There are many components to starting a nonprofit organization. Most of all, it requires an unending passion for the mission. Many people who want to start a nonprofit have a desire to give back. However, some legal guidance may be required to get a passion off the ground.
The Internal Revenue Service (IRS) requires that all nonprofit organizations have a 501(c)(3) classification. Getting this classification can be confusing and challenging, often causing delays to moving forward with the nonprofit’s stated goals. Nonprofits are set up to further a mission. Their goal is not to make a profit, although many do. Turning a profit can make nonprofit finances even more complex, requiring the guidance of a skilled lawyer.
Choosing to work with a nonprofit lawyer can be extremely beneficial. An experienced lawyer will understand the hurdles to jump through and guide applicants to a successful 501(c)(3) classification. However, there is ongoing work that needs to be done, too.
Filing for 501(c)(3) status may seem straightforward. However, for many applicants, it is a complicated process. The IRS requires a long list of documentation that must be provided to be approved. When an applicant leaves information off their filing or does not include all relevant documentation, that can severely delay the approval process. For many nonprofits that need to get to work, this can be crippling.
Many of the delays are not short, either. When an applicant has to provide additional information or restart their application, they go to the back of the line. This means many applicants find delays of more than six months if the IRS requires additional documentation.
Without the 501(c)(3) classification, the nonprofit organization cannot accept contributions. This means that their mission is essentially on hold until they get everything to the IRS. Not only does this look bad to supporters, but it can create extended delays that eventually prohibit the nonprofit from ever getting off the ground.
Review Applicable Laws
Just because an organization seeks nonprofit status, that does not mean they are exempt from abiding by federal and state laws. Some of these laws, especially local laws, can be difficult to locate and follow.
Another legal issue that can arise is in the field of trademark law. Selecting a trademark is an important step. It is a way that people recognize the organization at a glance, and there are countless organizations that use logos and catchphrases. Imposing on those other organization’s trademarks can cause embarrassing and costly fines for a nonprofit that does not do their due diligence. If a nonprofit violates another organization’s trademark, they may have to use a different logo altogether, which could create confusion for their contributors.
Conducting a trademark search is the first and one of the most important steps in a nonprofit’s early existence. When an organization skips this step, they risk fines and penalties for trademark infringement, not to mention additional costs to rebrand the organization. Nonprofits can avoid this by partnering with a skilled nonprofit lawyer who can conduct a search and make sure the intended logo does not infringe on the rights of other organizations.
Even nonprofit organizations have to hire people. Those who help run the nonprofit can receive a reasonable salary for their services. However, setting up payroll, making the right withholdings and deductions, and sending those tax payments to the right government agencies is a process ripe for mistakes. Even innocent mistakes can cause serious fines and result in back taxes.
A nonprofit will need to withhold employer and employee income taxes, Social Security taxes, and Medicare taxes. These taxes must be sent to the right federal and state government agencies on time to avoid penalties. In addition, a nonprofit organization is required to file IRS Form 941 every quarter to report the organization’s federal tax payments, even if none were made.
Wise nonprofit leaders will understand that a nonprofit’s financials will be scrutinized. It may not be something they want to spend their time on, but they know it needs to be absolutely accurate.
Contributions, specifically, must be properly categorized. These are the lifeblood of a nonprofit’s financial well-being. Without contributions, the nonprofit and its mission cannot succeed.
Depending on the size of the nonprofit, it may employ a few or many individuals. Their compensation and benefits must be closely watched to ensure that it is reasonable under the IRS. This goes for executives and board members as well.
Tax compliance is also key to avoiding fines, penalties, or losing the 501(c)(3) status altogether. Even if they are not paying taxes, nonprofits may still be required to file tax returns to show where the money was spent. Setting this process up correctly from the beginning makes it easier in the long run.
If a nonprofit does not file a tax return, they risk fines and penalties from the IRS. In fact, if a nonprofit fails to file a tax return for three consecutive years, it automatically loses its 501(c)(3) tax status. If the nonprofit fails to file and rectify the issue, individual executives may hold responsibility.
However, a nonprofit can have financial success by staying compliant. It would be impossible for anyone setting up a new nonprofit to know and understand the complexities and nuances involved in nonprofit financial management. By working with a knowledgeable nonprofit lawyer, however, the nonprofit can ensure financial success through compliance with the necessary rules and regulations they must follow.
Staying Updated With a Trusted Partner
People make contributions to a nonprofit organization because they believe in the mission. They expect that money will be handled appropriately and put to correct use. Board members, executives, and employees of nonprofit organizations have a fiduciary duty to the people they serve. Not only does the nonprofit itself need to follow applicable laws, so do the people furthering the mission. This includes financial decisions. Nonprofit employees must make financial decisions in the best interests of the organization and the contributors.
To help new nonprofit organizations, a trusted legal partner can provide regular updates and training for employees. The training may include a review of best practices in creating financial statements, transaction disclosures, oversight procedures, and how to best use and manage the nonprofit’s resources. Staying compliant is one of the best ways for a nonprofit to retain its classification and avoid trouble with the IRS and its contributors.
Working with just another lawyer is a mistake too many new nonprofits make. They incorrectly assume that any lawyer can help them set up a nonprofit. Ultimately, this can leave nonprofits with extreme headaches to overcome and challenges getting to their core mission.
Starting a nonprofit is entirely different. Lawyers who specialize in nonprofit organizations may be able to provide the guidance a new nonprofit needs to help them avoid trouble at the start. With the support of an experienced nonprofit legal team, financial success for new nonprofits is just around the corner.
Virginia Beach Nonprofit Lawyers at Anchor Legal Group, PLLC Help the Financial Growth of Nonprofit Organizations
The financial success of a nonprofit organization ultimately comes down to the people who support the mission, and that includes the legal team. Your nonprofit needs someone by your side who knows the ins and outs of the nonprofit nuances and who believes in your mission. The experienced Virginia Beach nonprofit lawyers at Anchor Legal Group, PLLC are ready to help with the financial growth of your nonprofit. Contact us online or call us at 757-LAW-0000 for an initial consultation. Located in Virginia Beach, Virginia, we serve clients throughout Chesapeake, Norfolk, Suffolk, Portsmouth, Newport News, Hampton, and Eastern Shore. We also serve our clients throughout the United States through our network of associated attorneys.