Legal Needs of Nonprofits: Taxes & More

 In Funders


We are often asked about legal issues related to nonprofits. This post provides a brief overview of the legal needs of nonprofits as outlined in Rosenthal’s 2012 book titled, An Overview of Nonprofits’ Legal Needs, by addressing the following frequently asked questions.

How Does a Nonprofit Differ from a For-Profit?

In answer to the question, “What distinguishes a nonprofit organization from a for-profit organization?”, nonprofit organizations must adhere to specific laws. These include tax laws that permit nonprofits to be tax-exempt and to receive charitable donations. Additionally, nonprofit senior management may not benefit from proceeds generated through the nonprofit’s work. All profits must be funneled back into the nonprofit organization. They must also adhere to public reporting and disclosure laws. And finally, nonprofits do not face requirements on how they utilize volunteers. These requirements are not so for for-profit organizations.

What Happens if a Nonprofit Deviates from its Mission?

In answer to the question, “What happens if a nonprofit organization deviates from its mission? If it is used primarily for the benefit of select private individuals?”, there are several options for the nonprofit to consider. First, the mission, vision, and charter may be modified to better meet the new needs of the organization. As such, the IRS must be notified of the changed charter and mission. Alternatively, the nonprofit board of director and executive director may decide to meet with general counsel and review the existing charter and mission to make system changes to better meet the expressed purpose of the nonprofit organization.

What are the Fiduciary Responsibilities of Directors?

In answer to the question, “List and describe the three basic fiduciary duties of directors and officers under most states’ laws. What consequences result from breach of these duties?”, the three duties are as follows. 1) Duty of Care, which relates to the understanding and attentiveness of board members to the finances and operations of the nonprofit; 2) Duty of Loyalty, which pertains to the upholding of the tenets of the nonprofit and to avoid any conflicts of interest; and 3) Duty of Obedience, which requires boards of directors and senior management to be faithful to the nonprofit’s purpose and to the law. Consequences for breaching these duties include the leveraging of fines on the actors, potential loss of nonprofit status, and even possible jail time.

What are the Tax Benefits for Nonprofits?

In answer to the question, “List several kinds of taxes that tax-exempt organizations save on, and other kinds of benefits from being tax-exempt. From what kinds of taxes are, tax-exempt organizations not exempt?”, there are a number of taxes from which nonprofits are exempt. These include federal/state income taxes; state/municipal real estate taxes; state sales tax for goods sold; taxes on goods purchased from vendors; and federal/state unemployment taxes. Examples of taxes from which nonprofits are not exempt include income tax. For instance, if a nonprofit organization engages in activities that are unrelated to their basic purpose, they are required to pay income taxes on that money.

What Does Tax-Exempt Really Mean?

In answer to the question, “What is a tax-exempt organization? Are contributions to all tax-exempt organizations tax deductible to the donor?”, tax-exempt status means that an organization is exempt from paying federal corporate income tax on income generated from activities that are substantially related to the purposes for which the entity was organized. Charitable gifts to nonprofit organizations made by donors are exempt from income and inheritance taxes. That is, the donor does not pay these taxes on the gift bestowed on the nonprofit.

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