Nonprofit FAQ’s

 

NAICS Code and SIC Code crosswalk

 

813319 Other Social Advocacy Organizations Social change advocacy organizations
8641 Civic, Social, and Fraternal Associations Crosswalk SIC Code

 

This organization is a 501(a) exempt organization, a 501(c)(3) charitable organization, and a 509(a)(1) public charity because the entity, TX CURE Inc, dba Citizens United for Rehabilitation of Errants – Texas Chapter,

 

  1. For income sources, primarily relies on donations from general public contributors and not from the sales of products or services,
  2. Provides public services in the form of advocacy relating primarily to prison and jail reform,
  3. As a non-governmental organization (NGO), makes policy recommendations for social change, but does not lobby legislators as a union,
  4. Acts as a state-level chapter for a national nonprofit 501(c)(3) organization (CURE National) with like or aligned mission statement and purpose, and
  5. At the core of this organization is a group of people working to benefit society and not for personal financial gain.

 

Under the Internal Revenue Code, all Section 501(c)(3) charities are considered to be private foundations unless they can show the IRS that they qualify as public charities. Section 509(a) sets out three primary classifications of “publicly supported” organizations that are not considered private foundations and therefore avoid the excise tax on investment income and significant limitations, including limitations on self-dealing and lobbying.

 

Charitable.[i]

The generally accepted legal definition of “charitable” includes relief of the poor, the distressed, or the underprivileged; advancement of religion; advancement of education or science; erecting or maintaining public buildings, monuments, or works; lessening the burdens of government; lessening neighborhood tensions; eliminating prejudice and discrimination; defending human and civil rights secured by law; and combating community deterioration and juvenile delinquency.

Educational.[ii]

The term “educational,” as used in section 501(c)(3), relates to:

  • The instruction or training of the individual for the purpose of improving or developing his or her capabilities, or
  • The instruction of the public on subjects useful to the individual and beneficial to the community.

 An organization may be educational even though it advocates a particular position or viewpoint so long as it presents a sufficiently full and fair exposition of the pertinent facts as to permit an individual or the public to form an independent opinion or conclusion. An organization is not educational if its principal function is the mere presentation of unsupported opinion.

Prohibited or restricted activities.

Certain activities are prohibited or restricted for organizations exempt from federal income tax under section 501(c)(3). Along with conducting activities that exclusively further one or more of the purposes listed in Part III, line 3, earlier, organizations exempt under section 501(c)(3) must:

  1. a) Refrain from supporting or opposing candidates in political campaigns in any way.

An organization exempt under section 501(c)(3) is prohibited from directly or indirectly participating in, or intervening in, any political campaign on behalf of (or in opposition to) any candidate for elective public office. The prohibition applies to all campaigns, including campaigns at the federal, state, and local level.

  1. b) Ensure that net earnings do not inure in whole or in part to the benefit of private shareholders or individuals (that is, board members, officers, key management employees, or other insiders).

An organization is not operated exclusively for one or more exempt purposes if its net earnings inure in whole or in part to the benefit of private shareholders or individuals. The term “private shareholder or individual” refers to persons who have a personal and private interest in the organization, such as an officer, director, or a key employee. Any amount of inurement may be grounds for loss of tax-exempt status.

  1. c) Not further non-exempt purposes (such as purposes that benefit private interests) more than insubstantially.
  2. d) Not be organized or operated for the primary purpose of conducting a trade or business that is unrelated to exempt purpose(s).

National Taxonomy of Exempt Entities (NTEE) Codes.

 

Education

B92 – Remedial Reading, Reading Encouragement

Crime, Legal Related

I01 – Alliance/Advocacy Organizations

I12 – Fund Raising and/or Fund Distribution

I19 – Nonmonetary Support N.E.C.

