Special Challenges for Nonprofit Organizations
Nonprofit organizations have to abide by specific laws to maintain their nonprofit status. Here are some of the common areas where conflicts of interests, strict regulations, and other laws can provide unique challenges for nonprofits.
Political campaigning is strictly controlled for nonprofits. Political campaigning is considered to be supporting of particular candidates for office (as opposed to lobbying, which is supporting legislation). The general rule is that charitable organizations may not do any political campaigning, while non-charitable nonprofits can only do limited campaigning.
Although the tax law does not impose an absolute ban on political campaigning by nonprofits that are noncharitable, federal election laws severely limit what nonprofit corporations can do.
The penalty for violating these rules can be a tax on the amounts expended or a complete loss of tax-exempt status.
Sources of Income
There are two main concerns for nonprofit organizations about the sources of income-that new funds do not cause it to lose its public charity status and that not too much of the money is from sources unrelated to its exempt purpose.
Donations. For a charitable nonprofit to be considered a public charity, it must pass either the public support test or the facts and circumstances test. Mainly, it must be sure that the income comes from public sources rather than a few donors. Keep these tests in mind when raising money, since this may mean declining certain donations if they threaten your public charity status.
Fundraising Activities. Both charitable and noncharitable organizations must be careful about how they earn money. If too much comes from improper sources, they may be required to pay tax penalties or completely lose their tax exemption. For charitable organizations, the basic rule is that the money making activities must be related to the exempt function of the organization. For non-charitable organizations, only a limited amount may be raised from non-members.
Conflicts of Interest
Organizations can have dealings with its insiders (disqualified persons in IRS parlance), but the dealings require careful documentation, and at times can look bad to outsiders. As previously discussed, any transactions with insiders should be documented.
Keep in mind that conflicts of interest and nepotism in an organization can have a negative effect on members or contributors. If the person who starts an organization only hires family members and no one else to work for the organization, this may be seen as a conflict of interest to those who make grants or want to join.
In some cases, the salaries in an organization are below normal and few other people are willing to get involved, so a conflict of interest may not occur. However, in a large organization where many people want to be involved, these political problems may result in a loss of support or even in the formation of splinter groups. Avoid keeping any conflicts secret. If the organization is dealing with an insider or an insider's family member, do not try to hide it. Explain the person's relationship to the organization and put the transaction in the records.