Frequently Asked Questions about Nonprofit Legal Issues

An Excerpt from the Center's Nonprofit Answer Book: An Executive Director's Guide to Frequently Asked Questions printed in 1998. Our goal is to provide nonprofit managers and directors with a useful reference for spotting potential problems and enable further research.

FAQ #1. How do we reduce our risks?

The most important way to reduce risk of loss is to have appropriate insurance.  A good insurance agent with experience insuring nonprofits can work with you to analyze your exposure and even to set up risk management programs.  An attorney can also provide risk analysis and prevention strategies.

Risk management programs generally consist of the following steps:

• •   Identify “loss exposure” (potential accidents or incidents that may result in the filing of a lawsuit or other damage to the organization).
• •   Evaluate alternative measures that could reduce or eliminate the risk of loss.
• •   Select the appropriate strategy.
• •   Implement the chosen strategy.
• •   Monitor the situation to determine whether the strategy is meeting the organization’s needs.

Adopting a risk management program may reduce some insurance underwriters’ concerns that nonprofit organizations are insufficiently attentive to potential losses.

Adapted from: Reconsidering Legal Liability and Insurance for Nonprofit Organizations, by Charles Tremper.

FAQ #2. What kinds of insurance do we need?

Nonprofit organizations are exposed to legal risks in many areas.  In most areas, insurance coverage exists to help mitigate these risks. The most common type of coverage for nonprofit organizations is comprehensive general liability.  This insurance covers the organization against liability for injury or loss to third parties (members of the public, clients, guests and the like) arising from the organization’s activities.  The primary costs covered typically include:

• •   Bodily injury.
• •   Property damages.
• •   Personal injury/advertising injury (damage to reputation or making an inaccurate representation to an audience on behalf of an advertiser or contributor to a newsletter, for example).
• •   Medical payments (covers medical bills for minor injuries, such as typical “slip and fall” accidents, regardless of fault of the insured organization; helpful in protecting good will).

Desirable policy features include occurrence basis for coverage (i.e. coverage of claims arising from incidents that occurred during the policy period, even if it is reported after the coverage has ended), payment of defense costs outside policy limits, coverage for volunteers, and cancellation only for cause.

Another important type of insurance is property insurance, which is necessary to insure the organization against damage or destruction of its personal and real property. 

Other types of insurance may be necessary depending upon the particular characteristics and activities of each particular nonprofit organization.  These insurance areas include:

• •   Professional malpractice (medical, legal, counseling).
• •   Directors and officers’ liability (see Board FAQ #6).
• •   Commercial auto liability (insures use of agency-owned vehicles) and non-owned or hired auto liability (insures use by employees and volunteers of their own autos).
• •   Improper sexual conduct (be sure both organization and alleged employee or volunteer perpetrator are covered).
• •   Student/volunteer/participant accident (affordable, good will coverage for volunteers; may be an inexpensive, hassle-free way for day care programs to cover medical costs of injured children).

Additional Resource

Am I Covered For..., A Comprehensive Guide to Insuring Your Nonprofit Organization by Mary L. Lai, Terry S. Chapman, and Elmer L. Steinbock (Consortium for Human Services, 1992) is an excellent resource for boards and management regarding insurance issues.)

Insurance questions for nonprofit

FAQ #3. Do we need a state tax exemption if we already have the federal tax exemption?

Tax exemption under Internal Revenue Code Section 501(c)(3) only exempts a nonprofit organization from federal income tax.  To obtain an exemption from state corporate franchise and income taxes, a nonprofit organization must apply to the California Franchise Tax Board by filing FTB Form 3500.  If an organization already has its federal tax exemption status, it likely will also qualify for state tax exemption.

Tax Exempt Status for Your Organization published by the IRS (PDF)

FAQ #4. How can we change the name of the corporation?

In order to change its legal name, a nonprofit corporation must file an amendment to its articles of incorporation (since the name of the corporation is set forth in the articles).  This requires the board of directors to pass a resolution approving the amendment and authorizing the officers of the corporation to file a Certificate of Amendment with the Secretary of State.  In the case of a public benefit membership corporation, the approval of members is also required to authorize such an amendment.  (Consult an attorney or the Secretary of State’s filing guidebook for the form and required signatures for the Certificate.)

An alternative to legally changing the corporate name is to register a fictitious business name with the county clerk in the county of the corporation’s principal address.  A nonprofit organization may want to use a fictitious business name when it wants to use an acronym or have a program operate as a distinctive entity.  A statement of fictitious business name must be renewed every five years.

FAQ #5. How can we dissolve the organization?

If you are considering dissolving your organization, you must seek legal counsel.  Board members cannot simply abandon a nonprofit organization.  Under California law, the last member of the board of directors cannot resign and remains responsible for taking steps required for winding down the corporation.

The following is a general outline of steps involved in the voluntary dissolution of a nonprofit corporation (we do not discuss the procedures for involuntary dissolution here).  Unless otherwise specified, these steps can be taken by either members of the board of directors or staff.  The steps are essentially as follows:

• •           The board of directors (and members, if any) votes to dissolve the corporation and authorizes officers to file a Certificate of Election to Wind Up and Dissolve (http://caag.state.ca.us/charities/forms.htm) with the Secretary of State and send a copy to the Attorney General to give the required notice of the election to dissolve.  (If the members voted to approve the dissolution, the corporation must notify members if it goes forward with the dissolution.)
• •           Board and staff begin the process of ascertaining the corporation’s outstanding liabilities, taking special care that payroll and other taxes be paid. (Remember, failure to pay payroll taxes is an area where board members could be personally liable). 
• •           In this connection, the organization must submit a Request for a Tax Clearance Certificate (FTB 3555 form) to the Franchise Tax Board and file final tax returns with the Internal Revenue Service and the Franchise Tax Board.  File the Request for Tax Clearance Certificate as soon as possible after the election to dissolve.  The Secretary of State will not record the final Certificate of Dissolution, which formally completes the dissolution, without a tax clearance certificate.  In turn, the Franchise Tax Board will not issue a tax clearance certificate until a final return is filed and all taxes paid or another organization or person assumes the tax liability or posts a payment bond.  (The dissolution of the corporation under California law can proceed in advance of the organization filing a final return with the IRS.)
• •           By law, the corporation must contact all vendors, lessors and other creditors who may have a claim against the organization and inform them of the pending dissolution.   (Think about creditors from whom you have not yet received bills, who are holding deposits or those, like the State Compensation Fund and other government entities, to whom you may need to submit a final report and payment.) 
• •           In many cases, when an organization is dissolving, its assets are insufficient to pay its outstanding debts.  The nonprofit organization should make every attempt to pay and settle debts with its creditors, perhaps negotiating partial payments to some creditors or pro rata payments to all creditors.  Creditors value cash in hand, so they may be willing to accept a reduced lump- sum payment rather than spend precious time and expense on a possibly fruitless suit to collect the full amount owed.  If you make such a reduced lump sum payment, be sure to get a written release of all other claims from the creditor in exchange for the payment.  Some vendors will make threatening demands, but most will eventually realize there are limited resources for them to recover.
• •           If debts exceed available cash, sell any remaining assets of significant value to further reduce the organization’s debt.
• •           If there are assets remaining after debts are paid, the assets must be transferred to another 501(c)(3) nonprofit organization as stated in the organization’s articles of incorporation and pursuant to California law.  This transfer requires a written waiver of objections from the Attorney General or a court decree (no waiver or decree is required for return or transfer of assets that were received subject to conditions requiring their return or transfer).
• ·                     Close down operations and leave a forwarding address (usually one board member takes responsibility for resolving all final unanticipated questions).

