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Run a Non-Profit: Keeping Your Tax Exempt Status

Just as important as incorporating a non-profit organization is learning how to run a non-profit. Read below to learn how to protect the tax-exempt status of your non-profit corporation.

Forming a non-profit corporation is much like forming a regular corporation. However, there are differences when it comes to running a non-profit corporation versus a regular corporation. There are special rules that go along with non-profit corporations.

Run a Non-Profit: Comply with Corporate Formalities

Just like a regular corporation, a non-profit corporation must have a board of directors that is charge of making important policy decisions. In addition, there are officers that are in charge of making decisions regarding the day-to-day running of the corporation. Lastly, depending on the size of the non-profit corporation, there will be employees that carry out the work.

However, unlike regular corporations, non-profit corporations do not have shareholders or owners. As well, non-profit corporations do not have owners. Because no one person or group of persons owns a non-profit corporation, the corporation cannot be "sold." Instead, if the directors of a non-profit corporation decide that the corporation should no longer be, they must make arrangements for all of the non-profit corporation's assets to be distributed.

Non-profit corporations can choose to have members that have voting rights. However, many non-profit corporations decide not to establish a membership structure and instead choose to allow the board to make all decisions for the corporation. If a non-profit corporation does decide that it wants to have a membership structure, all of the members will participate in major decision making. More specifically, members will have the power to choose who sits on the board of directors, amend the corporate bylaws, and vote on decisions regarding mergers or dissolutions.

Run a Non-Profit: Maintain Corporate Records

Like other corporations, non-profit corporations must keep detailed and accurate corporate records. If these records are not kept, the limited personal liability status of the directors may be in jeopardy. In addition, the non-profit corporation risks losing its tax-exempt status. By definition, good corporate record keeping means keeping accurate minutes of the meetings of the directors and documenting any important decisions that are made for the corporation.

After you have all of these records, you should make sure to organize them in an easy-to-manage corporate records book. This book should also contain a copy or the articles of incorporation, bylaws, and tax-exempt status documentation from the Internal Revenue Service as well as your state's tax agency.

Lastly, your non-profit corporation should also maintain records of any financial transactions in a double-entry bookkeeping system. As well, financial records should be kept in order to file an appropriate and accurate tax return.

Run a Non-Profit: Know Your Non-profit's Limitations and Restrictions

Equally as important as maintaining detailed and accurate corporate records, your non-profit corporation must follow other laws in order to keep and maintain its tax exempt status:

  • Your Non-profit Corporation Cannot Make Monetary Contributions to any Political Campaign -- Unlike regular corporations, non-profit corporations that are tax exempt under 501(c)(3) cannot make contributions to, or participate in political campaigns. If a non-profit corporation does engage in such activity, the Internal Revenue Service can revoke the corporation's tax exempt status and asses a special excise tax against the corporation as well as its managers.
  • Your Non-profit Corporation Can Only Engage in Political Lobbying in Limited Amounts -- If your 501(c)(3) corporation is shown to have influenced legislation to a "substantial degree," it could face the loss of its tax exempt, non-profit status. However, non-profit corporations can participate in the legislative process in a limited way. The IRS sets a limit on the money that the corporation can spend on political activities.
  • Your Non-profit Cannot Distribute Its Profits to Directors, Officers, or Members -- Non-profit corporations are not allowed to financially benefit its directors, officers, or members. However, this is not to say that directors, officers and members cannot receive a reasonable salary or be entitled to expenses.
  • Your Non-profit Corporation Must Pay Income Taxes on Profits Unrelated to Its State Purpose or Activities -- Under 501(c)(3) of the Internal Revenue Code, non-profit corporations are only exempt from income taxes on profits that are related to the non-profit corporation's charitable activities. However, if the corporation receives profits from unrelated activity, it must pay income taxes on that profit. The IRS requires that a non-profit corporation pay corporate taxes on any unrelated profits in excess of $1,000.
  • Your Non-profit Cannot Receive "Substantial" Profits from Unrelated Activities -- If your non-profit corporation realizes substantial profits from activities unrelated to its purpose, the corporation's non-profit status may be revoked. If you plan on having your non-profit corporation engage in activities unrelated to the corporation's purpose that could involved a substantial amount of time or generate substantial income, you should talk to a lawyer.
  • Your Non-profit Corporation Must Distribute All of Its Assets to Another Tax-Exempt Group on Dissolution -- Unlike regular corporations, a non-profit corporation cannot simply be sold. Instead, when the directors decide to dissolve a non-profit corporation, all of the assets of the corporation must be donated to another tax-exempt group. This means that any property that is donated to a non-profit corporation cannot later be sold or distributed to a director or a member.
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