Managing a nonprofit organization is not for the faint of heart. Not only does effective nonprofit management come with some inherent challenges (including limitations on funding and maintaining staff), but there are also strict legal compliance standards to adhere to. In fact, nonprofits face an incredible level of scrutiny from all levels, especially when it comes to maintaining tax-exempt status. With this said, nonprofit managers and other leaders need to stay up to date on compliance laws in order to keep working toward their goals and missions.
A solid understanding of MLS (Master of Legal Studies) can be a valuable asset, providing you with the knowledge needed to navigate these legal complexities. With a comprehension of the specific challenges those in nonprofit management roles face — plus a formal education in legal studies in your toolbox — you can be prepared for career demands.
The Basics of Nonprofit Organizations
First, it is essential to understand what designates an organization as a nonprofit, as well as some key differences between nonprofit organizations and for-profit entities.
Defining Nonprofit Organizations and Their Purpose
Specifically, a nonprofit organization refers to an organization that is primarily focused on pursuing its mission of helping others or striving toward a cause. In this sense, nonprofit organizations are less concerned about generating profit (although they still need to generate enough revenue to pay employees and for everyday operations). Rather, they are more concerned with making a positive difference in the world.
As a result, nonprofit organizations that meet certain compliance requirements are also considered exempt from taxes by the Internal Revenue Service (IRS). Instead, any revenue that is generated by a tax-exempt organization can be used directly to continue working toward the organization's goals.
Key Differences Between Nonprofits and For-Profit Entities
When comparing nonprofit organizations to for-profit entities, keep in mind distinct differences, particularly as they relate to:
- Tax status – Nonprofits are tax-exempt, whereas for-profit businesses are generally subject to taxes on revenue.
- Overall purpose – A nonprofit aims to help people or fulfill a social cause, whereas for-profit entities strive primarily to make money.
- Governance – Both nonprofits and for-profits are typically governed by a board of directors, but the role of the board of directors in a nonprofit is generally more focused on fundraising and maintaining donor relations.
Legal Framework Governing Nonprofits
Managing a nonprofit requires extensive legal knowledge, namely in regard to federal and state-specific regulations that nonprofits must follow in order to remain in good standing and uphold tax-exempt status.
Federal Regulations and Compliance Requirements
At the federal level, nonprofits must maintain numerous important compliance requirements to keep their tax-exempt status. For starters, the federal government and the IRS are responsible for granting taxation benefits to nonprofits, with some specific requirements for this including:
- The organization cannot be operated or organized for the benefit of private interests.
- The organization is restricted in political or lobbying activities conducted.
- No part of the organization's net earnings can benefit any shareholder or individual.
State-Specific Laws for Nonprofit Operations
In addition to federal requirements related to nonprofit compliance, individual states may also have their own laws. It is the responsibility of nonprofit management to be aware of the laws in the state where the organization operates, as they can change from time to time. Some states, for instance, have adopted a version of the New/Revised Model Non-Profit Corporation Act (NMCA), which covers important governance topics and standards.
Financial Oversight and Accountability in Nonprofits
Those working in nonprofit management positions must also take proactive steps to prevent fraud, ensure financial integrity, evaluate risk management, and carry out proper financial oversight as part of their work.
Understanding the Role of Financial Audits
Financial audits are an especially essential aspect of this, particularly in demonstrating financial transparency and accountability to donors and other stakeholders. Nonprofit managers should be prepared to order regular financial audits to check for potential issues that could prevent the organization from achieving its mission. Financial audits should be performed by independent auditors and, for integrity, be made completely available to the public.
Preventing Fraud and Ensuring Financial Integrity
Unfortunately, fraud is another major challenge in today's nonprofit sector — and members of management must be prepared to prevent fraud whenever possible. This can be done in many ways, including:
- Providing staff members with extensive fraud awareness training.
- Creating a reporting system where workers can report suspected fraud with confidentiality.
- Setting up clear internal controls with in-depth policies and procedures in place.
- Ensuring that regular independent reviews and audits are conducted on the organization and its finances.
Board Governance and Ethical Considerations
While nonprofits have a board of directors like many for-profit entities, the role of the board for a nonprofit tends to be much different in terms of governance and management — and there may be specific policies for handling potential conflicts of interest.
Best Practices for Recruiting and Managing Board Members
Board members of a nonprofit need a very specific skill set, so finding and recruiting those board members can be challenging. In order to find the right people for the job, it will first be crucial to pinpoint exactly what kinds of skills and experience the ideal candidate would have. From there, it can be helpful to narrow down candidates who have specific connections or experience with the goals of the organization. In some cases, it may even be possible to find somebody to volunteer for this type of position (though this may depend on their current employment status and workload).
Conflict of Interest Policies: What You Need to Know
Ideally, nonprofits should also have their own conflict of interest policies, specifying the exact steps to be taken when an internal conflict of interest arises within the organization. According to the IRS, "A conflict of interest policy is intended to help ensure that when actual or potential conflicts of interest arise, the organization has a process in place under which the affected individual will advise the governing body about all the relevant facts concerning the situation."
Properly written and executed, a conflict of interest policy could very well save an organization from losing tax-exempt status while maintaining a positive public image.