FAQ #6. How can we get a copy of our federal and state tax exemption letters? 

The federal tax exemption letter, or Form 1023, states the original intentions of the founders of the organization as to scope of activity and mission.  This information can be helpful in determining whether a potential endeavor accords with the mission of the organization.  A nonprofit organization is required to have a copy of its federal tax exemption letter available for the general public to review at its principle place of business. There are penalties associated with failure to comply with this provision. 

If your organization does not have a copy of its original letter, you should contact the IRS and request a copy.  There are two ways to do this:

1)    An officer of the organization can call the IRS; if the IRS can verify over the phone that the organization retains its tax-exempt status, it will send the officer a “current affirmation letter” confirming the organization’s status.

2)    To get a copy of the original letter, a member of the organization (not necessarily an officer) must send a written request, either by fax or letter, asking for a copy of the original letter. 

You can obtain copies of your organization’s state tax exemption application or letter approving the exemption by sending a written request to the Franchise Tax Board

There is no requirement that your organization make this document available to the public.

FAQ #7. How can we verify our corporate and tax-exempt status? 

Answer currently undergoing revision.

FAQ #8. Can we revive a dormant or “lapsed” nonprofit corporation?

The steps a nonprofit organization would take to reactivate its corporate and/or tax-exempt status depends on the reasons for and duration of the lapse.  Note that two separate characteristics are involved: corporate status under state law, and tax status under federal and state tax law.

An organization should first contact the California Secretary of State and Franchise Tax Board to determine whether its corporate and tax-exempt statuses have been suspended.  The Secretary of State may suspend an organization’s corporate status for failure to file a required annual Statement by Domestic Nonprofit Corporation, tax return or required annual Registration/Renewal Fee Report (RRF-1) reports to the Attorney General’s Registrar of Charitable Trusts (upon notice from the Franchise Tax Board or Attorney General).  In turn, the Franchise Tax Board may suspend or revoke an organization’s state tax exemption for failure to file an annual informational tax return (FTB Form 199) with the Franchise Tax Board or RRF-1 report with the Attorney General.  If either status has been suspended, ask the relevant agency what steps, if any, may be taken to reinstate them.  Often all that is required is filing the unfiled reports, perhaps paying back fees and penalties or taxes for the period in which tax exemption lapsed; in some instances, tax exemption cannot be “reinstated,” but can be obtained again by filing another application for exemption.

In some cases trying to determine who has corporate authority to represent a dormant organization (i.e., who are board members) poses a much more difficult obstacle than repairing standing with government agencies.  Unless the organization you are trying to revive has valuable property or intangible assets such as name recognition, it may be better to simply form a new corporation.  If you are trying to revive an organization that has such assets and you are unable to locate board members or voting members, contact the Attorney General for guidance

A charitable organization may lose its federal tax exemption for a significant failure to comply with Internal Revenue Code requirements governing eligibility for exemption.  An organization which has lost its exemption can obtain exemption again by fixing whatever caused its noncompliance and filing another application for exemption. 

Because of the complex questions about corporate authority and continued or renewed eligibility for tax exemption, you should seek assistance from legal counsel familiar with nonprofit law and regulations in each of these circumstances.

Additional Resources

California Corporations Code 

Advising California Non-profit Corporations, by California Continuing Education of the Bar.

650 Essential Nonprofit Law Questions Answered, by Bruce R. Hopkins

RRF-1 Form, California Attorney General’s Office (PDF)

RRF-1 Instructions, California Attorney General’s Office (PDF)

FAQ #9. How do we form a nonprofit organization?

This response is written for a nonprofit organization structured as a public benefit corporation and organized for charitable purposes and exempt under §50l(c)(3) of the Internal Revenue Code and §23701(d) of the California Revenue and Taxation Code.

It is important to note that in launching a new charitable endeavor, forming a nonprofit corporation is one of the last steps to take.  Many people mistakenly pursue incorporation first because they think incorporation will give their effort some added legitimacy and pursue tax-exempt status because they are in a hurry to raise funds.  It is far more important to carefully study the need for the potential program, assess whether other programs are meeting that need, and research whether foundations may support such a program.

After you have done the proper homework and find that you should continue developing the proposed endeavor, you still may find that you can pursue the goals without independent corporate status. See FAQ #11 regarding alternatives to incorporation.

Incorporating a nonprofit organization and obtaining tax exemption involves the following:

• •   Prepare articles of incorporation and files them with the Secretary of State.
• •   Prepare the organization’s bylaws.
• •   Conduct the initial meeting of the board of directors, at which the directors accept their designation as directors; adopt or ratify the bylaws; elect officers; and authorize application for tax exemption, creation of bank accounts, and other steps necessary to begin operations.
• •   Apply to the IRS for recognition of federal tax exemption.
• •   Apply to the Franchise Tax Board for recognition of state tax exemption.

The legal process of incorporating and obtaining tax-exempt status is arduous and time-consuming.  You may be able to do it yourself successfully with help from a guidebook.  The California Nonprofit Corporation Handbook, by Anthony Mancuso, is an excellent, step-by-step guide.  You may wish to engage the services of an attorney familiar with nonprofit law, however, particularly if you are in a hurry, and certainly if you have problems creating the necessary documents and describing how your organization meets the criteria for tax exemption.

