Legal Considerations When You Start a Nonprofit

Before you start up a nonprofit, it’s important to familiarize yourself with the legalities. You need to understand local, state and federal laws. Local and state laws can differ dramatically, so it’s crucial you know what the legalities are in your specific area.

Here, we’ll look at some of the legal considerations you need to make when setting up a nonprofit.

The Rules Surrounding Profits

As a nonprofit, it’s important to realize that you will not be able to keep any profits for yourself. While they can be used to pay essential salaries, excess profits need to be paid back into the charity.

If you were to personally utilize the profits within a nonprofit organization, you would be breaking the law. This is definitely something you need to be aware of before you get started. Nonprofits are designed to benefit people and communities; they are not businesses designed to make you profit.

Understanding Tax Rules

One of the most complex things to get your head around as a nonprofit is tax rules. In addition, these might be different from state to state so you’ll need to research your own state tax laws.

Generally speaking, all nonprofit organizations benefit from some level of tax exemption. However, you should seek advice on the specific tax rules you’ll need to follow to ensure you’re not breaking the law.

Prevention of Charitable Fraud

State governments are responsible for the prevention of charitable fraud. The exact laws surrounding charitable fraud again differ between states. A general rule is that nonprofits need to be registered before they can accept donations.

The top sources of charitable fraud in the United States include improper payments to grantees, employee theft, and endowment write-offs. So, you’ll want to be aware of charitable fraud and how it could impact your charity.

Consider Setting Up a Corporate Charity

While you can set up an incorporated charity, it is better to start a corporate charity instead. Corporations benefit from being separate legal entities which abide by state law.

In order to set up as a corporation, you’ll need a corporation name, the state you want it to be incorporated in and adopt bylaws. You’ll also need to create and file Articles of Incorporation. These are just some of the steps involved. To ensure you incorporate the charity properly, you should ideally hire a business lawyer or set it up via legal filing services.

Obtain a Federal Employer Identification Number

Finally, another thing you’re going to need is a federal employer identification number. This will basically be your account number through the IRS. You’ll need to include it in all of your correspondence, and it is also required to open up a business bank account.

The above are just some of the legal considerations when you start a nonprofit. It can be quite complex to understand all of the ever-changing laws. Therefore, hiring an advisor who specializes in the development of nonprofits would be really useful for your charity.