PRIVATE INUREMENT
The private inurement doctrine is one of the most important concepts of nonprofit law. It is the rule that the funds and benefits of a nonprofit organization cannot go to any particular persons but must be used for the approved purpose of the organization. The rule was meant to keep people from using the form of a nonprofit organization to avoid taxes for private transactions.
EXCESS BENEFITS TRANSACTIONS
Besides not having the purpose of the organization to benefit private parties, the actual operations of the group must not give excess profits to private individuals.
Nonprofit organizations are allowed to hire employees, rent property, and pay for services, and in most cases, there is not a prohibition against hiring, renting from, or buying from their own directors or officers-as long as it is a fair transaction. But the salary must not exceed what is fair in the community, the rent must be fair market rent, and the services must not be overpriced compared to other providers of the same services.
Transactions between nonprofits and their directors, officers, and members will be looked at carefully by the IRS, so you should keep careful records and be able to back up all transactions. For example, if a director rents office space to an organization, you should have evidence of what rents are charged to others and what other rentals are available to the organization. If the organization pays salaries to employees and officers, you should document what those people have earned elsewhere and what similar organizations are paying similar employees.
LOBBYING
The basic rule for charitable nonprofit corporations is that if a substantial part of the activities consist of propaganda or attempting to influence legislation, then the tax exemption will be denied or revoked.
Lobbying is generally considered to be either directly contacting legislators to influence legislation or attempting to influence public opinion on an issue of legislation. It is not considered lobbying merely to do a nonpartisan study or analysis or to respond to legislative requests for information.
POLITICAL CAMPAIGNING
Political campaigning is even more strictly controlled for nonprofits. Political campaigning is considered the support of particular candidates for office, (as opposed to lobbying which is support of legislation). The general rule is that charitable organizations may not do any political campaigning.
CONFLICTS OF INTEREST AND SELF-DEALING
It is not fatal for an organization to have dealings with its insiders (disqualified persons), but it requires careful documentation and at times can look bad to outsiders.
You should also keep in mind that conflicts of interest or nepotism in an organization can have a negative effect on members or contributors. If the person who starts an organization hires all of his family members and no one else to work for the organization, it may be seen as a conflict of interest to those who make grants or want to join. In some cases, where the organization is doing a clear good, the salaries are below normal, and few other people are willing to get involved, this may not be a problem. But in a large organization where many people want to be involved, it may cause political problems resulting in a loss of support and even the formation of splinter groups.
One thing you must avoid is keeping any conflicts in secret. If the organization is dealing with an insider or an insider's family member, don't try to hide it. Explain the relationship and put it in the records.
SOURCES OF INCOME
There are two main concerns of nonprofit organizations when it comes to the sources if income. The first is that new funds coming in do not cause it to lose its nonprofit status, and the second is that not too much of the money is from sources unrelated to its exempt function.
Nonprofit organizations must be careful about how they earn money. If too much comes from improper sources, they may be required to pay tax penalties or completely lose their tax exemption. The basic rule is that the money making activities must be related to the exempt function of the organization.
