing your non-profit organization can be multifaceted, overlapping, and convoluted. Taking a proactive stance and having an attorney by your side to safeguard you from legal risks and inefficiencies is key. Here are some of the most pressing legal concerns for non-profit organizations:
Selecting a business structure for your non-profit or charity is one of the most challenging decisions to make; the different types of entities will determine how you can raise funds and how you will be taxed. Either way, non-profits must file bylaws, a mission statement, and articles of incorporation in the state in order to enter into business dealings, form contracts, and own property. Secondly, there are many different types of non-profit organizations: 501(c)(1)’s, 501(c)(2)’s, 501(c)(3)’s, and countless others. A lawyer can help you assess which type of business entity best suits your organization based on taxation, funding, IRS requirements, and the needs of the community that you intend to serve.
Public Charities versus Private Foundations
The methods by which you are legally allowed to raise and handle money is dependent on whether you establish your non-profit as a public charity or a private foundation. Whereas public charities typically have a large base of donors, private foundations are generally controlled by an individual or a family, and obtain most of their income from a select few individuals. Because they are essentially monopolized by a small group of people, tax laws are less generous and much more stringent for private foundations. Public charities, on the other hand, are granted higher donor tax-deductible giving limits.
Board of Directors
Non-profit companies are typically governed by a board of directors, all of whom must act with duty of care, duty of loyalty, and duty of obedience. Individuals cannot possess any conflicts of interest, and in the event that a board member is compensated, he or she should be knowledgeable about intermediate sanctions policies and excise taxes. Although the board works as a collective unit -- decisions are made by the group rather than by a single person, and no one has exclusive authority over the organization -- each member is accountable for his or her own actions. Members typically sign annual contracts, and often consult a lawyer to create agreements designating the legal responsibilities of each individual in order to avoid potential disputes.
- Whistleblowing: From excessive compensation, to self-dealing, to ineffective governance, an individual board member’s unethical or unlawful misconduct can jeopardize the future of the entire organization. Historically, whistleblowers have played a critical role in keeping corruption in check, but had no specific legal recourse in the event of retaliation. Since the establishment of the Sarbanes-Oxley Act in 2002, the federal government has taken steps to offer greater protection to whistleblowers, in effect enabling employees to feel more comfortable reporting abuses of power.
Raising money is challenging in its own right, but non-profits must jump through more hoops than for-profit companies in order to maintain their tax-exempt status while simultaneously obtaining donations. Be aware of the laws surrounding funding early on, and talk to a lawyer in order to avoid potential legal entanglements and financial losses.
- Fundraising: The majority of non-profits primarily rely on outside donations, yet with these contributions come a variety of legal issues. Several states require non-profit organizations to register in order to request and obtain donations from state residents. The IRS has recently issued a revision of Form 990, which forces non-profits to include information about state registration; failure to do so will result in government scrutiny, as well as state fines and penalties. Dealing with donors -- or more specifically, donor tax deductions -- presents additional challenges. Contact a lawyer to help you negotiate with your donors and write a gift-acceptance policy.
- Taxation: Typically, non-profit organizations are tax exempt, but acquiring and maintaining this status requires constant effort, and in order to obtain a tax exempt status on your property, you have to attend a public hearing. Furthermore, non-profits can be taxed if they make money through an activity that is not substantially related to the organization.
The rules regarding employment for non-profit organizations -- especially the laws surrounding the differences between hired employees and volunteers – are complex. A lack of awareness of employment laws for non-profits can easily get organizations into trouble.
- Employees: The standard laws specified by the Fair Labor Standards Act apply to non-profit organizations, yet payment for non-profit employees is more elaborate, as certain rules that do not apply to for-profit organizations are legally mandated for non-profits. In the effort to lessen taxes, some organizations employ illegal payment practices that later result in tangles with the IRS.
- Volunteers: Non-profit organizations must abide by a variety of rules regarding what they can and cannot ask their volunteers to do, and who qualifies as a volunteer. For example, if an organization’s paid employee works as a volunteer when they are technically off the clock, non-profits can be end up paying expensive wage and hour claims. Employees are entitled to compensation and overtime wages should they choose to work as a volunteer in their spare time. Organizations must be particularly cognizant of and cautious about assigning responsibilities to volunteers. In most states, volunteers are not automatically covered by workers’ compensation, and if they are injured on the job, your organization can be held responsible. Additionally, organizations can accidentally create taxable income for their volunteers if they provide reimbursements for out-of-pocket or travel expenses. Keep track of your expenditures to avoid these pitfalls, and contact a lawyer to discussthe protocols and procedures that come with hiring volunteers.
- Liability: Not unlike for-profit companies, non-profits are liable for the actions of their workers. In order to minimize your liability, make sure that all of your staff members -- including your volunteers -- are trained, licensed, certified, or authorized to carry out their respective tasks. It is wise to create employee and volunteer agreements or handbooks with the help of an attorney to establish the codes of conduct and policies of your organization, thus ultimately helping you avoid future litigation.
A passion for your cause alone will not sustain your non-profit organization. Hire a lawyer through Priori Legal to help you with the legal logistics while you focus on helping others.
Special thanks to Ella Gibson for her research and editorial contributions to this article.