I31 – Transitional Care, Half-Way House for Offenders, Ex-Offenders

I40 – Rehabilitation Services for Offenders
I43 – Services to Prisoners and Families – Multipurpose
I44 – Prison Alternatives
I50 – Administration of Justice, Courts
I51 – Dispute Resolution, Mediation Services

I70 – Protection Against, Prevention of Neglect, Abuse, Exploitation

I73 – Sexual Abuse, Prevention of

Employment, Job Related

J01 – Alliance/Advocacy Organizations

J19 – Nonmonetary Support N.E.C.
J20 – Employment Procurement Assistance, Job Training
J21 – Vocational Counseling, Guidance and Testing
J22 – Vocational Training
J30 – Vocational Rehabilitation

Housing, Shelter

L01 – Alliance/Advocacy Organizations

Civil Rights, Social Action, Advocacy

R01 – Alliance/Advocacy Organizations
R19 – Nonmonetary Support N.E.C.
R20 – Civil Rights, Advocacy for Specific Groups
R40 – Voter Education, Registration
R60 – Civil Liberties Advocacy
R63 – Censorship, Freedom of Speech and Press Issues
R99 – Civil Rights, Social Action, Advocacy N.E.C.

Public, Society Benefit – Multipurpose and Other

W01 – Alliance/Advocacy Organizations
W24 – Citizen Participation
W70 – Leadership Development
W99 – Public, Society Benefit – Multipurpose and Other N.E.C.

Mutual/Membership Benefit Organizations, Other

Y01 – Alliance/Advocacy Organizations

 

Treas. Reg. Section 1.501(c)(3)-1(d)(2): the term “charitable”  includes “lessening the burdens of government.”

Form 1023-EZ Eligibility Worksheet
(Must be completed prior to completing Form 1023-EZ)

  If you answer “Yes” to any of the worksheet questions, you are not eligible to apply for exemption under section 501(c)(3) using Form 1023-EZ. You must apply on Form 1023. If you answer “No” to all of the worksheet questions, you may apply using Form 1023-EZ.
  

 

1. Do you project that your annual gross receipts will exceed $50,000 in any of the next 3 years?

Gross receipts are the total amounts the organization received from all sources during its annual accounting period, without subtracting any costs or expenses. You should consider this year and the next two years.

Yes þ No
2. Have your annual gross receipts exceeded $50,000 in any of the past 3 years? Yes þ No
3. Do you have total assets the fair market value of which is in excess of $250,000?

Total assets includes cash, accounts receivable, inventories, bonds and notes receivable, corporate stocks, loans receivable, other investments, depreciable and depletable assets, land, buildings, equipment, and any other assets.

Yes þ No
4. Were you formed under the laws of a foreign country (United States territories and possessions are not considered foreign countries)?

You are formed under the laws of a foreign country if you are not formed under the laws of (1) the United States, its states, territories, or possessions; (2) federally recognized Indian tribal or Alaskan native governments; or (3) the District of Columbia.

Yes þ No
5. Is your mailing address in a foreign country (United States territories and possessions are not considered foreign countries)?

Your mailing address is the address where all correspondence will be sent.

Yes þ No
6. Are you a successor to, or controlled by, an entity suspended under section 501(p) (suspension of tax-exempt status of terrorist organizations)?

Section 501(p)(1) suspends the exemption from tax under section 501(a) of any organization described in section 501(p)(2). An organization is described in section 501(p)(2) if the organization is designated or otherwise individually identified (1) under certain provisions of the Immigration and Nationality Act as a terrorist organization or foreign terrorist organization; (2) in or pursuant to an Executive Order which is related to terrorism and issued under the authority of the International Emergency Economic Powers Act or section 5 of the United Nations Participation Act of 1945 for the purpose of imposing on such organization an economic or other sanction; or (3) in or pursuant to an Executive Order issued under the authority of any federal law, if the organization is designated or otherwise individually identified in or pursuant to the Executive Order as supporting or engaging in terrorist activity (as defined in the Immigration and Nationality Act) or supporting terrorism (as defined in the Foreign Relations Authorization Act) and the Executive Order refers to section 501(p)(2).

