Running a nonprofit organization is a wonderful way to make a difference in your community. But it also comes with a lot of legal stuff to think about. If you're starting a new nonprofit or running an existing one, there are some key legal points you need to know.
Don't worry, I'm here to break it all down for you in simple, easy-to-understand language. I'll go through the different legal structures you can choose for your nonprofit, how to get tax-exempt status, rules around governance and compliance, contracts and agreements, insurance coverage, and more. By the end of this post, you'll feel confident navigating the legal side of things.
So let's dive in and explore the legal considerations for nonprofit organizations!
Choosing the Right Legal Structure
One of the first big decisions you'll make is what legal structure to set up your nonprofit as. There are a few different options, and the one you choose will impact things like taxes, liability, and how the organization is run.
Unincorporated Nonprofit Association
This is the simplest and most informal way to structure a nonprofit. Basically, it's just a group of people who come together for a common charitable purpose. There's no need to register with the state or file any official paperwork.
The upside is that it's easy and low-cost to set up. The downside is that an unincorporated nonprofit doesn't have much legal protection. The members can be personally liable for the group's debts and actions.
For example, let's say your unincorporated nonprofit puts on a community event, and someone gets hurt and sues. The injured person could potentially go after the individual members of your group, not just the nonprofit itself.
Nonprofit Corporation
This is the most common and recommended legal structure for nonprofits. To become a nonprofit corporation, you have to register with the state and get official incorporation documents.
Nonprofit corporations are their own legal entities, separate from the individual members and board of directors. This provides important liability protection - the nonprofit's debts and obligations are its own, not the individual people's.
Nonprofit corps also have more formal governance, like bylaws, annual meetings, and a board of directors. This helps keep things running smoothly and responsibly.
For instance, let's say you start an animal shelter nonprofit corporation. If someone gets hurt at the shelter, they would sue the nonprofit corporation, not the individual volunteers or staff.
Charitable Trust
This is a less common nonprofit structure, but it can be useful in certain situations. A charitable trust is a legal arrangement where a trustee holds and manages property for a charitable purpose.
Charitable trusts are often used when a nonprofit wants to hold and manage a specific asset, like real estate or investments. The trust framework provides a clear legal structure for how those assets must be used and maintained.
For example, imagine a wealthy donor wants to leave their family's historic mansion to a nonprofit to be used as a community center. Setting it up as a charitable trust ensures the mansion is properly taken care of and used for the intended purpose.
No matter which legal route you choose, it's really important to work with a nonprofit lawyer. They can help you understand the pros and cons of each option and make sure you set everything up correctly from the start.
Obtaining Tax-Exempt Status
One of the biggest perks of being a nonprofit is that you can apply to be tax-exempt with the IRS. This means you don't have to pay federal income taxes on the organization's revenue and donations.
To get tax-exempt status, you have to apply to the IRS and show that you meet the requirements for a specific tax-exempt category. The most common one is a 501(c)(3) public charity.
The application process can be pretty complex, so it's highly recommended to have a nonprofit lawyer guide you through it. They can help ensure you submit all the right paperwork and documentation to maximize your chances of getting approved.
For example, if you're starting an animal rescue nonprofit, your lawyer can help you figure out the best tax-exempt category to apply for and make sure your organizing documents, policies, and activities all align with the IRS rules.
Once you have tax-exempt status, you'll need to maintain it by filing annual tax returns, keeping detailed records, and making sure your nonprofit's work continues to match your exempt purpose. Your lawyer can provide ongoing support to keep you compliant.
Governance and Compliance
Nonprofits have to follow all sorts of state and federal laws when it comes to how the organization is run and operated. Here are some of the key legal considerations around governance and compliance:
Bylaws and Policies
Every nonprofit should have a set of bylaws that outline the organization's purpose, structure, and rules for governance. This includes things like the size and makeup of the board of directors, officer roles and responsibilities, and procedures for meetings and decision-making.
In addition to bylaws, nonprofits also need clear written policies covering areas like financial management, conflicts of interest, whistleblower protection, and document retention.
For example, the bylaws might say the board has to have at least 5 members, meet quarterly, and make decisions by majority vote. The financial policies could detail the approval process for spending and requirements for regular audits.
Board of Directors
The nonprofit's board of directors plays a critical role in providing oversight, setting strategy, and ensuring legal compliance. Board members have important legal duties, like the duty of care (making informed decisions), duty of loyalty (avoiding conflicts), and duty of obedience (following the organization's mission).
Nonprofits need to carefully select qualified board members, train them on their responsibilities, and make sure they understand what's expected of them. Failing to do this can expose the organization to legal liability.
Let's say a board member uses their position to steer a lucrative contract to their own private business. That would be a clear breach of their duty of loyalty, and the nonprofit could get sued as a result.
Fundraising and Solicitation
Nonprofits that fundraise, whether from the public or private donors, have to follow a bunch of state and federal laws around things like registration, truth-in-fundraising, and transparency. Violating these rules can lead to hefty fines and penalties.
