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Common Legal Mistakes to Avoid in Nonprofit Management

NONPROFIT MANAGEMENTEven though nonprofit organizations do wonderful work for communities, they are not exempt from legal requirements.[1] Just like all businesses, nonprofits have to follow strict rules that govern how they operate and act. There are questions that an attorney can answer, like “What does ‘non-profit’ mean?” “How do you start a nonprofit?” or “What rules do nonprofits have to follow?” It is important to ask these questions because when the rules are broken, nonprofits can get into serious legal trouble that could eventually result in closure of even the most benevolent entities.

Here are five common legal mistakes that nonprofits make.

Failing to Comply with Nonprofit Tax Laws

Nonprofits are often tax-exempt.[2] Although some people might think this indicates leniency toward rule-following for non-profits, the opposite is true. Often, non-profits have a more strict set of rules to follow than regular businesses. This is because the government wants to guarantee that nonprofits are not exploiting their benefits.

Certain rules must be followed to prove the organization deserves this tax-exempt status. In particular, nonprofits will want to follow regulations regarding salaries, lobbying, undocumented political activities, and tax shelter transactions. When this process isn’t followed, serious legal troubles can arise.

Failure to Follow Bylaws

Whether you are a nonprofit or for-profit organization, not following your corporate bylaws will get you into legal trouble. Always make sure that your actions align with the directions given in your bylaws. If a certain situation requires a vote from the Board, make sure all your Board members are informed and ready to vote. By following your own instructions, you will help keep your nonprofit out of trouble.

Failure to Comply with Fundraising Requirements

Because the area of fundraising has been a source of abuse in previous nonprofits, there are now more stringent laws surrounding this activity. These laws govern both the solicitation of an expenditure of donations. For example, it is necessary to record the source and amount of contributions you receive. In some instances, there are strict limits on the amounts that individuals may contribute. Make sure that you fully understand and follow all federal, state, and local laws regarding fundraising for nonprofits.

Confusing “Non-Profit” with “Tax Exempt”

Yes, many nonprofits are also tax-exempt, but this isn’t a guarantee. Your nonprofit status comes from your state. This status may come with benefits such as state sales, property, and income tax exemptions. [3] However, there is an additional question of whether the organization is tax-exempt by Federal law.

In order to qualify as tax-exempt, you must meet the requirements as listed in the Internal Revenue Code. Section 501 of the U.S. tax code outlines which types of nonprofit organizations are tax exempt. The section of this code that provides for exemption is section 501(a), which states that organizations are exempt from some federal income taxes if they fall under sections 501(c) or 501(d), or under section 401(a).

Covering Up Mistakes

When we make a mistake, it can be tempting to deny, deny, deny. However, this strategy often fails and leaves your organization in an embarrassing position of being both a liar and a law-breaker. If you or someone at your organization has failed to comply with the law, or you suspect that there is some issue or concern, contact your lawyer for advice on how to proceed.

Retain a Non-Profit Attorney for Help

Whether you have a new or existing nonprofit, it’s important to have an experienced business lawyer to help answer your questions and offer guidance. At J. Muir & Associates, we can help you be certain your nonprofit is compliant with all federal, state, and local laws. Give us a call today at 786-533-1100 or contact us online to find out how we can help.

 

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