can be sold, but the proceeds of the sale must benefit the organization, not private parties.
If you start a nonprofit and decide at some point in the future that you can’t or don’t want to manage it anymore, you have to walk away and leave the running of the organization to someone else. Or, if the time has come to close the doors for good, any assets the organization owns must be distributed to other nonprofits fulfilling a similar mission. You’ll need to follow the laws of your state to close the nonprofit organization, including selection of an appropriate and, in some cases, an approved nonprofit that will receive the assets.
Benefiting the public
People form nonprofit organizations to create a public benefit. In fact, nonprofit corporations are sometimes referred to as public benefit corporations. A nonprofit organization can’t be created to help a particular individual or family, for example. If that were possible, we’d all have our separate nonprofit organizations. You can start a nonprofit to aid a specific group or class of individuals – everyone suffering from heart disease, for example, or people living below the poverty level – but you can’t create a nonprofit for individual benefit or gain.
Being accountable
Although nonprofit organizations aren’t public entities like government agencies and departments, their tax-exempt status and the fact that contributions are tax deductible require them to be more accountable to the public than a privately owned business is.
It only takes a few media reports about excessive salaries or concerns about how a nonprofit has spent donated funds to prompt donors, legislators, and the general public to begin asking questions regarding the nonprofit’s finances and management.
A few nonprofit organizations have taken on the task of collecting information about other nonprofits and sometimes rating them in various categories so prospective donors can use this information to help them decide which organizations to support. Charity Navigator (www.charitynavigator.org), CharityWatch (www.charitywatch.org), GuideStar (www.guidestar.org), and BBB Wise Giving Alliance (www.give.org) are four prominent organizations providing information about nonprofits. If you’re just starting out and your nonprofit is small, it’s unlikely that your organization will be evaluated by one of these organizations. But it will serve you well to remember that the degree of operational transparency, financial stability, and program results in your organization can be put under scrutiny.
Federal law also requires nonprofits to make their three most recent 990 reports, as well as their application for tax exemption and supporting documents, available for public inspection. State and local laws in your area may require additional disclosures. Posting your 990 reports and other required documents on the web is an acceptable way to meet disclosure requirements.
Although nonprofit employees have no dollar limit on the amount of compensation they can earn, the IRS does have the authority to penalize individuals (and organizations) who receive (or pay) excessive compensation. Whether the IRS considers benefits “excessive” depends on the situation. For instance, a staff member earning $100,000 annually from an organization with a budget of $125,000 may need to worry, but someone earning $100,000 from a nonprofit with a $5 million budget probably doesn’t.
An employee who’s found to be receiving excessive compensation may be required to return a portion of his compensation and to pay an excise tax, and, in dire cases, the nonprofit organization may lose its tax-exempt status. Chapter 5 offers more information on excessive compensation.
So when setting your nonprofit’s executive director’s salary, make sure the amount of compensation is justified by salary surveys of similar organizations. Also factor in the local cost of living, the size of the nonprofit’s budget, and the type of services being provided. Community foundations and nonprofit consulting firms can offer salary guidelines to aid in the compensation decision. Also, many states have a statewide nonprofit organization that collects information about and provides information to other nonprofits.
Looking at the Many Varieties of Nonprofits
The words nonprofit and charity go together in most people’s minds, but remember that not all nonprofits are charitable organizations. The most common examples are business and trade associations, social welfare organizations, labor organizations, political advocacy groups, fraternal societies, and social clubs. Although these nonprofits enjoy exemption from corporate income taxes, people who donate to them can’t claim a tax deduction for their contributions.
Most nonprofits, charitable or not, are incorporated organizations that are formed under the laws of the state in which they’re created. Some nonprofits have other legal structures, such as associations or trusts, but these are in the minority. The IRS grants tax-exempt status to a nonprofit after reviewing its stated purpose. (See Chapter 4 for information about incorporating and applying for a tax exemption.) Nonprofit types are identified by the section of the IRS code under which they qualify for tax-exempt status.
In this section, we provide an overview of the types of nonprofit organizations and some of the rules and regulations that you’ll be subject to if you decide to incorporate and seek tax-exempt status from the IRS. You may