Under section 501(p)(3) of the Code, suspension of an organization’s tax exemption begins on the date of the first publication of a designation or identification with respect to the organization, as described above, or the date on which section 501(p) was enacted, whichever is later. This suspension continues until all designations and identifications of the organization are rescinded under the law or Executive Order under which such designation or identification was made.

Yes þ No
7. Are you organized as an entity other than a corporation, unincorporated association, or trust?

Answer “Yes” if you are organized as an LLC under the laws of the state in which you were formed.

Yes þ No
8. Are you formed as a for-profit entity? Yes þ No
9. Are you a successor to a for-profit entity?

You are a successor if you have:
 

1.          Substantially taken over all of the assets or activities of a for-profit entity;

2.          Been converted or merged from a for-profit entity; or

3.          Installed the same officers, directors, or trustees as a for-profit entity that no longer exists.

Yes þ No
10. Were you previously revoked or are you a successor to a previously revoked organization (other than an organization the tax-exempt status of which was automatically revoked for failure to file a Form 990-series return for three consecutive years)?

Do not check “Yes” if your previous revocation, or your predecessor’s revocation, was an automatic revocation (pursuant to section 6033(j)) for failing to satisfy Form 990-series filing requirements for three consecutive years.

Yes þ No
11. Are you currently recognized as tax exempt under another section of IRC 501(a) or were you previously exempt under another section of IRC 501(a)? Yes þ No
12. Are you a church or a convention or association of churches described in section 170(b)(1)(A)(i)?

There is no single definition of the word “church” for tax purposes; however, the characteristics generally attributed to churches include:
 

·           A distinct legal existence,

·           A recognized creed and form of worship,

·           A definite and distinct ecclesiastical government,

·           A formal code of doctrine and discipline,

·           A distinct religious history,

·           A membership not associated with any other church or denomination,

·           Ordained ministers ministering to the congregation,

·           Ordained ministers selected after completing prescribed courses of study,

·           A literature of its own,

·           Established places of worship,

·           Regular congregations,

·           Regular religious services,

·           Sunday schools for the religious instruction of the young, and

·           Schools for the preparation of ministers.

Although it is not necessary that each of the above characteristics be present, a congregation or other religious membership group that meets regularly for religious worship is generally required. A church includes mosques, temples, synagogues, and other forms of religious organizations. For more information, see Pub. 1828.

Yes þ No
13. Are you a school, college, or university described in section 170(b)(1)(A)(ii)?

An organization is a school if it:
 

1.          Presents formal instruction as its primary function,

2.          Has a regularly scheduled curriculum,

3.          Has a regular faculty of qualified teachers,

4.          Has a regularly enrolled student body, and

5.          Has a place where educational activities are regularly carried on.

The term “school” includes primary, secondary, preparatory, high schools, colleges, and universities. It does not include organizations engaged in both educational and non-educational activities, unless the latter are merely incidental to the educational activities.

Yes þ No
14. Are you a hospital or medical research organization described in section 170(b)(1)(A)(iii) or a hospital organization described in section 501(r)(2)(A)(i)?

An organization is a hospital described in section 170(b)(1)(A)(iii) if its principal purpose or function is providing medical or hospital care, or medical education or research. Medical care includes treatment of any physical or mental disability or condition, on an inpatient or outpatient basis. Thus, if an organization is a rehabilitation institution, outpatient clinic, or community mental health or drug treatment center, it is a hospital if its principal function is providing treatment services as described above.

A hospital does not include convalescent homes, homes for children or the aged, or institutions whose principal purpose or function is to train handicapped individuals to pursue a vocation.

An organization is a medical research organization described in section 170(b)(1)(A)(iii) if its principal purpose or function is the direct, continuous, and active conduct of medical research in conjunction with a hospital. The hospital with which the organization is affiliated must be described in section 501(c)(3), a federal hospital, or an instrumentality of a governmental unit, such as a municipal hospital.

An organization is a hospital organization described in section 501(r)(2)(A)(i) if the organization operates a facility which is required by a state to be licensed, registered, or similarly recognized as a hospital.

