Suggestions for a Successful Tax-Exempt Nonprofit Organization

If you've formed a nonprofit organization or are thinking about doing so, you're not alone. The Internal Revenue Service (IRS) reports that in 2023, there were just under 2 million nonprofit organizations operating in the United States. Over 1.5 million of these were 501(c)(3) tax-exempt organizations. These charitable endeavors make up nearly 10% of the private sector workforce.

In most cases, tax-exempt nonprofit organizations try to make the world a better place. Some nonprofits focus on saving animals. Other types of organizations are dedicated to fighting for the environment. In some cases, they're trying to fix just about everything they can. Your nonprofit corporation may be a public charity that finds its own niche.

Most tax-exempt nonprofit organizations survive on donations. There are restrictive rules and Internal Revenue Codes they must follow to keep their status. A certain level of transparency in how a nonprofit is operated goes a long way toward instilling trust and drawing in new donors, regardless of what type of 501(c)(3) the organization is.

Experience is the basis for wisdom. Following the tried and true tips listed below can help your tax-exempt nonprofit achieve everything you hope it can. It doesn't matter if you're a tiny nonprofit or one of the biggest. Every little bit helps, and your organization can change lives for the better.

Show Them What You're Made Of (Literally)

You don't need to post your annual income tax returns next to your organization's name on your website, but you should be willing to share some information on request. Potential donors may want to review your IRS Form 990 (or possibly Form 990-ez or Form 990-n) and your application for exemption before committing to a donation.

Use transparency to your organization's advantage. If the request is in writing, you have 30 days to provide a copy of the information. Providing access to the forms demonstrates that you have nothing to hide and that people can trust your organization. Your annual reports can serve as a means of fundraising.

Sometimes Not Sharing Is Caring

Donor lists can be private. That's often the norm. 501(c)(3) organizations aren't required to share their donor list with anyone. It's a requirement when you file Form 990, but the IRS won't share that information. Political organizations are more apt to share donor lists, but they can't have 503(c)(3) status.

Donors may have many different reasons to keep their donations quiet, none of which are yours to share. Unless they're funding a new wing of your hospital and want their name on it, respect the privacy of your donors and keep it quiet. This applies to religious organizations that have non-exempt status as well.

Within Arm's Reach

Much like your Form 990, your 501(c)(3) exemption determination letter is something you're going to want easy access to. Keep a copy of your exemption letter on file. Recognition of exemption is important for soliciting grants, solving any state or local tax issues, and showing potential donors.

Since it was an important part of your charitable plan, you might have let out a cry of joy when your exemption determination letter arrived from the IRS. Share that excitement with members of your staff and your donors.

Prepare for Conflicts (of Interest)

It's inevitable that at some point, either you or a member of your Board of Directors is going to encounter a conflict of interest. It behooves you to have a policy for dealing with these issues in place before they pop up. Conflicts of interest can cause big headaches, but being prepared reduces the risk.

It's a good idea to have a policy as part of your bylaws at the same time you file your articles of incorporation. Your conflict of interest policy should focus on the following two guidelines:

• Those with a potential conflict of interest should disclose the issue as soon as possible
• Board members with a noted conflict of interest should refrain from voting on any related issues

Figure out how the Board will handle things if conflicts surface. Check with your state laws regarding nonprofits, as there are often differences you should be aware of. And remember, conflicts of interest aren't always about the most important issues your nonprofit deals with. It might be something as simple as needing to hire someone to cut the grass at your office but one of your board members owns a landscaping company. By getting ahead of any potential problems, you're ahead of the game.

Follow the Money (and Keep It Fair)

Not all tax-exempt non-profit organizations pay their officers or board members. If you're going to and want to keep your 501(c)(3) status, you should have a well-researched compensation policy in place before you dole out a single dollar.

The IRS has a three-step compensation process in place that you should familiarize yourself with. Comparability is the key. Do your research and see what others in the same situation are paid. You can find salary numbers for each state through the National Council of Nonprofits.

This is a process you should expect to go through each year. In addition to new hires, you'll need to make sure the existing salaries are acceptable for a position in a tax-exempt organization of your size in your location. If you're unsure about any part of the process, consider speaking with a nonprofit business attorney. A mistake here could cause the revocation of your tax-exempt status.

Giving Diligence Its Due

As a 501(c)(3) charity, giving donations may well be part of your business model. Given your tax-exempt status, you're expected to conduct due diligence on anyone who might be a recipient. This includes other 501(c)(3) organizations.

You're not permitted to give to any sort of political organization, so research needs to be part for your donating process. Your goal is to provide funds to people and organizations that will use them to achieve and further their goals. Losing your tax-exempt status because of an improper donation is a chance you don't want to take. Make due diligence an essential part of your vetting process.

Chasing Your Dream

Starting an organization to improve the world is a noble endeavor. Don't let your good intentions get tripped up by a preventable mistake. If you feel you need additional information on how to proceed with your tax-exempt nonprofit organization, consider speaking with a business attorney for legal advice.

Related Resources:

• Nonprofit Financial Basics (FindLaw's Learn About the Law)
• Nonprofit Organization Law (Findlaw's Small Business Law)
• Becoming a Tax-Exempt Organization (FindLaw Small Business Law)