Nonprofit Law FAQs

This is a common misconception. Incorporation and tax exemption are two separate legal steps. A nonprofit must first incorporate at the state level. In Pennsylvania, that means filing Articles of Incorporation with the Department of State.

After incorporation, the organization must apply to the IRS for recognition of tax-exempt status, typically under Section 501(c)(3) for most charitable organizations, although separate sections apply for social welfare organizations, fraternal societies and other associations. Until the IRS determination letter is issued, the organization is not legally tax-exempt.

The revenue generated must be mission related to be tax-exempt. A non-profit can also have non-mission related income in small amounts, but that income may be taxable. A critical distinction is what happens to that revenue. In a for-profit business, earnings can be distributed to owners and shareholders. In a nonprofit, any surplus must be retained and reinvested into the organization’s mission.

Distributing profits to board members or founders is prohibited and can jeopardize tax-exempt status.

Bylaws are the governing document that establishes how the organization operates internally. They typically address board structure, officer roles, term limits, meeting requirements, voting procedures, and the process for amending the bylaws. They are not filed publicly, but they carry legal weight. Nonprofit organizations are required to have certain specific provisions in their bylaws to meet IRS requirements for tax-exempt status.

In disputes, courts and the IRS look to bylaws to assess whether an organization is being run appropriately.

Board members of Pennsylvania nonprofits owe three core fiduciary duties:

• Duty of Care: Board members must act with the care that a reasonably prudent person would exercise in similar circumstances. This means attending meetings, reviewing financial reports, asking informed questions, and making decisions based on adequate information.
• Duty of Loyalty: Board members must act in the best interest of the organization, not in their own personal or financial interest. This duty requires board members to disclose any conflicts of interest and recuse themselves from related votes. Transactions that benefit a board member at the organization’s expense, even if technically disclosed, can expose both the individual and the organization to legal liability.
• Duty of Good Governance: Board members must ensure the organization remains true to its stated mission and complies with applicable laws and regulations, including adhering to the organization’s articles of incorporation, bylaws, and any donor restrictions on gifts.

Duty violations can expose individual board members to personal liability and trigger regulatory scrutiny from the IRS or the Attorney General’s office, which has oversight authority over charitable organizations in Pennsylvania.

A conflict of interest policy establishes how the organization identifies and manages situations where a board member or officer has a personal or financial stake in a decision the organization is making. It is not legally required under Pennsylvania law, but is a best practice for a non-profit organization.

In addition, the IRS expects 501(c)(3) organizations to have one. Form 990 asks whether the organization has a written conflict of interest policy and whether it follows it.

Not without registering first. Almost all states, including Pennsylvania, require charitable organizations to register before soliciting donations from state residents. In Pennsylvania, nonprofits that solicit charitable contributions must register with the Bureau of Charitable Organizations within the Department of State.

Failure to register before fundraising, including online fundraising that reaches Pennsylvania donors, is a violation that carries financial penalties. Organizations raising funds in multiple states must track registration requirements state by state, as the rules vary.

Restricted funds are donations given with a donor-specified condition on their use. For example, if a donor gives $10,000 specifically for after-school programming, that money cannot be redirected to cover general operating expenses. Using restricted funds for purposes other than their designated use is a breach of fiduciary duty and can expose the organization to legal liability.

Nonprofits should maintain clear accounting records that distinguish restricted from unrestricted funds and follow written gift acceptance policies that address how restricted gifts are handled.

The IRS distinguishes between public charities and private foundations based partly on where an organization’s funding comes from. Public charities generally must receive at least one-third of their total support from broad public sources such as individual donors, government grants, and similar contributions.

Organizations that rely too heavily on a small number of major donors or investment income risk being reclassified as private foundations, which are subject to significantly more restrictive rules, including mandatory distribution requirements and excise taxes on certain transactions.

Yes, but the classification has to be accurate. The IRS and the Pennsylvania Department of Labor apply specific tests to determine whether a worker is genuinely an independent contractor or is actually functioning as an employee.

Misclassifying employees as contractors to avoid payroll taxes, unemployment insurance, and benefits is a serious legal exposure.

Section 501(c)(3) organizations are expressly prohibited from participating or intervening in any political campaign on behalf of, or in opposition to, any candidate for public office.

A single violation can trigger IRS investigation and, in serious cases, revocation of tax-exempt status.

The IRS permits 501(c)(3) organizations to engage in legislative advocacy. But it must constitute an insubstantial part of the organization’s overall activities.

Nonprofits face the same kinds of conflicts as any other organization such as employment disagreements, vendor disputes, governance conflicts, but with an added dimension. Every dollar spent on litigation is a dollar not serving the mission.

Mediation and arbitration are well-suited to nonprofit conflicts because they are private, faster than court proceedings, and significantly less expensive. Many contracts and grant agreements already contain mandatory ADR clauses. For organizations that do not yet have ADR provisions in their standard agreements, we recommend adding them.

We assist nonprofits with formation and tax-exempt status applications, bylaws and governance documents, board training, contract review, employment compliance, charitable registration, and dispute resolution.

We work with a range of organizations, from newly formed community groups to established regional nonprofits.

Before problems arise, not after. The organizations that manage legal risk most effectively treat legal counsel as a planning resource rather than an emergency service. Formation, bylaw drafting, employment policies, charitable registration, and gift acceptance policies are all areas where getting it right from the start is significantly less expensive than correcting mistakes later.

That said, if your organization is facing an IRS inquiry, a governance dispute, an employment claim, or concerns about restricted fund usage, contact an attorney immediately.