Photo from Unsplash

Originally Posted On: https://chisholmfirm.com/6-legal-considerations-for-starting-a-nonprofit-organization/

6 Legal Considerations for Starting a Nonprofit Organization 

Interest in forming nonprofit organizations has grown in recent years as more people look for ways to make meaningful contributions to their communities. Charitable organizations provide a powerful avenue for addressing local needs, improving quality of life, and inspiring positive change. However, starting a nonprofit means understanding and following specific legal requirements to establish a strong foundation that keeps your organization compliant with state and federal laws.

If you’re in the early stages of planning, it’s normal to feel both excited about the impact you hope to make and uncertain about taking the legal steps ahead. While you need passion to start a charitable organization, navigating these requirements can feel overwhelming without proper guidance. To help you on this journey, here are six legal factors involved in forming a nonprofit and tips for making these responsibilities more manageable.

1. Choose the Right Type and Legal Structure of Your Nonprofit Organization 

Every nonprofit needs a purpose and a legal structure. Not sure where to begin? Start by asking a few simple questions. What will your nonprofit do? Who will it help? How will it achieve its goals? Use the answers to these questions to create a mission statement – a clear and concise pronouncement that defines your organization’s purpose, guides its activities, and communicates goals effectively to potential supporters, donors, and stakeholders.

A well-defined mission statement can also help you select the right type of legal entity to form, particularly if you are seeking tax exemption through 501(c)(3) status. There are various types of nonprofit designations, each serving different purposes and governed by different regulations. For example, a 501(c)(3) organization is the most common type of nonprofit and is recognized by the Internal Revenue Service for its charitable, educational, or religious purposes.

Orgs that qualify for this status can receive tax-deductible donations, making it highly attractive to potential donors. On the other hand, 501(c)(4) entities, often known as social welfare organizations, are designed for advocacy and community action but do not qualify for the same tax benefits as a 501(c)(3).

Other common types of nonprofits include:

• 501(c)(6) Business Leagues and Associations: This designation applies to business leagues, chambers of commerce, real estate boards, and other professional associations. A 501(c)(6) organization promotes the interests of its members but cannot engage in activities for private profit. Contributions to these organizations are not tax-deductible, but the entity itself enjoys tax-exempt status.
• 501(c)(7) Social and Recreational Clubs: Social clubs, such as country clubs, hobby groups, and fraternities, fall under this designation. These organizations are tax-exempt as long as they focus on pleasure, recreation, or other social purposes, and they generate most of their income from member dues. Donations to 501(c)(7) organizations are not tax-deductible.
• 501(c)(8) and 501(c)(10) Fraternal Organizations: Fraternal beneficiary societies (501(c)(8)s) and domestic fraternal societies (501(c)(10)s) are tax-exempt if they provide for the payment of life, health, or accident benefits to their members. They must operate under a lodge system and have a nonprofit mission, often related to charitable work within their communities.

Learn about these distinctions so you can choose the right entity type that aligns your nonprofit’s mission with the right tax classification and operational goals. The entity you choose will determine your reporting obligations, eligibility for grants, and the types of activities you can engage in.

For instance, if your primary aim is to secure tax-deductible donations and apply for foundation grants, then obtaining 501(c)(3) status may be the best fit. However, if your focus is on influencing legislation or conducting political activities, another type of 501(c) designation may be more suitable.

2. Drafting and Filing Articles of Incorporation 

Incorporation is a foundational step in your nonprofit’s journey, and ensuring you follow the correct legal procedures will set you up for future success.

To formally incorporate your nonprofit, you must draft articles of incorporation that establish your organization as a legal entity, and file them with the appropriate agency in your state. This legal step requires careful attention to both federal and state regulations, depending on the legal structure you choose. Incorporation gives your nonprofit official recognition and allows it to operate legally, ensuring it meets the necessary compliance standards from the start.

Articles of incorporation must include specific details, such as:

• Purpose: Clearly define the mission and purpose of your nonprofit. This is not just a formality; it is required by law and helps establish your eligibility for tax-exempt status. Your purpose must align with the nonprofit designation you seek, particularly if you’re applying for 501(c)(3) status under the Internal Revenue Code.
• Directors: You will need to identify the initial board of directors and how many board members your organization will have at all times. These individuals will govern your nonprofit, making key decisions about its operations and strategic direction.
• Registered Agent: This is the individual or business responsible for receiving official legal documents on behalf of your nonprofit. The registered agent must have a physical address in the state where your nonprofit is incorporated.