Additional Resources 

Get Ready, Get Set: A Guide to Launching a Nonprofit Organization , by the Center for Nonprofit Management

How to Form a Nonprofit Corporation in California, by Anthony Mancuso

See the Center’s Starting a Nonprofit

Foundation Center's How do I establish a nonprofit organization?

FAQ #10. What different legal structures are available for nonprofits?

There are essentially three choices of legal structure for a nonprofit public benefit organization:  (1) unincorporated association, (2) sponsorship within an existing nonprofit organization or incubation in a “sponsoring organization,” or (3) nonprofit corporation.  (Unfortunately, as of this writing, California law does not recognize or permit creation of a nonprofit limited liability company.)  Many people may be surprised to learn that an organization does not need to be incorporated in order to be eligible for tax exemption.  The primary reasons for forming a corporation or seeking sponsorship by another organization are that unincorporated associations cannot offer protection against personal liability to directors and members, and that the law provides much more guidance regarding the governance of corporations.

Structure decisions should flow from strategies for mission fulfillment.  Note that organizational structure is not necessarily decided by choice of legal entity.  For instance, a regional or national organization may choose to have chapters that operate under one corporate umbrella or that are separately incorporated and bound together by rules of affiliation.  Further, rules regarding tax exemption may lead an organization to create two or more affiliated entities to accomplish various goals, such as an entity exempt under Internal Revenue Code Section 501(c)(3) to conduct strictly charitable activities, an affiliated entity exempt under 501(c)(4) to conduct advocacy, and a much more loosely related Section 527 political organization (political action committee) to support or oppose candidates for office. (See FAQ #13 regarding the attributes of different Section 501(c) tax designations.)

For existing organizations, structure decisions might include the number of delivery sites, chapter arrangements, an addition tax exemption status (e.g. 501(c)(4) to further advocacy work), and nonprofit and for-profit subsidiaries.

Consult an attorney experienced in tax and corporate law governing nonprofit organizations when choosing a legal structure.  (Do not attempt to form affiliated organizations like those described above without such assistance.)

Additional Resource

Get Ready, Get Set: A Guide to Launching a Nonprofit Organization , by the Center for Nonprofit Management

Advising California Nonprofit Corporations, by the California Continuing Education of the Bar

FAQ #11. Are there alternatives to creating new nonprofit corporations?

As one would expect, given the steps to incorporation described in Legal FAQ #9, establishing a nonprofit corporation and obtaining tax exemption presents emerging nonprofit entrepreneurs with many hurdles.  Completing the extensive government filings and setting up the necessary administrative infrastructure can be quite a burdensome process.  The energy and time required creating this corporation means less time and energy available to focus on realizing the idea that animated you in the first place.  Therefore, we suggest that you consider alternatives to incorporation to provide the organizational base for your program.  Two clear alternatives exist to incorporation: incubation in a designated “sponsoring” organization, or affiliation with an existing nonprofit that shares your program goals.

Incubators help fledgling charitable initiatives start and grow without delay and red tape by extending to them legal, corporate and fiscal sponsorship.  In addition to providing financial and administrative oversight, management training and technical assistance, such umbrella organizations can offer a nurturing supportive environment to help project leaders achieve their community service goals.  Generally at low cost, they can provide all the basic services a start-up project needs, from processing payroll and employee benefits and arranging purchase of needed goods and services (such as insurance, to accounting, tax filings and financial audits).  These services enable new project staff to focus on establishing a program track record and a stream of funds necessary to support the project.  Later, when the program is well established, it can leave the incubator and become a freestanding organization.  Community Partners , based in Los Angeles, is one such strong incubating organization

If your project closely aligns with the work of an existing nonprofit service provider, you may consider affiliating with this organization.  This relationship can provide an organizational home for your project with an emphasis on meeting your common goals.  Likely benefits include a ready source of clients for your program and access to staff knowledgeable about the specifics of your field of service. Important considerations when weighing this option include whether the goals of the potential affiliate match your goals, the nature of your relationship with the agency director and other key staff, and the financial arrangements, i.e. which, if any, of your program costs will be covered by the affiliate and how much is the administrative fee for funds raised explicitly for your project. 

We encourage you to weigh fully these three options — incorporation, incubation and affiliation — to decide the one that is right for you based on your current stage of development.  The creation of an organizational structure can be a capacity-building exercise or a fast track down the road to failure, so consider carefully the challenges inherent in breaking new ground.

FAQ #12. How would two nonprofit organizations merge?

As with many transactions, the underlying business decisions are far more important to success than the legal formalities. It is important to realize that a merger is not simply a legal procedure; the compatibility of each organization’s culture and the personal skills and relationships of board and staff will be key factors in the success or failure of any merger.  We recommend consulting Beyond Collaboration: Strategic Restructuring of Nonprofit Organizations, by David La Piana, an excellent discussion of the various options for consolidating some or all activities of two organizations.  Options include collaboration, strategic alliance, back-office consolidation, and joint venture and merger.  La Piana discusses the business and organizational culture issues involved in each option.

Before beginning the legal process of merging two nonprofit entities, the boards of directors and management of each organization must engage in a thoughtful process to determine if their missions can be better served through combining the entities.  This planning process should involve the clients, donors, volunteers, and staff members of each organization and should delineate the potential opportunities and difficulties a merger may present. It may be more effective and appropriate for the organizations to consider collaboration first, as a means of testing the relationship between the two organizations prior to the merger.

The specific requirements for effecting a merger are too complex to detail here. The following provides merely an overview of the steps involved.

• •   The boards of directors of each organization should adopt a non-binding resolution authorizing board and staff representatives of each organization to pursue discussions regarding the potential merger
• •   Representatives of the two organizations should discuss and reach agreement on all important issues regarding the characteristics of the merged organization and steps for achieving them, including such questions as: projected budget for the merged organization; which, if any, programs to discontinue; which staff will be retained; what board members from each organization will remain or join the merged organization’s board; and which corporate entity will be the surviving corporation and what its name will be.
• •   After reaching agreement on the business details of the merger, representatives of each organization must present the proposed merger to the board of each organization and its members, if any, for approval.
• •   If the boards and members, if any, of the two organizations approve the merger, the two organizations must draft a merger agreement that contains details such as: the full legal name of each organization, including the state of incorporation, and the corporate type (public benefit, mutual benefit) and tax status of each organization; merger terms and conditions; the name and status of the surviving organization and any required amendments to its articles or bylaws; the names of those who will be members of the board and officers of the surviving organization and the means, if any, for converting members of the disappearing corporation into members of the surviving corporation; provisions for maintaining the status quo of each organization until the merger takes effect and for termination of the merger process, if desired.  The board of each organization must approve the merger agreement document itself, not just the terms of the agreement.  The (1) chair, president or vice president, and (2) secretary or assistant secretary of each corporation must sign the merger agreement.
• •   The two organizations must give the Attorney General twenty (20) days prior notice of the impending merger.
• •   After satisfaction of any conditions to the merger, the two organizations must file a copy of the merger agreement, with officers’ certificates from each organization attesting to the merger attached, with the Secretary of State.  The merger is effective at the time the Secretary of State records the merger agreement.

