Thou Shalt Not
- Have any shareholders. A Non Profit Corporation is different from a For Profit Corporation because it has NO shareholders to whom dividends accrue. So, even if a Non Profit becomes well enough known that wealthy businesspersons want to invest as shareholders, they may not do so.
- Expend income on anything intended to advance any purpose other than your tax-exempt purpose. For example, you may rent a part of your building, throw a fundraiser, or host a movie night. However, these profits must ultimately be used for advancing your non-profit purpose(s).
- Contribute to political campaign(s). In addition to removing 501(c)(3) status, the IRS can require payment of special taxes when a 501(c)(3) Non Profit contributes to any political campaign(s).
- Lobby in order to affect legislation in any “substantial” way. It is not immediately clear what affecting legislation in a “substantial” way means. However, the IRS helps to clarify by setting a limit on the amount a Non Profit can lobby under the “expenditure test” to 20 percent of the first $500,000 of expenditures, 15 percent of the next $500,000 of expenditures, and so on up to one million in contributions. If a Non Profit intends on affecting legislation, it first must make an election under Form 5768.
- Make substantial profits from, or contribute substantial time on, “unrelated activities”. For example, while a children’s classics reading group, set up for the purpose of advancing literary and educational pursuits, may host a grunge rock concert, it may not make “substantial” profits on doing so. Furthermore, it may not commit substantial time on doing so. What makes a percentage of income or time substantial is not immediately clear; however, not more than 10 percent of income from, or time spent on, unrelated activities relative to income from, or time on, related activities is a good rule of thumb.
Thou Shalt
- Keep good records. Record-keeping is essential, in order to properly file annual returns with the IRS (namely the 990, addressed below). Moreover, proper records are essential to defense if a member, officer, director, or client accuses a Non Profit of impropriety. These records are also essential if a Non Profit suspects an officer, director, or member of impropriety.
- File a 990 informational return on time. Failure to timely file a 990 informational return to the IRS can lead to automatic revocation of a Non Profit’s tax exempt status. Access the 990 form here. (Note that this will not apply if you are a private foundation, in which case you would be required to file a 990-PF).
- Act in accordance with Company Bylaws. The Bylaws are the laws that govern a company. To stray from those laws means potential lawsuit, especially for any members, officers, or directors harmed by such violation(s).
- Conduct proper board meetings. A Non Profit should have a board meeting at least annually to conduct affairs and monitor compliance. More regular meetings are highly encouraged. Important to note, board meetings are typically addressed in the Company Bylaws.
- Make a conflict of interest policy. All officers and directors should sign a conflict of interest policy. Then, if an officer or director acts inconsistent with the policy, there will be a paper trail documenting their consent to the conflict of interest policy.
- Not allow a paid officer to also be a director. A Non Profit should prevent any possible conflicts of interest, and, there is little that would more clearly mean a conflict of interest than a director voting on his or her compensation. If a paid officer MUST also be a director, that officer should recuse him or herself from any vote involving him or her.
- Not pay a director, who is also an officer or member. For the same reasons as above, paying a director who has another interest in the company is likely to lead to a conflict of interest.
- Pay taxes on unrelated activities over $1,000.A Non Profit must pay taxes on income from unrelated activities exceeding $1,000. However, unrelated activities are not required to pay taxes over $1,000 when:
- All work for the activity is done by volunteers.
- The activity is primarily for the benefit of officers, members/employees, or clients/students/patients (e.g. a coffee shop for students and employees of a school).
- The activity is the sale of merchandise substantially received by donation (e.g. second-hand store).
- the activity is the exchange of mailing list(s) of donors or members.
- the activity is the distribution of a souvenir for donation (e.g. a bumper sticker or hat).
Thou May
- Pay members, officers, and directors. Profits may accrue to members, officers, and directors who earn them through salaries or expense reimbursement.
- Pay independent contractors. Profits may accrue to independent contractors at the rate of reasonable pay for services rendered.
- Build grassroots campaign(s). It is typically encouraged for a Non Profit to build a strong grassroots campaign.
- Promote the company. As long as the information is truthful, it is strongly recommended that a Non Profit advertise. Places in which advertisement is free and highly encouraged include on guidestar.org and facebook.com (with a fan page).
This article contains general legal information and does not contain legal advice. Rocket Lawyer is not a law firm or a substitute for an attorney or law firm. The law is complex and changes often. For legal advice, please ask a lawyer.
