Willcox, Buyck & Williams, PA Blog

Thursday, October 12, 2017

How Should I Structure My Nonprofit?

Nonprofit corporations do some amazing work, and many are able to do it because of their nonprofit status, which comes with many benefits.  Nonprofits can be eligible for tax exemptions, and their supporters are able to make tax-deductible donations.  Creating and operating a nonprofit isn’t difficult, but there are many rules that must be followed to maintain your nonprofit status.  By using a business organization lawyer to help carefully craft your organization, you can avoid running afoul of the rules and causing trouble for yourself down the road.

What Structural Protective Measures Can I Build into My Corporation?

Most nonprofits are incorporated under Section 501(c)(3) of the Internal Revenue Code, which has list of requirements and prohibitions that must be followed to maintain tax-exempt status.  That list makes a good starting place when considering how to structure your nonprofit, including the following points:
  • No Private Benefits
    The most obvious requirement for nonprofits is that they must be not for profit.  That means the organization’s “insiders,” such as its officers or members of its board of directors, are not allowed to take personal benefits from the organization (although officers are allowed to take reasonable salaries).  With that in mind, there are a variety of structural protections you can give your nonprofit to protect its status:
    1. Limit Executive Salaries
      A nonprofit’s officers and staff are allowed to be paid reasonable compensation for their services.  Treasury Regulations dictate that compensation is reasonable if the organizations board of directors (or other governing body) approved it ahead of time after considering appropriate information, and then documents the reasons for their decision.  By requiring this to happen before any compensation is paid, you can protect your nonprofit from violating this rule. 
    2. Preclude Board Salaries
      Most nonprofit boards of directors are composed of members who volunteer their time.  By requiring that your directors receive no compensation for their services as directors, you can avoid the question of private benefits altogether.
    3. Have Public Books and Frequent Audits
      Finally, you can avoid many questions through transparency.  The more information you make public about what assets come into your organization and where those assets go, the less likely you are to be accused of improprieties.  Requiring your nonprofit’s treasurer or other chief financial officer to conduct and publish frequent audits can protect against potential future problems.
  • No “Non-Exempt Activities”
    Tax-exempt status under Section 501(c)(3) is given on the condition that the organization only conduct operations for approved purposes, such as scientific research or charity.  You can ensure your nonprofit remains in-bounds by placing responsibility with its president or chief executive officer to keep the organization’s activities within the limits of its mission.  You can build in further protections through requirements such as having the board of directors approve any new projects and having the nonprofit’s secretary keep an explanation of how each project furthers the mission in the board’s minutes.
  • No Political Campaigning
    The last major prohibition for nonprofits under Section 501(c)(3) precludes them from attempting to influence legislation or political campaigns.  Clearly that means your articles of incorporation and bylaws should explicitly forbid such activities, but there are other structural protections you can create.  For example, your bylaws can require the chief executive officer and/or the board of directors to approve any printed materials prior to publication.  And in the age of social media, it’s very important to have policies declaring who may post social media messages in the nonprofit’s name, the topics those messages may address, etc.  

 If you’re thinking of starting a nonprofit, you probably have questions.  Our firm’s attorneys have helped many of our clients’ organizations incorporate and seek nonprofit status, and would be happy to guide you through the process as well.  If you would like to speak with an attorney about structuring your nonprofit, contact Willcox, Buyck & Williams, P.A. today for a consultation.


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