We strongly recommend consulting legal counsel familiar with nonprofit law when considering and pursuing a merger.

Additional Resources and Links:

Forging Nonprofit Alliances: A Comprehensive Guide to Enhancing Your Mission Joint Ventures & Partnerships, Management Service Organizations, Parent Corporations and Mergers, by Jane Arsenault. 

Beyond Collaboration: Strategic Restructuring of Nonprofit Organizations (Available for free at La Piana Consulting )

FAQ #13. How are 501(c)(3) organizations different from other types of nonprofit organizations?

Not all nonprofit organizations are exempt from taxes, and not all exempt organizations are nonprofit organizations.  The IRS separates nonprofit organizations into approximately 25 categories.   All of these entities are exempt from payment of corporate income taxes.  In addition to 501(c)(3) organizations, described below, the most common types of entities receiving tax exemption from the IRS are civic leagues, social welfare and local employee associations (501(c)(4)); business leagues and chambers of commerce (501(c)(6)); social and recreational clubs (501(c)(7)); and fraternal beneficiary societies (501(c)(8)).

Organizations whose purposes are charitable, educational, scientific, literary or religious are eligible for exemption under Internal Revenue Code Section 501(c)(3).  The most important distinctive feature of organizations exempt under Section 501(c)(3) is that, unlike gifts to most other exempt organizations, donations to 501(c)(3) organizations are deductible to the donor (as are gifts to government entities, veterans organizations, fraternal societies (if the gift is restricted to charitable purposes), and cemetery corporations). 

Important distinctive requirements and constraints imposed on 501(c)(3) organizations include an absolute prohibition against partisan political activity, limitations on lobbying activity, prohibitions on improper private increment and private benefit, limitations on amount of business activities unrelated to their charitable mission, and filing and public disclosure of tax returns (IRS Form 990).

Additional Resources

Advising California Nonprofit Corporations, by the California Continuing Education of the Bar.

The Legal Answer Book for Nonprofit Organizations, by Bruce R. Hopkins.

IRS Exemption requirement 

FAQ #14. Do we need a business license?

Business license requirements are imposed by city or county governments.  Typically, nonprofit organizations, like businesses, are required to have business licenses.  Business licenses are required at each site where the organization has a physical presence.  Business licenses typically are issued by the City Clerk of each municipality.  In many cases, the municipality does not require nonprofit organizations to renew the license annually.  You should check with the applicable City Clerk(s) for rules on renewal and fee waivers in your city.

Organizations which do not have established offices determine the city in which they are operating by the address they use in filing their Statement of Domestic Corporations (Form SO100).  A municipality would consider a nonprofit organization to be operating within its limits if the business phone listing is there.

FAQ #15. Do we need a solicitation permit for our fundraising events and campaigns?

Solicitations raise two overlapping but distinct regulatory issues: requirements regarding disclosure of information and requirements of permits.  California law imposes disclosure requirements on certain solicitations (solicitation of members or of visitors to the organization’s premises are exempt from those requirements).  (See California Business & Professions Code Sections 17510 -17510.7) 

Solicitation permits are imposed by city and county governments. Generally, solicitation permits are only required for contacting the general public — individuals with whom your organization does not already have a relationship. 

Approximately 200 local governments have solicitation ordinances.  (To see a listing of city and county offices with information on solicitation permits, see http://www.ceb.com/info/NonprofitsAppendixC.asp ) Unfortunately, there is not a uniform requirement, form, or set of procedures for complying with these laws.  To further complicate this area, the act of solicitation is not governed by the location of the nonprofit organization, but by the address of the person you are contacting for a contribution. Therefore, if a nonprofit organization were raising funds across the County of Los Angeles, it would need to have contacted each city within the county and completed any necessary paperwork for each municipal entity. 

Complying with these local solicitation laws can be a significant burden.   Begin by securing a solicitation permit from the city in which you are located and any cities from which you will be doing significant and visible fundraising.  For your volunteers to be found lacking proper permits may be embarrassing at a minimum and potentially damaging if the media becomes aware of the incident.

For a good discussion of disclosure and permit requirements, and a list of local government ordinances, see Advising California Nonprofit Corporations, by the California Continuing Education of the Bar.

Organizations interested in soliciting regionally or nationally may want to consider the Unified Registration Statement (http://www.multistatefiling.org/), a project of the National Association of Attorneys General and the National Association of State Charities Officials.  Thirty-four states currently accept this filing.

FAQ #16. Are nonprofit organizations exempt from sales tax?

In the state of California, nonprofit organizations are generally not exempt from sales tax.  There are a few general and specific exemptions.  (The applicability of sales tax to nonprofit organizations varies from state to state, generally only applying to organizations based in that state. )

Sales tax applies regardless of whether the product sold is related to your nonprofit mission.  (If you sell products (as opposed to services), you should contact the State Board of Equalization, http://www.boe.ca.gov/, to get a sales permit.)  You will then need to develop an accounting system that tracks these sales and segregates the sales tax revenue.  Depending upon the volume, the sales tax can be forwarded to the State Board of Equalization on a monthly, quarterly, or annual basis. 

Can I sell things for a profit and be tax-exempt?

FAQ #17. Can a landlord get a tax advantage for renting property to a nonprofit at a discount?

A landlord renting to a 501(c)(3) nonprofit organization at no cost or at a below market rate would not be eligible for a charitable deduction for rent they could have received but did not. The reason for this is that the IRS only recognizes property actually realized and controlled by the taxpayer as property for which a deduction may be taken.  (Another example of the effect of this rule is that professionals, such as doctors and lawyers, cannot deduct the value of the time they spend giving donated services.)