Yes þ No
15. Are you an agricultural research organization described in section 170(b)(1)(A)(ix)?

An organization is an agricultural research organization described in section 170(b)(1)(A)(ix) if it is an agricultural research organization directly engaged in the continuous active conduct of agricultural research (as defined in section 1404 of the Agricultural Research, Extension, and Teaching Policy Act of 1977) in conjunction with a land grant college or university (as defined in such section) or a non-land grant college of agriculture (as defined in such section), and during the calendar year in which the contribution is made such organization is committed to spend such contribution for such research before January 1 of the fifth calendar year which begins after the date such contribution is made.

Yes þ No
16. Are you applying for exemption as a cooperative hospital service organization under section 501(e)?

A cooperative hospital service organization described in section 501(e) is organized and operated on a cooperative basis to provide its section 501(c)(3) hospital members one or more of the following activities.
 

·           Data processing.

·           Purchasing (including purchasing insurance on a group basis).

·           Warehousing.

·           Billing and collection (including purchasing patron accounts receivable on a recourse basis).

·           Food.

·           Clinical.

·           Industrial engineering.

·           Laboratory.

·           Printing.

·           Communications.

·           Record center.

·           Personnel (including selecting, testing, training, and educating personnel) services.

A cooperative hospital service organization must also meet certain other requirements specified in section 501(e).

Yes þ No
17. Are you applying for exemption as a cooperative service organization of operating educational organizations under section 501(f)?

An organization is a cooperative service organization of operating educational organizations if it is organized and operated solely to provide investment services to its members. Those members must be organizations described in section 170(b)(1)(A)(ii) or (iv) that are tax exempt under section 501(a) or whose income is excluded from taxation under section 115.

Yes þ No
18. Are you applying for exemption as a qualified charitable risk pool under section 501(n)?

A qualified charitable risk pool is treated as organized and operated exclusively for charitable purposes. Check the appropriate box to indicate whether you are a charitable risk pool. A qualified charitable risk pool is an organization that:
 

1.          Is organized and operated only to pool insurable risks of its members (not including risks related to medical malpractice) and to provide information to its members about loss control and risk management,

2.          Consists only of members that are section 501(c)(3) organizations exempt from tax under section 501(a),

3.          Is organized under state law authorizing this type of risk pooling,

4.          Is exempt from state income tax (or will be after qualifying as a section 501(c)(3) organization),

5.          Has obtained at least $1,000,000 in startup capital from nonmember charitable organizations,

6.          Is controlled by a board of directors elected by its members, and

7.          Is organized under documents requiring that:

a.   Each member be a section 501(c)(3) organization exempt from tax under section 501(a),

b.  Each member that receives a final determination that it no longer qualifies under section 501(c)(3) notify the pool immediately, and

c.   Each insurance policy issued by the pool provide that it will not cover events occurring after a final determination described in (b).

Yes þ No
19. Are you requesting classification as a supporting organization under section 509(a)(3)?

A supporting organization (as defined in section 509(a)(3)) differs from the other types of public charities described in section 509. Instead of describing an organization that conducts a particular kind of activity or that receives financial support from the general public, section 509(a)(3) describes organizations that have established certain relationships in support of public charities described in section 509(a)(1) or 509(a)(2). Thus, an organization can qualify as a supporting organization (and not be classified as a private foundation) even though it may be funded by a single donor, family, or corporation. This kind of funding ordinarily would indicate private foundation status, but a section 509(a)(3) organization has limited purposes and activities, and gives up a significant degree of independence. A supporting organization is an organization that:
 

1.          Is organized and operated exclusively for the benefit of, to perform the functions of, or to carry out the purposes of one or more specified organizations as described in section 509(a)(1) or 509(a)(2). These section 509(a)(1) and 509(a)(2) organizations are commonly called publicly supported organizations.

