Emily Robertson is the founder of Robertson Law Office, LLC, through which she helps nonprofits and tax-exempt organizations with tax and regulatory compliance, governance, and general business issues. She is a board member at the Charities Review Council, adjunct faculty for Hamline University in its Masters in Nonprofit Management program, and is a frequent speaker on governance, tax, and other issues related to nonprofit organizations.
In many ways, nonprofit organizations are like any other business. For example, they may or may not have employees, they have intellectual property, they sign contracts, they rent or purchase property, they are subject to state and local licensing requirements, and they can sue and be sued. However, there are areas that are more unique and that frequently cause problems for nonprofit organizations, and for which there may not be a corollary in the for-profit arena. Below is a quick introduction to some of the core issues with which directors and advisors of nonprofits should be familiar.
Nonprofit organizations in Minnesota are generally created and governed under Minn. Stat. 317A, the Minnesota Nonprofit Corporations Act. Unincorporated associations are common, but Minnesota does not have a statute that formally recognizes them. Nonprofit LLCs are also described in statute, but they are less common and governing members must be nonprofit corporations.
Nonprofits are encouraged to adopt various policies governing their activities in order to assist the organization’s leaders in operating within the boundaries of the law and best practices. Often recommended policies cover topics such as: conflicts of interest, whistleblowers, document retention and destruction, gift acceptance, travel and expense reimbursement, and executive compensation.
Nonprofit directors and officers have the fiduciary duties of care, obedience, and loyalty to a nonprofit corporation. Fiduciary duties are not unique to nonprofits, but they are often overlooked and may be enforced by the Minnesota Attorney General.
Nonprofit organizations, primarily charitable organizations, are subject to a variety of laws affecting their fundraising activities. Organizations raising money for charitable purposes are required to register with the state charity official in 39 states and the District of Columbia. If an organization raises money through gaming and raffles, there are strict rules governing those activities (and they can only be conducted by certain types of nonprofit organizations). Nonprofits must comply with restrictions placed upon donated funds, must handle acknowledgments properly under IRS rules, and must be cautious when engaging in charitable promotions, product placement, and other similar interactions with for-profit businesses.
Public Charity v. Private Foundation
Section 501(c)(3) organizations come in two flavors: public charities and private foundations. Public charities generally include organizations that are seen to be responsive to the general public because they get their funds from a wide variety of places. Private foundations are generally family foundations or corporate foundations. It is important to understand which type of 501(c)(3) your organization is, in particular if it is a private foundation. Private foundations are subject to a series of unforgiving excise taxes that operate in often unintuitive ways, and the individuals governing such foundations should become familiar with the issues.
Nonprofit organizations are not completely exempt from taxes. If they sell services or products to generate revenue, that revenue may be subject to the Unrelated Business Income Tax (UBIT). UBIT is a tax on a trade or business that is regularly carried on and is not substantially related to the organization’s exempt purposes (other than through the production of income used to carry on its activities). The existence of UBIT may require an additional tax form--the Form 990-T (and corresponding state tax form)--and too much UBIT may jeopardize tax-exempt status.
In addition to UBIT, nonprofits may have to pay sales tax and property tax, or may have to collect sales tax for certain activities unless that activity falls under one of the exceptions. They are also still generally liable for payroll taxes and may be liable for other state or local fees (taxes) that are imposed.
Private Inurement and Private Benefit
Most tax-exempt organizations are prohibited from allowing private inurement. The prohibition is intended to prevent assets from being diverted by insiders of the organization, and it is absolute (i.e., there is no de minimis allowable amount). Inurement can arise from direct transactions with the organization, such as non-fair market value transactions between the organization and the insider that results in excessive monetary benefits flowing to the insider. Or inurement can arise indirectly, such as when preference is given to certain insiders, rather than unrelated vendors, purchasers, etc. Inurement may exist because a certain type of transaction or arrangement is in place, or it could exist because of all of the facts and circumstances surrounding an organization’s operations. The prohibition on private inurement is enforced through the intermediate sanctions excise tax rules, which allow the IRS to impose an excise tax on insiders who improperly benefit from a transaction with certain tax exempt entities.
The concept of private benefit extends beyond insiders of the organization to individuals or entities outside of the organization. The prohibition on private benefit is not absolute; there can be private benefit so long as it is only incidental to achieving the organization’s exempt purposes. Private benefit may exist if the number of people eligible for benefits is too small, e.g., a genealogical society for a particular name. It could also come up because the benefit is too significant, e.g., management consulting for small businesses.
Limitations on Lobbying and Political Activities
Nonprofits have different limitations on their lobbying and political activities, depending on their tax exempt status. For 501(c)(3)s, there is an absolute limit on political activities (which is broader than just a prohibition on saying “vote for” or “vote against”), but other common types of tax-exempt organizations can engage to some degree in partisan activities. Similarly, 501(c)(3) organizations can generally engage in limited amounts of lobbying, while other common types of tax exempt organizations can generally engage in unlimited amounts of lobbying. The rules here are nuanced, and it is important to remember that these rules are quite separate from campaign finance rules (which may also apply).
The Form 990
The Form 990-series returns are the annual information returns filed with the IRS. Which return is filed generally depends on an organization’s annual gross revenues. There are exceptions to these filing requirements (e.g., churches can, but are not required to file a 990), as well as an alternate form for all private foundations. Like any tax form, it is important to remember to file the 990 because if an organization fails to file for three years in a row, its tax exemption will be automatically revoked. It is also important to review the filing before it is made. The 990 is filled with information relevant to the various stakeholders of an organization, like donors, volunteers, and potential employees, as well as to enterprising reporters looking to pull up some dirt. An organization’s 990 is widely available via www.guidestar.org.
This is just a cursory look at the unique legal issues facing nonprofits. Because of their tax-exempt status, nonprofits are subject to particular scrutiny and an expectation of transparency. A solid understanding of the rules and regulations governing nonprofits empowers these important organizations to fulfill their missions with integrity and accountability.