Deductions reduce a donor’s net or “taxable “ income, so that they only pay tax on their net gain.  When a donor gives away property, his or her taxable income for the tax period (with some carryover allowed) is reduced by the value of the gift.  In essence, the charitable deduction puts the donor in the position they would have been in if they had kept the property but earned less income.  This way, people with the same net gain are taxed equally, regardless of whether one person earned more but gave away property, or earned less but made no deductible gifts.  Otherwise, a person who could deduct income they never actually earned would pay less taxes than someone else who received the same income, even though they both took in the same amount of resources to live on.  (Another reason for this rule is that it is difficult to establish the value of income not earned.) 

FAQ #18. Are nonprofit organizations required to pay property tax?

Most nonprofit organizations are required to pay property tax in California.  The two major exceptions are churches and organizations that qualify under the “welfare” property tax exemption under Section 214 of the California Revenue and Taxation Code.   To be eligible for the welfare property tax exemption, the real property must be owned by a religious or charitable organization and must be used exclusively for “religious, hospital or charitable” or “scientific” purposes.

If you believe your nonprofit organization owns property that qualifies for an exemption, you should first contact your local County Assessor’s Office about filing an application.  The Assessor’s Office should be able to review the application and process it through the State Board of Equalization.  If the County Assessor’s Office does not process such exemption applications, you should contact the Property and Special Tax Department of the State Board of Equalization (http://www.boe.ca.gov/proptaxes/proptax.htm) to inquire about applying for an exemption.  The organization must apply annually.  This process is complex and difficult and therefore, you should seek the advice of an attorney familiar with nonprofit law.

Only property that a nonprofit actually uses for qualifying purposes is eligible for an exemption.  If only part of the property is used for qualifying purposes, it may be possible to obtain an exemption for that portion of the property.  For example, a nonprofit medical clinic that owns a two story building, operates the clinic on its first floor and rents the second floor to doctors in private practice could qualify for an exemption from property taxes for the first floor portion of its property.  Note that the exemption only applies to general property tax assessments; the nonprofit organization would still be responsible for paying special assessment charges (such as water or school district fees).

For leased property, if both the lessor and the lessee are nonprofit organizations, the property may qualify for the exemption; both parties must apply for the exemption and be approved.  Real property owned by an entity that does not qualify for the exemption, such as a private owner, is not eligible for a welfare property tax exemption, even if it is leased by a nonprofit organization that would otherwise qualify.  The nonprofit organization may, however, obtain an exemption for any real property improvements it owns on the real property and for its personal property.

FAQ #19. What is the difference between a “related” and an “unrelated” business?

When a nonprofit organization either charges a fee for a service or sells a product as an ongoing activity, one question it needs to ask is whether that activity or product is “related” to its mission.  Whether a business is related or unrelated is important in two respects.  First and most important, if the business activity is unrelated to the organization’s exempt purposes, the organization may run the risk of losing its tax-exempt status if the business becomes too large a share of the organization’s total activities.  The second and less important consideration is the question of whether the organization will need to pay income tax on profits. 

In this context, “business” refers to selling of goods or services that is “regularly carried on,” as distinct from the occasional car wash, bake sale or other similar profit-making activity. A business is considered “related” to an organization’s exempt purposes if it “contributes importantly to the furtherance of the organization’s exempt purposes.”  For example, a health clinic may charge its patients a reduced price for its health services, in which case the provision of affordable health care services is substantially connected to the health mission, or a homeless services organization may operate a restaurant for the purpose of providing job training opportunities to its clients, in which case feeding customers for a fee enables the organization to provide work experience for its trainees.  Note that simply producing revenue to support an organization’s other activities would not make a business “related.”   

If the business is “related” to an organization’s exempt purposes, then the nonprofit will not incur corporate income taxes on the net proceeds of that business activity (though it may need to pay sales and other taxes), and there is a much reduced risk that the nonprofit will lose its tax exemption for carrying on too much activity that is not in furtherance of its exempt purposes. 

If, however, the business is not related to the organization’s exempt purposes, then it is considered “unrelated,” and income from the business is taxed like any other business proceeds.  For example, if a nonprofit organization were to operate a restaurant franchise, the business would be unrelated and the organization would need to pay income taxes on the profits just like any other business.  (For more on taxation of unrelated business income, see Legal FAQ #20.) 

There are limitations on the amount of unrelated business activity in which a nonprofit can engage.  Under IRS regulations, a nonprofit organization risks losing its tax exemption if an unrelated business constitutes a “substantial” portion of the organization’s total activities, regardless of whether the organization paid income taxes on the endeavor.  While the word “substantial” is subject to interpretation and involves other factors, if the unrelated business activity grows to 25% of the nonprofit organization’s activity, it should seek legal counsel.  One option for continuing to engage in a substantial amount of unrelated business activity is to form a subsidiary corporation or limited liability company to carry on the business.

In addition, there are many legal exceptions to the rules regarding treatment of unrelated business income. Generally, “passive” business activity, such as collecting interest, most royalties, and some rents, are not considered “business activities,” so nonprofit organizations can charge and collect such fees without either endangering their tax-exempt status or paying tax on the income. 

This is a brief description of an area that is complex.  If your nonprofit organization is carrying on or planning to start a business venture, the Center strongly urges you to seek the advice of legal counsel familiar with these complicated tax rules governing nonprofit organizations.

FAQ #20. What is Unrelated Business Income Tax?  How should it be reported?

Since 1950, the government has taxed the net income that a nonprofit earns on an unrelated business  (See Legal FAQ #19) as if it was earned by a for-profit, taxable company.  The Unrelated Business Income Tax (UBIT) rules were enacted to eliminate a source of unfair competition with the for-profit sector by placing the unrelated business activities of an exempt organization on the same tax basis as those conducted by a non-exempt organization.

The UBIT tax is determined in the same manner as with for-profit entities.  The unrelated income tax rates payable by most tax-exempt organizations are corporate rates.  There is a specific minimum of $1,000 in net gain in order for the tax to be applied.

This tax falls on net unrelated business income.  An exempt organization is allowed to subtract its business expenses from gross unrelated income in arriving at taxable net unrelated income.  The law generally states that a deductible expense must be directly connected with the operation of the business. 

UBIT taxes are paid by means of an unrelated business income tax return — Form 990 T.  Tax-exempt organizations must make quarterly estimated payments of this tax.  

FAQ #21. Can nonprofits charge a fee for their services?  Are there limits on these fees? 

Answer currently undergoing revision.

FAQ #22. Do we need a records retention policy?

Yes, a nonprofit organization should maintain records retention policies in several areas: personnel (see Human Resources FAQ #34), financial, corporate, and program standards.