2.          Has one of three types of relationships with one or more organizations described in section 509(a)(1) or 509(a)(2). It must be:

a.   Operated, supervised, or controlled by one or more section 509(a)(1) or 509(a)(2) organizations (Type I supporting organization);

b.  Supervised or controlled in connection with one or more section 509(a)(1) or 509(a)(2) organizations (Type II supporting organization); or

c.   Operated in connection with one or more section 509(a)(1) or 509(a)(2) organizations (Type III supporting organization).

3.          Is not controlled directly or indirectly by disqualified persons (as defined in section 4946) other than foundation managers and other than one or more organizations described in section 509(a)(1) or 509(a)(2).

See Pub. 557 for more information.

Yes þ No
20. Is a substantial purpose of your activities to provide assistance to individuals through credit counseling activities such as budgeting, personal finance, financial literacy, mortgage foreclosure assistance, or other consumer credit areas?

These activities involve the education of the consumer on budgeting, personal finance, financial literacy, mortgage foreclosure assistance, or other consumer credit areas. It may also involve assisting the consumer in consolidating debt and negotiating between debtors and creditors to lower interest rates and waive late and over-limit fees.

Yes þ No
21. Do you or will you invest 5% or more of your total assets in securities or funds that are not publicly traded? Yes þ No
22. Do you participate, or intend to participate, in partnerships (including entities or arrangements treated as partnerships for federal tax purposes) in which you share losses with partners other than section 501(c)(3) organizations? Yes þ No
23. Do you sell, or intend to sell carbon credits or carbon offsets? Yes þ No
24. Are you a Health Maintenance Organization (HMO)? Yes þ No
25. Are you an Accountable Care Organization (ACO), or an organization that engages in, or intends to engage in, ACO activities (such as participation in the Medicare Shared Savings Program (MSSP) or in activities unrelated to the MSSP described in Notice 2011–20, 2011–16 I.R.B. 652)?

ACOs are entities formed by groups of physicians, hospitals, and other health care service providers and suppliers to manage and coordinate the care provided to patients. For a discussion of tax law issues relating to ACOs, see Notice 2011-20 and FS-2011-11, available at IRS.gov/uac/Tax-Exempt-Organizations-Participating-in-the-Medicare-Shared-Savings-Program-through-Accountable-Care-Organizations.

Yes þ No
26. Do you maintain or intend to maintain one or more donor advised funds?

In general, a donor advised fund is a fund or account that is owned and controlled by the organization but that is separately identified by reference to contributions of a donor or donors and with respect to which a donor (or any person appointed or designated by the donor) has or expects to have advisory privileges concerning the distribution or investment of amounts held in the fund or account by reason of the donor’s status as a donor. For additional information, see Pub. 557.

Check “No” if you are a governmental unit referred to in section 170(c)(1) or a private foundation referred to in section 509(a).

Yes þ No
27. Are you organized and operated exclusively for testing for public safety and requesting a foundation classification under section 509(a)(4)?

Generally, these organizations test consumer products to determine their acceptability for use by the general public.

Yes þ No
28. Are you requesting classification as a private operating foundation?

Private foundations lack general public support. What distinguishes a private operating foundation from other private foundations is that it engages directly in the active conduct of charitable, religious, educational, and similar activities (as opposed to indirectly carrying out these activities by providing grants to individuals or other organizations). Private operating foundations are subject to more favorable rules than other private foundations in terms of charitable contribution deductions and attracting grants from private foundations. However, to be classified as a private operating foundation, an organization must meet certain tests. Additional information about private operating foundations is available at IRS.gov/Charities-&-Non-Profits/Private-Foundations/Private-Operating-Foundations.

Yes þ No
29. Are you applying for reinstatement under section 4 of Rev. Proc. 2014‐11, and seeking to change your foundation classification from the classification you had at the time of your revocation?
Only organizations that are seeking the same foundation classification that they had at the time of revocation may use Form 1023‐EZ to apply for reinstatement under section 4 of Rev. Proc. 2014‐11. If you wish to change your foundation classification, you must use the full Form 1023.
Yes þ No
30. Are you applying for retroactive reinstatement of exemption under section 5 or 6 of Rev. Proc. 2014-11, after being automatically revoked?

