Not for profit organizations (NFPO) are organizations where all profits earned are funneled back into the organization and do not pay shareholders. The laws governing NFPOs can be complicated and failure to comply can lead to serious legal issues.

Marcia at MFP LAW LLC can help you with a NFPO from formation until its cessation and from document review to litigation, if necessary. Contact Marcia at 219-356-2610 to schedule a free consultation and to ensure that your not-for-profit organization succeeds.

Key Laws and Regulations Governing Not-for-Profit Organizations

Not-for-profit organizations operate in a legal environment subject to various laws and regulations. Some key legal issues that NFPOs should be aware of involve anything from incorporation to contracts law.

  • Incorporation. NFPOs are typically formed as nonprofit corporations, which are subject to state incorporation laws. Failure to properly incorporate can result in the loss of legal protections, such as limited liability.
  • Tax-exempt status. NFPOs must apply for tax-exempt status with the IRS to avoid paying federal income tax. NFPOs must also maintain their tax-exempt status. Failure to obtain and maintain tax-exempt status can result in significant tax liabilities. 
  • Fundraising and solicitation. NFPOs must comply with state and federal laws governing fundraising and solicitation. Failure to comply can result in fines, penalties, and loss of tax-exempt status.
  • Governance. NFPOs must comply with state and federal laws governing governance, including board composition, conflict of interest policies, and record-keeping requirements. Failure to comply can result in legal liability for board members and other officers.
  • Employment law. NFPOs must comply with a range of employment laws, including those governing minimum wage, overtime, and discrimination. Failure to comply can result in legal liability and damages.
  • Intellectual property. NFPOs must protect their intellectual property, including trademarks, copyrights, and trade secrets. Failure to protect intellectual property can result in loss of valuable assets and legal disputes.
  • Contracts. NFPOs must enter into contracts with vendors, employees, and other parties. Failure to properly negotiate, execute, and enforce contracts can result in legal disputes and financial liability.

NFPOs should be aware of the various legal issues that impact their operations. They should seek appropriate legal counsel to ensure compliance.

Types of Not-for-Profits

Not-for-profits can involve any number of organizations with any number of purposes. The most common types are:

  • Charitable organizations, registered as a 501(c)(4)
  • Social advocacy groups, registered as a 501(c)(4)
  • Civil leagues, social welfare organizations, registered as a 501(c)(4)
  • Local employee associations, registered as a 501(c)(4)
  • Trade and professional associations, registered as a 501(c)(4)
  • Social and recreational clubs, registered as a 501(c)(7)
  • Fraternal societies, registered as a 501(c)(8)
  • Employee beneficiary associations, registered as a 501(c)(9)
  • Domestic fraternal societies and associations, registered as a 501(c)(10)
  • Teacher's retirement fund associations, registered as a 501(c)(11)
  • Cemetery companies, registered as a 501(c)(13)
  • State-chartered credit unions and mutual reserve funds, registered as a 501(c)(14)
  • Mutual insurance companies, registered as a 501(c)(15)
  • Cooperative organizations to finance crop operations, registered as a 501(c)(16)
  • Supplemental unemployment benefits trusts, registered as a 501(c)(17)
  • Veterans' organizations, registered as a 501(c)(19)
  • State-sponsored organizations providing health coverage for high-risk individuals, registered as a 501(c)(26)

Registering under the right IRS code is the first of many rules and regulations to follow.

5 Important Compliance Issues for Not-for-Profit Organizations

Though there are many compliance issues that not-for-profits should keep in mind and avoid, there are a few that occur and harm an NFPO more than other compliance issues. Much of the reason these compliance issues become an issue in the first place is simply failing to have the right legal counsel to ensure everything is in order.

1. The Purpose Must Fit the IRS Code.

Charitable organizations, registered as 501(c)(3) organizations are organized and operated exclusively for the following purposes:

  • Charitable
  • Religious
  • Educational
  • Scientific
  • Literary
  • Testing for public safety
  • Fostering national or international amateur sports competition
  • Preventing cruelty to children or animals

Not having a purpose that qualifies means the NFPO is not in compliance.

2. Not for Profits Must Comply with State Laws. 

Not-for-profit organizations must comply with state laws, such as registering with the state attorney general's office, filing annual reports, and complying with state fundraising laws. 

3. Not for Profits Must Have Governance and Management Practices. 

Not-for-profit organizations must have effective governance and management practices in place, such as adopting bylaws, having a board of directors that meets regularly, and maintaining accurate financial records.

Not-for-profit organizations must also have appropriate financial management practices in place, such as preparing accurate and timely financial statements, maintaining proper internal controls, and complying with applicable accounting standards.

4. Not for Profits Must Comply with Fundraising and Solicitation Laws.

Not-for-profit organizations must comply with laws and regulations related to fundraising and solicitation, such as registering with state charitable solicitation authorities, providing proper disclosures to donors, and avoiding deceptive or misleading fundraising practices. This is true for each state where donations are solicited.

5. Not for Profits Must Maintain Proper Recordkeeping and Reporting.

Not-for-profit organizations must maintain accurate and complete records and comply with reporting requirements, such as filing annual information returns with the IRS and providing proper disclosures to donors.

It's important for not-for-profit organizations to stay up-to-date with these compliance issues if they want to maintain their tax-exempt status and operate in a legal and ethical manner.

Not-for-Profit Organization may be Subject to Litigation

Not-for-profit organizations can be sued in certain circumstances. Not-for-profit organizations, like any other organization, are subject to legal liability and can be sued for various reasons. 

Examples of potential lawsuits include:

  • Breach of contract. When a not-for-profit organization enters into a contract but fails to fulfill its obligations under the agreement, it may be sued for breach of contract.
  • Personal injury. When a not-for-profit organization is responsible for a person's property or bodily injury, it can be sued for damages related to the injury.
  • Discrimination. Not-for-profit organizations are subject to anti-discrimination laws and can be sued if they engage in discriminatory practices based on race, gender, age, religion, or other protected categories.
  • Intellectual property infringement. If a not-for-profit organization infringes on another person's or organization's intellectual property (IP) rights, it can be sued for damages. 

Lawsuits involving not-for-profits can be complicated – they often have different legal requirements and regulations than for-profit businesses. But also, many NFPOs have limited financial resources, and so a lawsuit can bankrupt the organization. Compliance, therefore, is a serious matter for not-for-profits.

Contact Marcia at MFP LAW LLC Today

Not-for-profits must be formed appropriately and comply with the law. Failure to do so can lead to legal problems that can jeopardize the purpose and operations of the NFPO. Marcia at MFP LAW LLC is experienced in representing not-for-profit organizations and handles all types of legal issues for these organizations. Contact Marcia either by using the online form or calling her at 219-356-2610 to schedule a free consultation and make sure your NFPO is formed properly, complies with the law, avoids legal issues, and overall benefits its beneficiaries as it was intended to do.