How to Keep Your Non Profit in Compliance: A Checklist (2024)

Thou Shalt Not

• Have any shareholders. A Non Profit Corporation is different from a For Profit Corporation because it has NO shareholders to whom dividends accrue. So, even if a Non Profit becomes well enough known that wealthy businesspersons want to invest as shareholders, they may not do so.
• Expend income on anything intended to advance any purpose other than your tax-exempt purpose. For example, you may rent a part of your building, throw a fundraiser, or host a movie night. However, these profits must ultimately be used for advancing your non-profit purpose(s).
• Contribute to political campaign(s). In addition to removing 501(c)(3) status, the IRS can require payment of special taxes when a 501(c)(3) Non Profit contributes to any political campaign(s).
• Lobby in order to affect legislation in any “substantial” way. It is not immediately clear what affecting legislation in a “substantial” way means. However, the IRS helps to clarify by setting a limit on the amount a Non Profit can lobby under the “expenditure test” to 20 percent of the first $500,000 of expenditures, 15 percent of the next $500,000 of expenditures, and so on up to one million in contributions. If a Non Profit intends on affecting legislation, it first must make an election under Form 5768.
• Make substantial profits from, or contribute substantial time on, “unrelated activities”. For example, while a children’s classics reading group, set up for the purpose of advancing literary and educational pursuits, may host a grunge rock concert, it may not make “substantial” profits on doing so. Furthermore, it may not commit substantial time on doing so. What makes a percentage of income or time substantial is not immediately clear; however, not more than 10 percent of income from, or time spent on, unrelated activities relative to income from, or time on, related activities is a good rule of thumb.

Thou Shalt

• Keep good records. Record-keeping is essential, in order to properly file annual returns with the IRS (namely the 990, addressed below). Moreover, proper records are essential to defense if a member, officer, director, or client accuses a Non Profit of impropriety. These records are also essential if a Non Profit suspects an officer, director, or member of impropriety.
• File a 990 informational return on time. Failure to timely file a 990 informational return to the IRS can lead to automatic revocation of a Non Profit’s tax exempt status. Access the 990 form here. (Note that this will not apply if you are a private foundation, in which case you would be required to file a 990-PF).
• Act in accordance with Company Bylaws. The Bylaws are the laws that govern a company. To stray from those laws means potential lawsuit, especially for any members, officers, or directors harmed by such violation(s).
• Conduct proper board meetings. A Non Profit should have a board meeting at least annually to conduct affairs and monitor compliance. More regular meetings are highly encouraged. Important to note, board meetings are typically addressed in the Company Bylaws.
• Make a conflict of interest policy. All officers and directors should sign a conflict of interest policy. Then, if an officer or director acts inconsistent with the policy, there will be a paper trail documenting their consent to the conflict of interest policy.
• Not allow a paid officer to also be a director. A Non Profit should prevent any possible conflicts of interest, and, there is little that would more clearly mean a conflict of interest than a director voting on his or her compensation. If a paid officer MUST also be a director, that officer should recuse him or herself from any vote involving him or her.
• Not pay a director, who is also an officer or member. For the same reasons as above, paying a director who has another interest in the company is likely to lead to a conflict of interest.
• Pay taxes on unrelated activities over $1,000.A Non Profit must pay taxes on income from unrelated activities exceeding $1,000. However, unrelated activities are not required to pay taxes over $1,000 when:
  • All work for the activity is done by volunteers.
  • The activity is primarily for the benefit of officers, members/employees, or clients/students/patients (e.g. a coffee shop for students and employees of a school).
  • The activity is the sale of merchandise substantially received by donation (e.g. second-hand store).
  • the activity is the exchange of mailing list(s) of donors or members.
  • the activity is the distribution of a souvenir for donation (e.g. a bumper sticker or hat).

Thou May

• Pay members, officers, and directors. Profits may accrue to members, officers, and directors who earn them through salaries or expense reimbursem*nt.
• Pay independent contractors. Profits may accrue to independent contractors at the rate of reasonable pay for services rendered.
• Build grassroots campaign(s). It is typically encouraged for a Non Profit to build a strong grassroots campaign.
• Promote the company. As long as the information is truthful, it is strongly recommended that a Non Profit advertise. Places in which advertisem*nt is free and highly encouraged include on guidestar.org and facebook.com (with a fan page).

Keep in mind that these are just basic guidelines. It’s always best to speak to a business lawyer before proceeding.

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Maxwell Charles Livingston is a Wisconsin lawyer based in Brookfield, Wisconsin, or in the suburbs of Milwaukee, Wisconsin. Living by the motto "relentless.respectful.results", Max takes a variety of transactional and litigation cases throughout Southeastern Wisconsin, focusing on business, nonprofit, real estate, family, and estate planning cases. Max is licensed in all state and federal Wisconsin Courts, including in all Wisconsin bankruptcy courts.

This article contains general legal information and does not contain legal advice. Rocket Lawyer is not a law firm or a substitute for an attorney or law firm. The law is complex and changes often. For legal advice, please ask a lawyer.