Financial records, such as general ledgers and audits, should be kept for seven years. This standard is derived from the ability of the Internal Revenue Service to audit your records for intentional fraud for up to six years; the seventh year is needed to cover starting balances. 

Corporate records, which set forth policy decisions, such as board minutes, should be kept forever.  The goal is to present a full history of the organization, since an organization may need to review historic decisions (e.g. the restrictions placed on a donation).

Client service and program records should be kept based on industry standards.

FAQ #23. Can a nonprofit board of directors use proxies?

California law does not permit directors of a nonprofit public benefit organization to cast votes by proxy. (A proxy is a brief document that authorizes a person to exercise another person’s voting rights.)  In contrast, a membership organization can use proxies for member meetings and votes.  Both paper and delegate proxies are acceptable.  

The reason for the prohibition on proxy voting by directors is that the fiduciary duties of directors require that, in order to make prudent, well-considered decisions, directors must meet and debate either in person or by telephone or other electronic medium (as long as all directors present can hear each other).

Adapted from: California Corporations Code, Sections 5063, 5211; The Legal Answer Book for Nonprofit Organizations, by Bruce R. Hopkins.

FAQ #24. Must our board meetings be conducted according to Robert’s Rules of Order?

Meetings of the board of directors of a nonprofit organization are not required to be governed by Robert’s Rules of Order.  It is helpful to agree on some parliamentary procedure.  Robert’s Rules of Order is only one specific set of parliamentary procedure. For most organizations, standard procedures for operating a meeting can be as simple as a board member making a motion, another board member seconding the motion (supporting the motion upon which the board should take a vote), discussing the proposed motion, and finally voting on the motion.

Organizations should be careful in determining how their meeting will be run.  Rigid adherence to a precise set of rules can limit participation by board members not familiar with these procedures or give inappropriate power and influence to individuals who know how to use them.

FAQ #25. Do we need a conflict of interest policy for our board of directors?

Conflicts of interest involving a director are not inherently illegal nor are they to be regarded as a reflection on the integrity of the board or of the individual director.  It is the manner in which the director and the board deal with a disclosed conflict, which determines the propriety of a decision or transaction.

A conflict of interest is present whenever a director has a material personal interest in a proposed contract or transaction to which the corporation may be a party.  The director may be personally involved with the transaction, may have an employment or investment relationship with an entity with which the corporation is dealing or it may arise from some family relationship.  The law recognizes these problems, not by treating the conflict as inherently a moral or legal offense, but rather by prescribing the methods whereby a board of directors and the individual director should disclose such conflicts and proceed to make an impartial decision in such situations.

Board members must always act in good faith in what they believe to be the best interests of the corporation, not their own personal interests.  This “duty of loyalty” requires all board members to be conscious of the potential for such conflicts, to strive to avoid them and to disclose any such conflicts of interest to fellow board members prior to any decision by the board in which they have an interest. The duty of disclosure of an interest exists without regard to whether the proposed transaction is fair, whether the director urges or opposes the transaction, whether the director is present during discussion of the transaction or votes or abstains from voting on the decision.

It is a good idea to include in your organization’s bylaws a statement of the legal procedures for disclosure of a conflict of interest and approving any transaction in which a director may have an interest, if for no other reason than to provide guidance to individual directors and to the board.  The board may also wish to go beyond what the law requires and establish more stringent policies, such as strictly forbidding the making of transactions in which a director has an interest, or a strong preference for avoiding even the appearance of a conflict of interest.  Such broader policy statements should be made by resolution, rather than written in the bylaws, so they will be easier to amend or take exception from if the need arises. 

Adapted from: Guidebook for Directors of Nonprofit Organizations, by the American Bar Association.

What goes in conflict-of-interests policy?

How do we safeguard against conflict of interests?

FAQ #26. How much notice is required for board and membership meetings?

Meetings of the board of directors and membership have legal notice requirements imposed by the California Corporation Law.  These provisions apply unless the bylaws of the organization call for a more restrictive standard. Notice provisions should be outlined in the bylaws.

Regular meetings of the board of directors require formal notice unless a schedule for meetings was previously adopted.  If the board sets a schedule of the time and place of regular meetings, no further notice is required until the schedule is changed.  The time and place of regular meetings of the board can be set through a provision in the bylaws or by resolution.

If the board has not set a meeting schedule, then the organization must notify board members of the meeting time and place by first- class mail at least four days before the meeting, or 48 hours prior to the meeting if by personal delivery, phone, or fax.

Any officer or two directors can call for a special meeting.  Notices must state the purpose(s) of the meeting and must be sent at least four days before the meeting if by first-class mail, or at least 48 hours prior to the meeting if given by personal delivery, phone, or fax.

These provisions apply to nonprofit organizations, which have statutory members.  (Under California law, statutory “members” are any persons or organizations whom the bylaws give the right to elect directors; approve a merger, dissolution or disposition of substantially all of the assets of the corporation; or to vote on changes to the articles of incorporation or bylaws — California Corporations Code, Sec. 5055.)    If members are required or permitted to take action at a membership meeting, then written notice of the meeting must be sent by first- class mail not less than 10 days nor more than 90 days before the meeting.  If notice is sent by other than first-class mail (such as being included in the organization’s newsletter), the notice must be not less than 20 days no more than 90 days before the meeting.

In all cases the notice must specify the date, times, and places of the meeting (unless otherwise specified in the bylaws or by prior agreement).

FAQ #27. Must we keep minutes? Who may or should have access to them?

Minutes of board and committee meetings must be kept within an official board book.  Nonprofit corporations must act like corporations (“observe the corporate formalities”) in order to preserve their rights to the beneficial attributes of corporate status, such as limited liability for directors, officers and the corporation itself.   Since the board of directors is charged with all legal responsibility for governing the corporation, minutes of meetings of the board of directors are important evidence of acting like a corporation.  Minutes are required of committees, which are acting on behalf of the board, such as an executive committee.  Minutes are not required, but may be recommended, for committees, which are advisory in nature (see Board FAQ #16).

The Secretary of the corporation is responsible for preparing the minutes and distributes them either in advance of the next board meeting or at the meeting. While most organizations formally approve these minutes, a vote of approval is only required ifs board members want to make changes to the minutes as presented by the secretary.

All board members should receive copies of the minutes and have access to the minutes at any time.  The board of directors may make the minutes available as they choose to staff, consultants, auditors or other inside or outside parties. If a nonprofit organization has no formal voting members, there is no legal requirement that the minutes be made available to any outside party.