Your lawyer can help make sure all your fundraising activities are above-board and compliant. For example, if your nonprofit solicits donations online, you'd need to register as a charity in any state where you're actively fundraising.
Employment and Labor Laws
If your nonprofit has employees, you have to follow all the relevant federal and state employment laws. This includes things like minimum wage, overtime, anti-discrimination, and workplace safety regulations.
You also need to be careful about how you classify volunteers, interns, and independent contractors to make sure you're following labor laws. Misclassifying workers can get you into legal trouble.
For instance, let's say you hire some part-time admin assistants but don't pay them overtime when they work more than 40 hours per week. That would be against the law, and you could end up owing back wages and penalties.
Keeping on top of all these governance and compliance requirements can be really challenging for nonprofits. That's why it's so important to have a nonprofit lawyer in your corner. They can help you set up the right policies and procedures from the start, train your board and staff, and make sure you stay compliant over time.
Contracts and Agreements
Nonprofits frequently enter into all sorts of contracts and agreements, like leases, vendor contracts, partnership agreements, and employment contracts. It's critical to have your lawyer review and approve these before you sign on the dotted line.
Your lawyer can help ensure the terms are fair, protect the nonprofit's interests, and comply with relevant laws. For example, let's say the lease for your office space has a clause that lets the landlord terminate with just 30 days' notice. That's pretty risky, so your lawyer could try to negotiate a longer 90- or 120-day notice period instead.
Nonprofits also need to be careful about any agreements that could jeopardize their tax-exempt status or expose them to unrelated business income tax. Your lawyer can provide guidance on navigating these complex issues.
Risk Management and Insurance
Nonprofits face all kinds of risks, from potential lawsuits to unexpected crises. Proper risk management and insurance coverage are crucial to protect the organization, its assets, and the people involved.
Some key insurance policies nonprofits should consider include:
- General liability insurance
- Directors and officers (D&O) liability insurance
- Professional liability insurance
- Property and casualty insurance
- Workers' compensation insurance
Work closely with an insurance broker who understands the unique risks of the nonprofit sector. Your lawyer can also advise on risk management strategies and make sure your insurance policies are adequate.
For instance, let's say one of the kids gets hurt during a field trip organized by your nonprofit youth program. The general liability insurance would likely cover any claims or legal costs associated with that incident.
Intellectual Property and Data Privacy
Nonprofits also have to think about things like trademarks, copyrights, and data privacy laws. Failing to properly manage these areas can lead to legal issues like lawsuits, fines, and reputational damage.
For example, let's say you start using a new nonprofit logo without properly trademarking it. Another organization could potentially sue you for trademark infringement down the line. Having a lawyer handle the trademark registration process from the beginning can help avoid these kinds of problems.
You also need to comply with data privacy laws like GDPR and CCPA when collecting and storing people's personal information. A lawyer can ensure you're covering all your bases.
Advocacy and Lobbying
Many nonprofits try to influence public policy and advance their mission through advocacy and lobbying efforts. But there are important legal restrictions on these activities, especially for tax-exempt 501(c)(3) organizations.
Nonprofits have to be very careful to distinguish between permissible advocacy (educating the public and policymakers) and prohibited lobbying (direct attempts to influence legislation). There are also limits on the amount of lobbying a 501(c)(3) can do without jeopardizing their tax-exempt status.
Working with a lawyer who specializes in nonprofit advocacy and lobbying law is crucial. They can help you develop strategies, monitor legislative changes, and ensure you're filing the required disclosure reports.
For instance, if your animal welfare nonprofit wants to lobby for stronger animal cruelty laws, your lawyer can advise you on what kinds of activities are allowed and how much time/money you can devote to lobbying.
Mergers, Dissolutions, and Other Transitions
Over time, a nonprofit may go through major changes like a merger, acquisition, or even dissolution. These types of transitions come with their own unique legal considerations.
For mergers and acquisitions, nonprofits need to carefully review things like asset transfers, governance structures, mission alignment, and tax/regulatory implications. If dissolving, they have to follow a specific legal process to wind down operations and distribute remaining assets properly.
Throughout any of these major organizational changes, it's critical to have a nonprofit lawyer guide you every step of the way. They can help ensure you're complying with all relevant laws and protecting the interests of the nonprofit and its stakeholders.
For example, let's say two similar nonprofits decide to merge. Their lawyers would need to review all contracts, identify potential liabilities, and negotiate the terms of the merger agreement to safeguard both organizations.
Conclusion
Navigating the legal side of running a nonprofit can definitely feel overwhelming at times. But with the right guidance and support, you can make sure your organization is on solid legal footing while you focus on your important mission.
The key is to work closely with an experienced nonprofit lawyer who can help you understand your options, ensure compliance, and protect your organization. They can provide invaluable advice and support throughout the lifecycle of your nonprofit.
Remember, your nonprofit's work is making a real difference in people's lives. Don't let the legal stuff distract you from that. With the right legal foundation in place, you can keep doing what you do best - creating positive change in your community.
So reach out to a nonprofit lawyer, get the support you need, and keep up the amazing work! The people and causes you serve are counting on you.