Seeking legal counsel can be beneficial during this process. A lawyer can ensure that your articles of incorporation are properly drafted to meet all state and federal requirements, help avoid common pitfalls, and ensure that your nonprofit is set up to qualify for tax-exempt status.

3. Building a Strong Governing Framework and Board of Directors 

Creating a solid governing framework is vital to the effective operation of your nonprofit. When we talk about governance, we’re referring to the systems and processes in place to direct, control, and hold accountable the organization’s leadership. At the heart of this framework is your board of directors, whose role is to guide your nonprofit toward fulfilling its mission while ensuring legal and ethical integrity.

Drafting Bylaws

One of your first governance tasks is to draft bylaws, which are essentially the rulebook for how your nonprofit will operate. These bylaws will outline critical procedures such as how board members are selected, how meetings will be conducted, and how decisions will be made. Every nonprofit should have well-drafted bylaws to avoid future legal complications. They should be thorough, clear, and compliant with both state and federal regulations.

Best practices for drafting bylaws include defining the scope of the board’s authority, specifying quorum requirements for board meetings, and creating procedures for amending bylaws as the organization grows or evolves. Your bylaws should also outline the roles of officers such as the president, treasurer, and secretary, along with their responsibilities.

Define the Roles and Responsibilities of the Board of Directors 

The board of directors is responsible for the governance of your nonprofit. Their duties include overseeing the nonprofit’s strategic direction, ensuring it operates within the law, safeguarding its financial health, and ensuring it remains aligned with its mission. Board members have a fiduciary duty to act in the best interest of their nonprofit, which includes duties of care, loyalty, and obedience.

In addition to these responsibilities, your board plays a key role in approving budgets, setting policies, and providing oversight of the executive leadership. They’re also responsible for evaluating the nonprofit’s performance and addressing any risks or challenges that arise.

To maintain compliance, your nonprofit will have to adhere to legal obligations regarding board meetings and decision-making processes. Most states require regular board meetings, with decisions made according to the rules outlined in bylaws. Nonprofits must also keep accurate records of board meetings (commonly known as meeting minutes), which document decisions, discussions, and the overall governance process. You will need to provide these records should your organization be audited or face any kind of legal challenge.

Establishing processes for resolving conflicts, particularly between board members or between the board and staff, is also an important role for the board. Your bylaws should clearly outline conflict resolution procedures to ensure transparency and accountability.

Conflict of Interest Policies 

Having a conflict of interest policy is necessary to maintain the integrity of your nonprofit’s decision-making. A conflict of interest can arise when a board member has a personal or financial interest that could improperly influence their decisions. If you have an established policy that requires board members to disclose any potential conflicts, anyone who is impacted would have to recuse themselves from related discussions or votes and act solely in the best interest of the organization.

Failure to manage conflicts of interest appropriately can lead to legal complications, jeopardize your nonprofit’s tax-exempt status, and damage its reputation. It’s in your best interest to have a

clear and enforced conflict of interest policy from the outset as both a best practice and a legal safeguard.

4. Fundraising and Compliance 

To run a successful nonprofit, you have to understand both state and federal charitable solicitation laws and fundraising registration requirements that apply to your organization.

Every state has regulations governing how philanthropic organizations and public charities can operate and solicit donations. Some may have more stringent requirements for solicitation registration, while others might regulate specific types of fundraising activities like raffles or online campaigns. Many require nonprofits to register before soliciting donations, whether through direct mail, online campaigns, or fundraising events. This process, often known as charitable registration, involves filing the necessary paperwork with state regulatory agencies and keeping that registration up to date.

If your organization doesn’t register properly, it can be subject to fines, penalties, and reputational damage. Be sure to research the specific requirements in each state where your nonprofit plans to solicit funds so you can comply with applicable laws and stay up to date with timely renewals.

Set Donation Policies and Recordkeeping Practices 

Clear donation policies and good record-keeping are important to maintaining transparency and showing accountability to both donors and regulators. You should craft donation policies that outline how donations are accepted, the types of contributions your organization can accept, and how funds will be used to further your mission. These policies will set donor expectations and ensure transparency, which can build trust with supporters.

Proper recordkeeping is equally important for nonprofits with federal tax-exempt status, as it helps demonstrate compliance with IRS regulations, especially during audits or when verifying the tax deductibility of donations. Maintaining accurate records not only simplifies the process of financial audits, it also ensures compliance with federal regulations. It provides a clear trail of how funds were raised and utilized, which is a cornerstone of maintaining donor trust.