If, however, the organization has statutory members, that is, members with vested legal rights (generally, the right to elect directors and to approve important corporate changes), then members have the right to review minutes of board meetings in which issues related to membership are addressed.  There are three types of considerations in which the board would not need to make the minutes available to members: litigation, personnel issues, and contract consideration.  In these and other cases, the board of directors could adjourn to “executive session” (see Legal FAQ #30) and keep separate executive committee minutes, which would not need to be shared with members. 

While it may be necessary in specific situations to keep minutes confidential, it is generally recommended that they be shared with all key constituents.  Minutes can be a useful tool for providing valuable information about board action and direction that will be helpful to staff, members, and other constituents.

Who should see board minutes?

FAQ # 28.      How should we take minutes?

Minutes are the permanent record of the proceedings of a board or committee meeting.  They need to be clear, accurate, brief, and objective. 

Minutes should include the following basic items:

• •   The date, time and place of meeting.
• •   The name of the person chairing the meeting.
• •   The names of the present and absent members.
• •   The existence or absence of a quorum.
• •   All proper motions, including the name of the mover and the person that seconded the motion.
• •   The results of all votes taken.
• •   The names of persons abstaining from any vote or requesting that their vote be recorded.
• •   A list of all reports and documents introduced during the meeting (copies of these reports should be attached to the official minutes).
• •   A summary of significant points raised during discussion, but not a verbatim account of speeches.
• •   Any commitments made by officers or any other person present.
• •   The time of adjournment.
• •   The signature of the meeting secretary.
• •   When appropriate, minutes may include a brief addendum showing required follow–up activities, which also identifies the persons responsible for the actions and the date by which they will be completed.

Adapted from: 10 Minutes To Better Board Meetings, by Planned Parenthood Federation of America.

FAQ #29. What are bylaws?  What are the major issues to consider with bylaws?

Every nonprofit corporation should have a set of bylaws, which provide rules for the internal governance, and management of the organization.  In the absence of bylaws, certain provisions of the California Corporations Code govern the procedures and activities of nonprofit organizations; of these, some may not be altered by the adoption of contrary provisions in bylaws.  Unless restricted by the California Corporations Code or the articles of incorporation, the board of directors has discretion to set, adopt and amend bylaws provisions.

Typical bylaws provisions include the following:

• •   Purpose or mission of the corporation.
• •   Limitation of liability of directors.
• •   Types of officers.
• •   Terms, power, and succession of officers.
• •   Location of principal office.
• •   Whether the corporation will have members or whether all powers will be vested in a board of directors.
• •   Number of board members and terms of office.
• •   Guidelines regarding place of meetings, meeting notice, and provision for annual and special meetings.
• •   Quorum requirements.
• •   Guidelines regarding the establishment and power of committees.
• •   Rules for amending the bylaws.
• •   Rules for maintaining financial records and inspections.

A nonprofit organization should have its bylaws reviewed every three years at a minimum. (The Center for Nonprofit Management can review your bylaws, for a reduced fee, or refer you others who can perform this service.)

Adapted from: California Corporations Code Sections 5150, 5151; The Nonprofit Handbook,, by Gary M. Grossman.

FAQ #30.       Who must we allow to attend board meetings?

Boards of directors of nonprofit organizations are generally entitled to meet in private; they are not required under the California Corporations Code to allow anyone other than directors to be present at a board meeting.  (Boards of organizations of which a significant number of directors are appointed by a government body may be required by the Brown Act, or perhaps by the terms of certain government grants, to hold public meetings.)  This means that even an organization’s voting membership may be excluded from meetings of the board of directors.  Likewise, the board of directors may permit anyone that they choose (such as the executive director or their attorney) to be present at a meeting.

A common misconception is that in order to exclude non-directors from a meeting of the board, a board must invoke an “executive session.”  There are no legal provisions regarding “executive sessions” under the California Corporations Code.  Most likely the practice of calling an “executive session” is merely a decorous way of asking staff and other non-directors present to leave the meeting.

Brown Act (PDF)

FAQ #31.       May nonprofits engage in political activity?

Nonprofit organizations with a 501(c)(3) designation are strictly forbidden from engaging in political activity and run a very high risk of revocation of their nonprofit status if they do so.  The legal use of the phrase, “political activity” refers to participation in a campaign for elective office, such as by endorsing or opposing a candidate (as distinct from endorsing or opposing a proposed law or initiative, which is permitted within applicable limits on lobbying). Unlike the restrictions on lobbying (see Legal FAQ #32), the prohibition on political activities is absolute and applies to any such activities, no matter how insignificant.  In addition to possible loss of exemption, an organization that violates this restriction will be subject to an excise tax of 10% of such political expenditures.

Adapted from:  Guidebook for Directors of Nonprofit Organizations , by the American Bar Association.

The Ban on Election Intervention: What Charities Should Know

FAQ #32. What is lobbying?  Are there any restrictions on lobbying by a nonprofit organization?

Under IRS regulations, “lobbying” is defined as a communication intended to influence specific legislation (pending or proposed).  There are two basic types of lobbying.  “Direct lobbying” is communication with a legislator or their staff that expresses a view about specific legislation.  “Grassroots lobbying” is communication to members of the public that refers to specific legislation, expresses a view about that legislation and urges the audience to contact legislators about the legislation.

Roughly speaking, “legislation” is defined under the IRS regulations as action by a legislative body, such as a city council or county board of supervisors, state or federal legislatures, as well as by the public when voting on a legislative initiative or referendum.  Since courts and administrative or executive agencies (e.g., your local school board or Department of Public and Social Services) are not considered legislative bodies, their actions are not considered legislation.  Therefore, urging them to take certain actions would not be considered lobbying.  Note also that to constitute lobbying, a communication must address “specific legislation”, which means either a proposed or pending law or bill, as distinct from addressing a broad policy issue.  With regard to ballot initiatives, a proposal is specific legislation once it is presented in a petition for signatures to qualify the proposal for the ballot. 

A great deal of advocacy, then, would not be considered lobbying under the IRS regulations.  Lobbying does not mean:

• •   Making available the results of nonpartisan analysis, study, or research.
• •   Providing technical advice or assistance to a government body, or to its committee or other subdivision, in response to a written request from the chair of that body (this is sort of a free pass to directly express a view about legislation to the relevant legislators).
• •   Self-defense communications with a governmental body regarding legislation which would affect your existence, your powers or duties, your tax-exempt status, or the deductibility of contributions to your group.
• •   Discussing broad social issues, without mentioning specific legislation.
• •   Communicating with a government official or employee, other than for the purpose of influencing legislation.  Many important decisions, such as how to enforce or implement a law, are made by government agencies, and since their decisions are not legislation, direct communication to agency officials about these decisions is not considered lobbying.
• •   Communicating with members of your organization with respect to legislation and expressing a view about the legislation so long as the communication does not encourage members to take action regarding the legislation.

