Forming a nonprofit can be a very rewarding and worthwhile experience. Presumably, you have decided to begin a nonprofit for educational, scientific, religious, or humanitarian reasons.

Even though the organization does not exist in order to make money for shareholders, nonprofits still need to be aware of state and federal laws that apply equally to nonprofits and for-profits, or are simply unique to nonprofits.

Below are three legal issues in which a startup nonprofit needs to be aware of in order to be successful:

1. Corporate Governance

Every state in the country requires a nonprofit to file Articles of Incorporation (sometimes other names are used) as an organizing document, and create and retain corporate Bylaws that govern the day-to-day operations of the nonprofit.

It is imperative to have clean, concise, and easy to read Articles of Incorporation, as this document will not only be important for the nonprofit’s incorporation, but also will be referenced plenty of times throughout the life of the nonprofit. Pay particular attention to sections in the Articles of incorporation that deal with why the nonprofit is being formed or its “corporate purposes.”

The Bylaws are the internal rules for the nonprofit’s governance, and typically would include more detail than the Article of Incorporation. Bylaws may include rules, for example, on nonprofit membership; board of director composition and election or appointment; how voting occurs; and when and how meetings are convened.

2. Tax Compliance

Many, but not all nonprofits are also recognized as exempt from Federal income taxes as organizations described under Section 501(c) of the Internal Revenue Code.

The application process for a nonprofit to be recognized as tax-exempt is critical. There are different federal requirements for different types of tax-exempt organizations, and describing the organization accurately in the exemption application is a must. Further, because the IRS has recently taken an increased interest in corporate governance of nonprofit organizations, including by requesting information on these issues in the annual information tax return (IRS Form 990) to be filed, organizations and their boards of directors need to be aware of a variety of issues at the outset of the organization’s existence and on an ongoing basis.

3. Privacy Protection and Cybersecurity

It seems that not a week goes by without a large company being hacked and inadvertently exposing its customer’s personal information. With this increasing focus being put on privacy protection and cybersecurity, nonprofits need to have the same types of protections in place as larger corporations. Although there is no cyber security federal statute, almost every state in the country has enacted rules that nonprofits need to comply with if they gather personally identifiable information.

Creating an internal program or process by which the nonprofit protects this information is paramount – just as important is what the nonprofit’s procedures are if they are hacked and personal information is exposed. Insurance coverage may be available for certain exposures in this area.

These three areas are just a start, mind you.

To navigate these and other legal issues that may be relevant, such as employment or labor law, corporate and commercial law, lobbying practices, antitrust compliance, and intellectual property protection to name a few, be sure to work with a qualified attorney or attorneys that understand the specific needs of nonprofits.

As part of Bloomerang’s Content Donation Program, $100 was donated to the ASPCA.

David Lieberman
David Lieberman is an Associate at Webster, Chamberlain & Bean, where he concentrates on numerous aspects of non-profit law, including anti-trust, intellectual property, employment matters, and corporate governance.