5. Employment and Volunteer Legal Considerations 

Nonprofits, like any other employers, have to comply with various legal requirements to ensure fair treatment of their employees and volunteers. They must adhere to federal and state wage laws, including minimum wage, overtime pay, and employee classification regulations. Even though your organization may have a charitable mission, it is not exempt from complying with laws like the Fair Labor Standards Act (FLSA). Misclassifying employees as independent contractors or unpaid interns can lead to costly penalties.

Discrimination laws also apply to nonprofit employers. Title VII of the Civil Rights Act, the Americans with Disabilities Act (ADA), and the Age Discrimination in Employment Act (ADEA) prohibit discrimination based on race, gender, disability, age, and other protected characteristics. Your org should establish non-discriminatory hiring practices and provide a safe and inclusive working environment for all.

For volunteers, special laws like the Volunteer Protection Act (VPA) provide certain protections against liability, but only if the nonprofit follows best practices. While volunteers are not subject to the same wage laws as employees, you should still ensure they are treated fairly and not exploited as a replacement for paid work. Failing to follow the letter of the law in these cases can lead to significant legal consequences, potentially jeopardizing the organization’s mission and reputation.

Consider Employment Contracts and Volunteer Agreements 

To protect your organization, draft clear employment contracts and volunteer agreements that define roles, responsibilities, and expectations for those working with your nonprofit. Employment contracts should detail job duties, compensation, benefits, and conditions for termination, providing clarity for both the employer and the employee. These agreements can help prevent misunderstandings and provide clarification in the event of disputes.

Volunteer agreements, though not legally required, are equally important. They outline the scope of volunteer activities, the expected time commitment, and any training or guidelines required. Having written agreements with volunteers helps clarify that they are serving without compensation, which is crucial for maintaining compliance with labor laws and managing liability risks.

Also be sure you’re familiar with laws around employee benefits, workplace safety, and harassment prevention. Following these laws can help you create a positive environment for your staff and volunteers while offering regular training and workshops can keep everyone informed and ensure compliance.

6. Protecting Your Nonprofit 

Protecting your nonprofit involves more than just following initial legal requirements; it requires ongoing vigilance to ensure compliance and safeguard the organization’s assets and reputation. You’ll need to stay on top of various requirements to maintain your organization’s standing and avoid potential penalties. They include:

• Ongoing Legal Obligations: After your nonprofit is officially established, maintaining compliance with federal and state regulations is essential. This includes submitting annual filings, such as IRS Form 990, to maintain tax-exempt status. Many states also require annual reports, charitable solicitation renewals, and other documentation to keep your organization in good standing. Maintaining accurate records is so important here, and this includes using your Employer Identification Number (EIN) on all official tax filings and financial documents to ensure compliance with IRS regulations.
• Liability Insurance: Insurance policies, such as general liability, directors and officers (D&O) insurance, and property insurance, help shield your organization from financial loss due to lawsuits, accidents, or damages. D&O insurance, in particular, is important for protecting board members and key decision-makers from personal liability in the event of legal claims against the nonprofit. Securing this type of protection ensures your leaders can confidently guide your organization without fear of personal financial risk.
• Protecting Your Nonprofit’s Name, Logo, and Content: Securing your nonprofit’s intellectual property through trademarks and copyrights is another important legal consideration. Trademarking your organization’s name and logo helps prevent other entities from using a similar brand, preserving your reputation and preventing donor confusion. This is particularly important if your nonprofit operates across multiple states or plans to expand its reach.
• Developing Employee Policies and Handbooks: A well-structured employee handbook is a valuable tool for ensuring consistent practices and compliance with labor laws. This document should outline key policies, such as anti-discrimination measures, workplace safety, codes of conduct, and procedures for addressing grievances. Clear policies not only help create a positive work environment, but they also protect your nonprofit from potential legal claims related to employment practices.

Chisholm Law Can Help 

When you’re deciding whether or not to start a nonprofit, you have to look toward establishing a solid legal foundation for your organization. Though these considerations can seem overwhelming, having the right guidance can make all the difference in ensuring compliance and the success of your nonprofit idea.

That’s where seeking legal counsel with a strong track record of success can help you better navigate the intricacies of starting a nonprofit. At Chisholm Law, we understand the intricacies of forming and maintaining a successful nonprofit. Our experienced team can assist you with every aspect of the process—from drafting and filing your articles of Incorporation to ensuring compliance with charitable solicitation laws and protecting your organization’s intellectual property. With our support, you can focus on what matters most: making a positive impact in your community.

Let us help you get your nonprofit off to the best possible start. Get a free consultation today and take the first step toward realizing your vision.