Nonprofit corporations are most readily identified by the mission and vision of the work they do. It is true that the charitable work nonprofits do are a requirement for the State and the IRS in determining what defines a nonprofit. Yet, there are some other very important concepts that legally define a nonprofit corporation. I call these the “five clauses”. They are defined in state law and IRS requirements and necessary for every nonprofit to know and follow. They are, or should be, in your Articles of Incorporation. They are all written in legal “lawyerly” terminology. I’m not going to share the “legalese” of the actual verbiage here, but you can go to my website to see a copy.
The “Five Clauses” of a Nonprofit Organization
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Charitable Purpose Clause:
This clause is just as it states. It means that the organization will act for a charitable purpose defined by the IRS as” relief of the poor, the distressed, or the underprivileged; advancement of religion; advancement of education or science; erecting or maintaining public buildings, monuments or works; lessening the burdens of government; lessening neighborhood tensions; eliminating prejudice and discrimination; defending human and civil rights secured by law; and combating community deterioration and juvenile delinquency. Therefore, the phrase “relief of the poor” in your organizing document properly limits your purpose.”
It is important that your mission and vision statement follow this requirement and that the board always makes decisions centered around the mission and vision of your organization.
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The dissolution clause states that if and/or when the organization comes to end and no longer exists, the assets, cash and property, is dissolved into another 501c3 organization. The nonprofit volunteers or staff, including the founder or board of directors, cannot take the money for themselves. The organization can pay out its debts including salaries. If there is money and property left over, then the board votes on a like nonprofit 501c3 organization to give over these assets.
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Limitation on Director Liability:
Directors serving on nonprofit boards are volunteers and as long as they act in the best interest of the nonprofit, have regular meetings, take and record votes, follow fiduciary policy and generally participate in the governing of the organization, they cannot be personally sued. There are limits to this. If the board does not meet regularly, take and record votes, keep meeting minutes, allow state and IRS filings to lapse, embezzle money, or specially disregard their duties to the detriment of the nonprofit, they could be individually sued. Directors need to know their duties and responsibilities and follow them to the best of their ability. Directors should seek out training and education to be the best board member they can be. Additionally, nonprofit organizations should purchase Director and Officer Liability Insurance to help cover legal costs.
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The State and IRS wants to make sure that individuals involved with the nonprofit are not benefiting from the nonprofit. The nonprofit is not set up to make money for the founder, staff or board of directors of the nonprofit. For example, if a board member has a printing shop, they may offer to do printing for the nonprofit and charge wholesale or less amount to the nonprofit and the board votes to give him the printing work. This is a form of innurement. The board member is going to benefit from serving on the board knowing that the nonprofit needs printing services even before any other printing companies know and can get the work before another printing company can bid the work. The board should be bidding the work and should avoid any possible innurement where a board member is paid money for services to the nonprofit. This does not include reasonable reimbursement for expenses related to the serving on the board (travel expenses to board meetings, paper, supplies, printer cartridges, etc.)
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The rules differ for 501c3 and other tax exempt status organizations. For 501c3 organizations, nonprofits are not allowed to give money or endorse or ask their community/supporters to vote for a political candidate (a person running for office). 501c3 organizations are allowed to support and endorse ballot initiatives. They can ask their community/supporters to support and vote for initiatives supportive of the work of the nonprofit. However, the IRS says such activity must be “insubstantial”. The IRS has started to define “insubstantial” and interpretations say 20% of the total time and money of the nonprofit should be spent on legislative lobbying.