Only organizations applying for reinstatement under section 4 or 7 of Rev. Proc. 2014-11 may use Form 1023-EZ. If you are applying for retroactive reinstatement under section 5 or 6 of Rev. Proc. 2014-11, you must submit the full Form 1023 along with the appropriate reasonable cause statement and a statement confirming you have filed the required annual returns as described in the revenue procedure.

Yes þ No

 

Start a Nonprofit FAQs, a 501c3 | Rocket Lawyer

  • What is a nonprofit organization?

There is not an official definition of “nonprofit organization.” Most experts say that a nonprofit organization is a group of people who come together to support a specific cause or to advocate a shared viewpoint.

When asked what a nonprofit organization is, we usually think of the most familiar types: organizations dedicated to charity, education, religion, promoting the arts and humanities, and protecting the environment. However, many people are surprised to learn that other types of nonprofits exist. Some examples are veterans’ clubs, volunteer fire departments, social clubs, chambers of commerce, and labor unions.

Nonprofit organizations can be very small, such as a local music appreciation club that also raises money for scholarships for students studying music, or they can be very large and employ thousands of people, like a hospital.

Nonprofit organizations can look like businesses and charge for services, such as museums or universities, or they can give all or most of their services away for free, such as a food bank or disaster aid organization.

Nonprofits can make their services open to the public, such as a local civic organization. Alternatively, they may restrict their services to members, such as labor unions or professional football leagues.

What links these seemingly different types of organizations into the category of “nonprofit organization”? The answer is that state and federal law treats these organizations differently from ordinary, for-profit businesses. These laws restrict how nonprofit organizations may operate, place special responsibilities on the people who manage the organizations, and limit how the organization uses its money and property.

While nonprofit organizations come in many shapes and sizes, at the core of each organization is a group of people working to benefit society and not for personal financial gain.

  • How does a nonprofit work?

A nonprofit forms and operates very similarly to a for-profit business. In most cases, a nonprofit starts when an individual registers the nonprofit with the state. There are several options, but most nonprofits register as nonprofit corporations (also called non-stock organizations in some states).

Once registered with the state, the nonprofit becomes a legal entity. It can own property, buy and sell items, open a bank account, enter into contracts, and much more.

The next step is to appoint one or more individuals to manage the nonprofit. One or more individuals form a board of directors or a board of trustees. The board is legally responsible for the nonprofit’s activities, even those assigned to employees or volunteers. The board adopts bylaws which are a set of rules for how the board will make decisions and use the nonprofit’s assets.

Once the nonprofit has humans to run it, the nonprofit must earn income and use its income to provide services. Most nonprofits begin with no money except what was donated by the individuals who started the nonprofit. The nonprofit board is responsible for finding money to keep the nonprofit operating. Money can come from various sources, such as donations, membership, fees charged for services, and fundraising events.

As the nonprofit begins to grow and earn income, the nonprofit will follow many of the same business practices as a for-profit business. It will hire employees and contractors. It must follow the same employment laws. The nonprofit must file a tax return each year. While many nonprofits are exempt from paying state and federal income tax, not all are. In addition, many nonprofits must pay sales tax, franchise tax, and real estate tax just like a for-profit business does.

To summarize, a nonprofit begins and operates much like a for-profit business does. However, instead of existing to earn a profit for the benefit of owners and investors, the nonprofit exists to earn income to provide beneficial services to society.

  • What are the advantages of starting a nonprofit?