Regulatory Compliance and Reporting
When it comes to legal compliance in nonprofits, managers have a critical responsibility to navigate the complex world of IRS filings and state reporting to avoid potential penalties, legal trouble, or loss of tax-exempt status.
Navigating IRS Filings and Maintaining Tax-Exempt Status
Nonprofit organizations with tax-exempt status still need to follow appropriate forms and provide important documentation to the IRS, as the exact rules can vary widely depending on the amount of revenue generated during the tax year. For example, nonprofits with an annual revenue of less than $200,000 and assets valued at less than $500,000 can file Form 990-EZ or Form 990 with the IRS. Meanwhile, nonprofits with revenue greater than $500,000 need to file Form 990.
State Reporting and Compliance Checklist
While some states grant tax-exempt status to nonprofit organizations, this is not always the case for every state. With this in mind, nonprofit managers should research and stay current on all state reporting and compliance requirements, especially related to taxes. In addition to specific filing/tax requirements, nonprofits in some states may need to submit employment forms, fundraising information, and registration renewal with the state in which they operate at least once per year.
Nonprofit Advocacy and Political Activity
Unlike for-profit entities, nonprofit organizations must follow strict requirements in regard to advocacy and lobbying to remain in good standing.
Guidelines for Lobbying and Political Campaigns
Nonprofit organizations may be permitted to engage in lobbying activities — but they may be required to follow specific requirements or pass certain "tests" in order to lobby legally. For example, nonprofits must follow the "substantial part test," which prevents them from allocating significant funds from their operations to lobbying activities. Nonprofits are completely prohibited from engaging in any political campaigning, too, either directly or indirectly.
Understanding the Boundaries of Advocacy
Nonprofit managers are also required to understand and adhere to certain boundaries that exist surrounding advocacy and nonprofits. Along with being prohibited from any kind of political campaigning, for instance, nonprofits must remain within legal lobbying limits and report all lobbying expenses on Form 990 each year.
On the other hand, nonprofits can advocate for issues that support their cause or mission. Because there can be some gray areas here, it is essential for nonprofit managers and those in charge of any advocacy activities to have a solid legal understanding of what is permitted and what may be prohibited. After all, failing to comply with these compliance requirements can result in an organization's tax-exempt status being revoked.
Risk Management and Insurance Coverage
Risk management and insurance coverage are two topics that go together with successfully running a nonprofit — and, once again, these are issues that most commonly fall into the lap of management professionals.
Identifying Key Risks for Nonprofits
Like any other type of business, nonprofits are subject to a range of risks. It is the responsibility of the nonprofit manager to be able to pinpoint the most likely risks and take proactive steps to mitigate them. This might entail, for example, carrying out a dedicated risk assessment and then researching and implementing specific mitigation strategies. At the same time, these professionals must take governance and board involvement as well as regulatory compliance requirements into careful consideration in identifying and mitigating risks as much as possible.
Choosing the Right Insurance Policies
Another central aspect of risk management for nonprofits is having the right type (and amount) of insurance coverage. There are numerous types of insurance that a nonprofit may need to carry, ranging from general liability insurance to directors and officers liability. Depending on the type of organization being run, it may also be necessary to purchase property insurance or even professional/volunteer liability.
Having the proper insurance coverage in place is critical to perpetuating the overarching goals and mission of any nonprofit. After all, it only takes one lawsuit to potentially derail an organization's mission — but the right insurance policy can provide sound financial and legal protection if the unthinkable happens.
When choosing insurance coverage for a nonprofit, various factors should be considered, including:
- The maximum limits of the policy.
- The amount of any deductible that must be paid by the insurance holder before benefits kick in.
- Any potential exclusions to the coverage provided.
- The process that will need to be followed in order to make a claim (as this can differ greatly from one insurance carrier to the next).
Learn More in an M.L.S. Program
As evidenced above, there are many legal aspects of successfully running a nonprofit organization. With a firm grasp of nonprofit law, those in management roles can be better equipped to overcome common legal challenges while adhering to laws for nonprofit organizations. Fortunately, the topics covered in a Master of Legal Studies (M.L.S.) program can provide nonprofit managers with the foundational skills and knowledge needed to confront these challenges.
Specifically, an online Master of Legal Studies degree from the University of Miami School of Law can empower you to apply what you learn in class today to your nonprofit work tomorrow. Our general legal studies track — available 100% online for your convenience — can be completed in just 30 credit hours and can help you better understand the nuances of legal services nonprofit management.
Contact us to request more information about our online M.L.S. degree, or take the next step by filling out your online application for enrollment.
Sources
https://admissions.law.miami.edu/academics/MLS/
https://admissions.law.miami.edu/academics/mls/curriculum/#general
https://www.irs.gov/charities-non-profits/form-1023-purpose-of-conflict-of-interest-policy
https://www.irs.gov/charities-non-profits/measuring-lobbying-activity-expenditure-test
https://www.irs.gov/e-file-providers/e-file-for-charities-and-nonprofits
https://nonprofitrisk.org/resources/what-basic-insurance-coverage-should-a-nonprofit-consider/
https://www.councilofnonprofits.org/running-nonprofit/nonprofit-audit-guidec/what-independent-audit
https://www.merriam-webster.com/dictionary/nonprofit