Tax exempt 501(c)(3) nonprofit organizations are prohibited from lobbying “except to an insubstantial degree.” The IRS evaluates an organization’s lobbying activities under two rules.  The general rule looks at the totality of an organization’s lobbying activities, whether by paid staff or volunteers, and considers whether those activities are “insubstantial.”  This test gives the IRS fairly broad discretion; courts have in the past considered expenditures of more than 5% of the organization’s budget, time and effort to be “substantial.”  The other more defined test is the 501(h)-expenditure test, named after the “bright line” rule set forth in Section 501(h) of the Internal Revenue Code.  This test sets specific dollar limits on a nonprofit’s lobbying activities.  The 501(h) test not only sets clear limits, it also only includes lobbying expenditures (money and staff time) toward those limits; the work of volunteers is not counted against the limits, as it would be under the “insubstantial” test.  In order to be governed by the 501(h) test, an organization must file a form electing to be evaluated under the rule (IRS Form 5768).  The disclosures required under the 501(h) test are essentially the same, as that required for the annual informational return (IRS Form 990).  In most cases, an organization will be able to engage in more lobbying activity, with greater security that it will not endanger its tax exempt status, if it elects to be governed by the 501(h) test. 

Adapted from:

Being a Player: A Guide to the IRS Lobbying Regulations for Advocacy Charities, by Harmon, Curran, Gallagher & Spielberg;

The California Nonprofit Corporation Handbook, by Anthony Mancuso;

Rules and Regulations Every Nonprofit Should Know; and The Oregon Nonprofit Corporation Handbook by Cynthia Cumfer and Kay Sohl.

Center for Lobbying in the Public Interest

Summary of federal rules about lobbying 

FAQ #33. Are there free or low-cost legal resources available to nonprofit organizations?

There are a few sources of legal assistance for nonprofit organizations.  The programs listed below can provide assistance with your organization’s transactional legal matters (corporate law, contracts, leases, and the like).  Unfortunately, as of this writing there is no program that provides free or low-cost legal representation in litigation matters (pursuing or defending against a lawsuit). 

Public Counsel can match attorneys who are willing to work on a pro bono basis with nonprofit organizations. 

Arts organizations also can receive a similar service through California Lawyers for the Arts .  There may be a fee charged for legal services in some cases.

In addition, the Center can make referrals to attorneys who specialize in nonprofit legal issues.  While there will be fees associated with this assistance, there are not likely to be significant time delays.

FAQ #34. Can one 501(c)(3) transfer funds or assets to another? 

Yes, a 501(c)(3) nonprofit organization can generally transfer funds or assets to another 501(c)(3) nonprofit organization if the payment or grant is in furtherance of the originating nonprofit organization’s mission. Limitations on this type of transfer can occur if (1) it is a transfer of all or a substantial part of the organization’s assets or (2) a transfer is part of a dissolution process.  Such transfers would require prior notification to  the Attorney General of the State of California (See Legal FAQ# 5).  All significant transfers, other than payments made in the ordinary course of the organization’s business, should be approved by the board of directors.  In the case of a transfer of substantially all of the organization’s assets, whether in connection with a dissolution or otherwise, the transfer must be approved by the full board of directors.

A 501(c)(3) nonprofit organization cannot transfer funds or assets to other types of exempt entities (exemptions other than 501(c)(3)) or businesses unless a transfer is a payment for a specific service or product needed by the 501(c)(3) organization for their ongoing work (e.g., normal business transactions for printing, rent, etc.).

FAQ #35. Can individuals benefit from their relationship with a nonprofit organization?

While there are many ways an individual can benefit from their association with a nonprofit organization (e.g. personal learning, expanded network, joy from having done well), an individual cannot reap an inappropriate financial benefit.

As noted elsewhere in this guidebook, a 501(c)(3) corporation must be operated for charitable purposes and must not serve private interests.  No part of the net earnings of a nonprofit corporation may inure to the benefit of an individual (including staff and board members), except as reasonable compensation for the fair value of work on behalf of the corporation in pursuit of its charitable purposes.  There are no shareholders who can receive dividends or equity interest in a 501(c)(3) organization.

If an organization improperly provides benefits to private individuals involved with the organization, it may lose its tax-exempt status and incur penalties under both federal and state tax laws and state corporate law. In a nutshell, improper “private increment” occurs when a nonprofit organization transfers to or uses its assets for the benefit of “insiders” (people who have influence within the organization, such as board members, officers and employees), when such benefits are not given as a fair exchange for goods or services provided to the organization.  Some examples of this would be if an organization’s primary function seems to be to  provide employment to an insider or his/her relatives, or to pay excessive salaries to insiders, such as an executive director.

It is important to note that transactions with board members and other insiders are not strictly forbidden by either corporate conflict of interest laws or IRS or state tax regulations prohibiting private increment.  Such “self-dealing” transactions are permitted so long as the insider discloses their interest in the transaction and the disinterested members of the board of directors approve the transaction, based on their finding that the deal is in the corporation’s best interests and is the best deal that could be found with reasonable effort (see Board FAQ #8).  Staff members, of course, can be paid reasonable compensation for their services, subject to some restrictions on incentive compensation and bonus plans (see Human Resources FAQ #35).

Individuals and corporations can benefit from the nonprofit organization purchasing their goods and services as it would from any corporation or business.  Further, individuals involved with the organization may permissibly benefit from its services if they receive these benefits as members of a class of people which the organizations serve.  For example, it is not improper for low-income residents to serve on the board of an affordable housing organization that provides them with housing.

Additional Resources

650 Essential Nonprofit Law Questions Answered, by Bruce R. Hopkins.

Guidebook for Directors of Nonprofit Organizations, by the American Bar Association, 2003.

FAQ #36.  What does it mean to have a fiscal sponsor?  Why do fiscal sponsors charge?

Answer currently undergoing revision.

DISCLAIMER:

The answers provided can deal with complicated and sensitive legal issues. These answers are only intended to give general guidance and does not contitute legal advice. The law is constantly changing and its application always depends on the particular circumstances involved. We strongly urge readers to seek legal counsel in the event they are confronted with a possible legal problem.