Nonprofits are usually intended to serve the community and its members. Since they are expected to benefit communities, the government offers tax advantages to help maximize the services they can offer. Many nonprofit founders may say that the “feel goods” are a benefit from starting a nonprofit, but there are tangible advantages as well. Major benefits include the following:

    • Limited liability protection – Directors, officers, and members usually are not held personally liable for the organization’s debts and activities. Incorporating your nonprofit can help protect your assets.
    • Tax-exempt status – Nonprofits can apply for both federal, state, and local tax-exempt status, allowing them to devote a larger proportion of their resources to achieving their goals.
    • Access to grants – Some nonprofits are eligible to receive public and private grants or government funding.
    • Tax-deductible donations – Donors can make tax-deductible donations to most nonprofit corporations.
    • Lower rates on many goods and services – For example, many nonprofits are eligible for reduced postage rates—approximately 40% lower than the regular rate for commercial mailers.
    • Perpetuity – Nonprofits can survive their founders.
    • Possible state tax advantages – In addition to all these benefits, nonprofit organizations also benefit from many state specific tax advantages.

With Rocket Lawyer, you can create, store, and customize all the legal forms for your nonprofit. Become a member and form your nonprofit with our free incorporation service, and enjoy the many benefits of a nonprofit organization.

  • Who owns a nonprofit?

No one. This answer surprises many people. How can a nonprofit not have an owner? To answer that, we have to look at who owns the assets.

All nonprofit assets are held in trust and may only be used to carry out the nonprofit’s purposes. A group of directors or trustees oversees the management of the nonprofit. They are the guardians of the nonprofit’s assets and are responsible for ensuring that the nonprofit uses its assets appropriately. The directors or trustees do not own the nonprofit or its assets.

Since a nonprofit’s assets are held in trust, the assets cannot be sold to an individual or a for-profit business. In addition, the profit earned by the nonprofit must be used to carry out the nonprofit’s purposes. While a for-profit business often pays out its profits as a dividend to its investors, a nonprofit cannot do that.

When a nonprofit wants to stop operating, it cannot simply close its doors and divide the remaining assets among the board of directors. Instead, the nonprofit must donate its assets to another nonprofit that serves a similar purpose. It must donate the assets because no one owns the assets. State and federal laws require that the assets go to a nonprofit organization with a similar purpose.

  • How do nonprofit organizations make money?

Nonprofit organizations cannot survive on volunteer work alone. Instead, nonprofits must earn income somehow so they can provide services. Nonprofits can make money in a variety of ways.

Some common ways to raise money are:

    • Donations, gifts, and grants.
    • Membership dues.
    • Income from selling products or services.
    • Investment income such as from endowment funds and restricted accounts.
    • Licensing intellectual property, such as trademarks, copyrights, and patents.
    • Commercial co-venture agreements (where a for-profit business promotes a nonprofit and donates a portion of the sales proceeds to the nonprofit).
    • Fundraising events.
    • Raffles, bingo, and other games of chance.

Many people mistakenly believe that a nonprofit cannot “make a profit.” This is not true. While a nonprofit cannot have a commercial purpose—meaning that it cannot exist to make money—a nonprofit can earn income and make a profit. However, all profit must be used for the nonprofit’s purposes.

  • What is the difference between nonprofit and for-profit?

There are several important differences between nonprofit and for-profit entities.

Ownership: No one owns a nonprofit. Instead, a group of individuals oversees and manages the nonprofit. However, no one owns any of the nonprofit’s assets. In contrast, people or businesses own a for-profit. The for-profit owners also own the business’s assets.

Governance: The individuals managing nonprofits and for-profits act in the best interest of the organization. However, a nonprofit is held to some additional standards. For example, individuals with decision-making authority must be careful to avoid conflicts of interest and, when they occur, follow certain practices to ensure a fair decision is made. Further, individuals with decision-making authority have a legal obligation to act in the best interest of the nonprofit even if the decision may not be in the best interest of the individual or his or her family members.

Assets: A nonprofit organization is an organization that reinvests its profit back into its charitable purposes. It is not permitted to distribute the profits to its directors, managers, and members. However, a nonprofit may use its operating income to pay for reasonable expenses, such as rent, employee wages, insurance, supplies, equipment, and advertising. By contrast, a for-profit business exists to generate profit for its owners and may lawfully distribute its profit to its owners.

