Learn how to protect your tax-exempt status while
running a nonprofit corporation.
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.
The 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 record keeping 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.
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.
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. - 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. - 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.
