LAW OF NONPROFIT ORGANIZATIONS

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*DISCLAIMER: The following information is purposely general in nature; please consult your state's and locality's specific laws and/or contact an attorney for specific information and advice.

Q: Can you refer me to a couple of good general sources of information for someone involved in a nonprofit corporation or someone who wants to form such an organization?

A: While we recommend you retain an attorney and accountant familiar with nonprofit laws and requirements and request their advice when making decisions, there are some books out there that can give you a basic understanding of nonprofit issues. We like "The Zondervan Church and Nonprofit Organization Tax & Financial Guide" (1998 Ed., by Daniel Busby, CPA) and "How to Form a Nonprofit Corporation" (4th Ed., by Anthony Mancuso). You can purchase these books at www.amazon.com.

Q: I've been asked to serve on a local nonprofit corporation's board of directors. Should I be concerned about possible liability as a director?

A: Yes, you should be concerned and you should ask some questions before taking on a directorship. Think about whether you have the time and interest to make the commitment. Serving as a director is an honor that carries with it both responsibility and potential liability. Failure to attend board meetings regularly could conceivably expose you to claims against the organization by, for example, a person injured at one of the organization's functions. Although actual litigation involving nonprofit directors is rare, the possibility of being personally liable is real. What if the organization hosts a party serving alcohol and an inebriated guest runs over someone in his car on the way home? Someone might try to hold you liable because you were on the board, voted to have the party, and helped obtain the alcohol. Although ultimately you might be found not responsible, you might rack up some hefty legal bills by the time that determination was made. Some nonprofits carry insurance for that sort of situation.

Q: I'm a scientist and I want to establish a nonprofit corporation for scientific purposes. Will my organization qualify for the federal nonprofit tax exemption? What is the benefit of a federal tax exemption?

A: Assuming you meet all the other requirements, "scientific purpose" is one type of purpose that is valid for nonprofit corporations. To qualify for federal nonprofit tax exemptions, you must operate a nonprofit corporation for charitable, religious, literary, educational or scientific purposes. This federal tax exemption relieves the organization from having to pay federal corporate income taxes, allows it to apply for exemption from other state taxes (such as excise, sales, franchise, etc.) and usually makes it eligible for a state income tax exemption. Importantly, it also enables people who donate money to the organization to deduct their contributions on their federal (and, usually, their state) income tax returns.

Q: I'm involved in a nonprofit corporation that plans to engage in a business that will probably make a profit. Will this activity endanger our status as a nonprofit organization with the IRS?

A: It depends on your situation. Regular commercial business activities can be used to help finance a nonprofit corporation. To avoid possibly losing your federal tax exemption, however, your money-making business must be an incidental activity of the organization. In other words, your for-profit business should not be the main goal or a substantial part of the nonprofit organization's activities.

Q: I'm helping run a nonprofit organization. We need more board members to help us get things done. What sort of people should we ask to be on our board?

A: Obviously, you should contact people who have an interest in the type of organization you're running. If you work with disabled children, for example, you might talk to people who are involved with Special Olympics or who have experience in physical therapy for children. Generally, because board members are almost always looking for donations, people with fundraising experience are a plus on nonprofit boards. And speaking of money, an accountant or experienced financial planner or bookkeeper could be very helpful in making sure your books are properly organized and updated. You might also need the practical expertise of a lawyer on your board (not just any lawyer, but one with some nonprofit know-how). People with contacts and "real-world" experience in the specific area of your nonprofit's interest are also valuable assets to your organization.

Q: I've been asked to serve on a nonprofit board; how much compensation will I receive?

A: Don't open a new bank account for your earnings just yet. Usually nonprofit directors serve without compensation. Most nonprofits limit themselves to reimbursing directors for any out-of-pocket expenses incurred in performing director duties (but some small organizations may even expect directors to pick up those incidental expenses as a "donation" to the organization). State nonprofit laws generally allow directors to be paid provided the payment is reasonable and related to the performance of services to the organization. Nonprofits have to be careful about director compensation because their assets should not be used for the private enrichment of the organization's incorporators, agents, directors, employees or members.

Q: I'm an employee of a nonprofit corporation that may go belly-up soon. I'm worried that unpaid creditors might try to come after ME, since I have a few non-exempt assets of my own. Am I liable in any way for my nonprofit employer's debts?

A: Generally, no, you are not liable for the corporation's debts. As long as an employee is working within the course and scope of his or her employment, employees won't usually be personally liable for the financial losses their acts or omissions may cause to the corporation or to third parties. It is the corporation that should pay for any losses. It's important to note, however, that the employee who is responsible for reporting or paying federal or state corporate or employment taxes can be held personally liable for failure to report or pay those taxes.

**Prepared by Lisa McNair Palmer, Law Office of Lisa McNair Palmer, 1831 E. 71st St., Tulsa, OK 74136-3922; telephone: (918) 461-1996; fax: (918) 461-9061; email: lisapalmer@email.com