Taxes: Most, but not all nonprofits, are exempt from most state and federal income taxes. Depending on state law, nonprofits may also be exempt from paying sales tax, real estate tax, occupancy tax, and franchise tax. However, like a for-profit business, all nonprofits must pay payroll taxes, local business occupation taxes, state unemployment taxes. All nonprofits must pay unrelated business income tax.

Dissolution: Every nonprofit and for-profit eventually comes to the end. Often this is due to the lack of interest by volunteers or the public, the lack of money, or the nonprofit accomplished its purpose. Since a nonprofit is not owned by anyone, when it wants to stop operating, it must distribute its assets to another nonprofit. In contrast, a for-profit will distribute its assets to its owners. In addition, many states require a nonprofit to notify the state Attorney General before dissolving the nonprofit and distributing the assets to another nonprofit.

  • Can the founder of a nonprofit receive a salary?

Yes. A nonprofit may pay a reasonable salary to anyone who provides services to the organization.

A nonprofit may pay employees, contractors, and suppliers for the services provided. The founder may receive a salary if the founder provides services and the services are reasonably necessary for the nonprofit to operate. The salary or payment must be reasonable as compared to other nonprofits in similar industries, of similar size, and in similar locations.

For example, a small art museum in a mid-sized city should not look at the salary of household name art museums in major metropolitan areas. Instead, it should review the salaries of similar museums in similarly-sized cities.

So, yes, a founder may receive a salary for services provided. However, a founder may not receive a salary or any other payment simply because the founder started the nonprofit or donated money to start the nonprofit.

  • Can board members of a nonprofit be paid?

Yes, but the IRS discourages it. According to IRS Treasury Regulation 53.4958-6, ‘charities should generally not compensate persons for service on the board of directors except to reimburse direct expenses of such service.’

However, nonprofits may reimburse board members for reasonable expenses incurred while serving on the board. For example, a nonprofit may reimburse board members for necessary and reasonable travel or for purchasing items to be used by the nonprofit.

In addition, the IRS does not prohibit nonprofits from paying board members. The IRS publishes guidance for those that choose to do so. Nonprofits that pay their directors usually do so because the nonprofit has significant assets to manage and needs the specialized expertise and time commitments of their directors.

However, before paying board members, a nonprofit must consider some factors. First, most nonprofits simply do not have extra income to afford to pay board members. Second, community and donor perceptions are important. Paying more than a nominal ‘honorarium’ can result in negative feedback from the community and donors. Third, some states, such as California, limit how many board members may be paid.

Finally, paying board members can create a conflict of interest. This means a board member may be less likely to challenge a bad decision because the board member wants to stay on the board and continue to receive payment.

  • Can family members be on a nonprofit board?

Yes, with limitations. No law bans family members from serving on the board of directors of the same nonprofit. In fact, some types of nonprofits, such as family foundations, will naturally have members of the same family serve on the board.

However, many states, such as California and Indiana, require a certain percentage of the board of directors to be ‘disinterested’ or ‘unrelated.’ Family members are, by definition, ‘related’ and do not meet these criteria. Therefore, a board of directors may include some family members but must also include individuals who are not related.

How many family members may a nonprofit board have? The IRS regularly advises, through Revenue Rulings and court cases, that at least 51% of the board members should be unrelated to each other. The reason is that when board members are related to each other, they may be unconsciously influenced by family interests and make decisions that benefit a family member to the detriment of the nonprofit.

What is a 501(a) Exemption Status?

 

Thank you,

L Michael Francis

Registered Agent and Temporary Secretary/Treasurer

 

 

[i] Instructions for Form 1023-EZ (01/2018) | Internal Revenue Service (irs.gov)

 

[ii] Instructions for Form 1023-EZ (01/2018) | Internal Revenue Service (irs.gov)

 

Treas. Reg. Section 1.501(c)(3)-1(d)(2): the term “charitable”  includes “lessening the burdens of government.”