5 Legal Mistakes Nonprofits Should Avoid

by: Joe McAlister, Chief Legal Officer

Attorneys who work with nonprofit organizations know all too well some of the mistakes nonprofits can make. By the time they seek legal advice it’s usually too late. Here are eight of those legal traps you can avoid before you get caught in a snare.

A Poor Understanding of Nonprofit Tax Laws
Nonprofits, although “tax exempt” can actually be regulated more aggressively than for profit businesses. It’s because they have a tax exempt status and many other concessions, the US government makes sure no one is exploiting these benefits. There are many other federal, state and local laws or regulations that nonprofits must follow to maintain good standing.

Tax exempt entities are subject to different limits on their activities. Digressions such as overpaying certain members of staff, excessive lobbying, undocumented political activities and accepting tax shelter transactions can cause severe penalties for your organization.

Not Understanding the Difference Between Nonprofit and Tax Exempt Status
Nonprofit status is a state law concept. Nonprofit status may make an organization eligible for certain benefits, such as state sales, property and income tax exemptions. Although most federal tax-exempt organizations are nonprofit organizations, organizing as a nonprofit organization at the state level does not automatically grant the organization exemption from federal income tax. To qualify as exempt from federal income tax, an organization must meet requirements set forth in the Internal Revenue Code. – source The Internal Revenue Service

Not Operating Within Their Own Bylaws
It is not uncommon for nonprofit boards to adopt bylaws with specific guidelines, but never follow their own mandates. For example, don’t specify in your bylaws a vote needs to be taken under certain circumstances but fail to provide board members with a vote when an important decision is made. Encourage compliance by conducting regular reviews of the governing documents.

Not Understanding Fundraising Laws
Because there have been so many abuses in the fundraising arena, scrutiny surrounding the solicitation and purpose of donations has dramatically increased. It is critical to comply with any federal, state and local laws applicable to the solicitation of gifts, particularly financial. Government regulations shouldn’t be your only consideration. Public perception is crucial for your nonprofit. Take steps wherever possible to avoid a public relations nightmare.

Not Admitting “We Made A Mistake”
Everyone throughout the course of their career will make mistakes. If you try to cover up a mistake it will only make the situation worse. Admit your failures quickly and see each one as a learning opportunity. If you don’t take the time to acknowledge the problem, you miss the opportunity to prevent it from reoccurring.

If you find you’ve overlooked something important, make sure to involve a nonprofit attorney as soon as you can. The longer you wait to find help, the worse the situation could become. There are many attorneys who will take your case pro bono. To find help, use a website like Taproot. This site helps connect nonprofits with passionate, skilled individuals who are willing to share their expertise pro bono.