Non-profit organizations have lately become an integral part of the modern American culture. They are legal entities that operate for a social, public, or collective benefit – and not exclusively with the objective of profit-making. However, the structure and objectives of a non-profit organization make its formation and sustenance challenging. Unlike forming a corporation in the United States, the primary objective of a non-profit organization is not to earn profit. Therefore, it is crucial to understand the non-profit law pertaining to the unique challenges of an organization that does not operate exclusively for profits.
The laws also govern their taxation policies and help prevent charitable fraud. The growing incidence of non-profit organizations and their contribution to the American economy cannot be overemphasized. In fact, the non-profit sector was America’s third-largest employer in 2018 and makes up around 10.2% of the total U.S. workforce today.
These laws may vary depending on the type of non-profit organization. For instance, organizations such as the American Red Cross are described as charities. On the other hand, there are non-profit organizations that operate solely for the members’ private benefits. These may include condominium associations, country clubs, etc. Again, there are organizations like chambers of commerce, labor unions, etc. that also operate as 501(c)(5) non-profit organizations. Each of them has unique legal challenges and governing laws.
Typically, if any group is formed not primarily for the purpose of profit, then it does not require any government approval or involvement. However, if the group requires certain legal benefits such as tax exemption, then the non-profit law requires it to be formally incorporated and registered as an NGO. Registering your business, whether for-profit or not-for-profit, is important to establish the organization as a legal entity. One can miss out on tax and legal benefits if the organization is not registered.
Requirements for registering and forming an organization vary from one U.S. state to another. However, it typically includes providing the organization’s description, name & address, mission, and a fee. Many U.S. states have an incorporation statute that helps streamline the process. Registration under this statute does not require the legislature’s approval. If the organization is formed for education, religious, or other charitable purposes, it should also register with a state charity official.
If the non-profit organization seeks exemption from tax status, then the charter, articles of association, or trust instrument must mention that no part of their asset benefits any of the members, agents, officers, or directors. Additionally, the non-profit law requires the organization to have a charitable, legal purpose. It must be established to support charitable, religious, or educational activities.
This does not mean that the non-profit organization cannot pay its contractors or employees for services or work they render. It means that if the organization utilizes excess revenue for developmental activities or maintains an endowment, then it will not be taxed under the Internal Revenue Service. Any surplus income left after paying the operating expenses must not be paid as a benefit or dividend to any member running or organizing the non-profit. It should only be spent for public or charitable purposes.
Non-profit organizations and members operating them must adhere to all the laws as applicable to any for-profit business. However, there are certain exceptions related to taxes or First Amendment concerns. Officers and directors of non-profits hold a fiduciary duty to the organization as well as its beneficiaries. They owe a liability for any injury caused by their volunteers and employees to third parties. They must also adhere to the minimum wage law and get workers' compensation insurance.
In the US, the non-profit law pertaining to the prevention of charitable fraud may vary from one state to the other. However, adhering to this law is important because such frauds may impact the reputation and operations of both small and large non-profits. While many charitable organizations want to handle these fraud cases quietly, working with a corporate attorney can help mitigate the risks.
Complying with the laws concerning the formation and running of non-profits is pretty straightforward. However, one should be aware of these laws to leverage the benefits, reduce risks, and operate successfully.
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