5 Common Legal Mistakes Nonprofit Managers Make And How To Avoid Them
Although nonprofit organizations do wonderful work, they must operate in compliance with certain legal requirements, just like all businesses.
To help you, we put together a list of 5 common legal mistakes nonprofits make. Read on to learn how to avoid them.
Failing to Follow Corporate BylawsNo matter what type of organization you run, nonprofit or for-profit, failing to follow your corporate bylaws will surely get you into legal trouble. You must always make sure that every action you take aligns with the directions outlined in your bylaws. If a particular situation requires a vote from the board of directors, you must make sure all your board members are promptly informed and ready to vote. Following your own rules is crucial when it comes to keeping your nonprofit out of legal trouble.
Failing to Comply with Nonprofit Tax LawsIn the United States, nonprofits are typically tax-exempt. However, nonprofits have more strict rules to follow than regular businesses because the government wants to guarantee that they are not exploiting their benefits.
To prove that your nonprofit organization deserves the tax-exempt status, you must follow certain rules. Specifically, you will want to follow the rules regarding undocumented political activities, salaries, lobbying, and tax shelter transactions. If you do not follow these rules, not only will your application for the tax-exempt status be denied, but also serious legal issues may arise.
Thinking All Nonprofits are Tax ExemptAlthough the majority of nonprofits are tax-exempt, this does not mean that all of them are, nor does it mean that a nonprofit will automatically obtain the tax-exempt status.
The status of your nonprofit will come from your state and may come with benefits including sales, property, and income tax exemptions. However, under Federal Law, in order for an organization to qualify for the tax-exempt status, it must meet the requirements listed in the Internal Revenue Code.
Section 501 of the U.S. tax code outlines the types of nonprofit organizations that will be given the tax-exempt status. Specifically, the section of the code that provides for exemption in Section 501(a), which states that a nonprofit organization will be exempt from some federal income taxes so long as they fall under sections 501(c), 501(d), and 401(a) of the code.
Trying to Cover Up MistakesWhen we make a mistake, we are typically driven by instinct to deny we made a mistake, which then leads to trying to cover up the mistake so that no one notices because we do not want to deal with the consequences. However, 99% of the time, this strategy fails. As a manager, trying to cover up a legal mistake could leave your organization in an embarrassing position, and you could be considered both a law-breaker and a liar.
When you or someone at your organization fails to comply with the law, the first step you must take is to admit a mistake has been made and get ready to deal with the consequences. The second step is to call an experienced business lawyer from Jurado & Farshchian, P.L.
Underestimating the Importance of Hiring a Business LawyerWhether you have an existing nonprofit or are thinking about starting one, having an experienced business lawyer by your side is crucial. Jurado & Farshchian, P.L. can help you be certain your nonprofit is operating in compliance with all federal, state, and local laws. We can help you operate without making legal mistakes.