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Rules & Regulations of Nonprofit Organizations

Nonprofit organizations have to maintain compliance to retain their tax-exemptions.

While nonprofit organizations have many of the characteristics and responsibilities of a for-profit corporation, they also have some different rules to follow as tax-exempt entities. Being corporations, nonprofits have to maintain their legal status and reporting functions like any corporation. But unlike other corporations, when they account for themselves in their returns to the IRS, they have to show no profit and how they used their money in order to maintain their tax-exempt status.

Conflicts of Interest

Like all corporations, conflicts of interests can cause problems for nonprofits. Each state has some form of limit on nonprofit directors who are also "interested parties." In other words, these laws restrict directors or executives from having their businesses perform services or sell products to the nonprofit--thus, using the nonprofit for their personal gain. Some states, like Minnesota, offer free templates for nonprofits to develop policies to prevent such conflicts of interest. Other states, like California, require nonprofits to submit any "self dealing" transactions to the attorney general for review and approval in advance.

Form 990

Every year, nonprofit organizations must summit a Form 990 to the Internal Revenue Service. This should outline all revenues and expenditures, including salaries and reserves. In this annual filing, the IRS is checking to see how nonprofits are spending their money and that they are fulfilling their mission qualified them for tax-exemption. Essentially, the form is a tax-return for nonprofits that just doesn't require any taxes to be paid. States usually require a state-version of this same report for their tax boards or treasuries.

Corporate Governance

Nonprofits are required to conduct themselves like all corporations. This means they must have bylaws governing their structures, board of director memberships and operations. Corporations must report their current directors to their states periodically--frequency varies by state. Like all corporations, company finances must be separate from those of their directors, executives and employees. Most importantly, nonprofit corporations are entities unto themselves with no owners, only directors. They must be treated and managed as such. Directors and employees who use a nonprofit's tax-exempt status as a shield or tool for their own advantage--such as avoiding taxes or shielding themselves from liability in personal business--can face severe civil and criminal penalties.


Article Written By Eric Feigenbaum

Eric Feigenbaum started his career in print journalism, becoming editor-in-chief of "The Daily" of the University of Washington during college and afterward working at two major newspapers. He later did many print and Web projects including re-brandings for major companies and catalog production.