How To Ace Compliance

Let’s go back to our college classroom days for a minute.

Do you remember that dreadful feeling of getting a paper back that you stayed up all night working on, only to find out you bombed it? And you had no idea why. You thought it was a masterpiece. 

Well, it turns out you didn’t check the syllabus, and you missed some key points. In other words, you didn’t comply with the teacher’s requirements. 

That’s how we think about compliance for nonprofits. Despite doing good, hard work, nonprofits are subject to losing their 501(c)(3) statues if they do not meet the required compliance standards. By definition, compliance is the state or fact of according with or meeting rules or standards. Since 501(c)(3) nonprofits are exempt from federal corporate taxes and have access to public funding, maintaining compliance is critical. 

If nonprofits don’t meet and maintain certain compliance standards, they can be prohibited from receiving grants or tax-deductible donations and their 501(c)(3) status can be revoked along with costly financial penalties.

We’ve outlined some of the key things you need to know for your nonprofit to stay compliant.

Federal and State Compliance

Nonprofits have to comply with both federal and state regulations. First, we’ll outline compliance requirements at the federal level.

• Filing a Form 990 - Nonprofits are required to file a Form 990 to the IRS annually. This form provides the IRS with information about nonprofits’ income, expenses, program accomplishments, and board members. When not filed in a timely manner, there are various monthly fees associated with this. After failure to file for three years, a 501(c)(3) status can be revoked.  

State Compliance 

• Division of Charities Registration - Compliance requirements differ from state to state, so it’s important to know the laws in the state your nonprofit is incorporated in. However, in most states, nonprofits must register with the Division of Charities. If the nonprofit crosses state lines, it must register in every state in which it is present. Similarly to the form Form 990, this needs to be renewed annually. 

• Register and maintain state tax accounts - Nonprofits are required to file and pay state level tax returns and maintain state-level tax exemption for franchise, income, sales and other tax types.

• Create and maintain bylaws - Required when becoming incorporated, bylaws are a form of agreement or a contract between the corporation and its owners to conduct itself in a certain way. A nonprofit's bylaws are both a legal document and a roadmap for your organization's actions. 

• Establish a registered agent - All states require nonprofit corporations to have a registered agent in the state of formation. The registered agent is responsible for receiving legal and tax documents, must have a physical address (no P.O. boxes allowed) in the state of incorporation, and must be available during normal business hours.

• Register and maintain charitable solicitation or fundraising registration. In order to be able to fundraise, nonprofits must register for and maintain charitable solicitation. Many states require initial registration as well as renewal registrations in subsequent years. Late fees apply, so be sure to take note of renewal deadlines.

Other Compliance Regulations

In addition to maintaining the proper legal paperwork to remain compliant, nonprofits must meet other internal regulations. Again, regulations differ from state to state. In the less-tangible sector, there are two rules all nonprofits must follow. First, nonprofits are not allowed to have shareholders. Second, nonprofits are prohibited from contributing to political campaigns. 

You might be thinking, “Well how can some well known nonprofits such as Planned Parenthood or the NRA outwardly support certain candidates?” In some cases, organizations earn a 501(c)(4) status, which permits them to outwardly support political campaigns and candidates.

Lastly, nonprofits cannot lobby to affect legislation in any substantial way. According to the IRS, legislation includes action by Congress, any state legislature, any local council, or similar governing body, with respect to acts, bills, resolutions, or similar items (such as legislative confirmation of appointive office), or by the public in referendum, ballot initiative, constitutional amendment, or similar procedure. 

While compliance can often feel overwhelming and easily be overlooked, it is critical to stay organized to ensure your nonprofit does not lose its 501(c)(3) status.