501(c)(3) 101: A Crash Course on Nonprofit Operations by Lindsey Fila

Right now, “doing good” is as trendy as hashtags, Instagram, and tattoos. I’m empowered by the growing social change movement, and I happily welcome everyone who is new to the nonprofit sector. If you don’t have time to study the IRS website (as I clearly do), read this basic information on nonprofit organizations (NPOs) to help you stay out of trouble, and therefore devote more time and resources to your cause. You’ll thank me later.

Common Myths

Your organization can’t generate profit.
Nonprofit does not mean no profit. NPOs can post an income, and even charge for their services! The main difference between nonprofits and for-profits is how they must use their income, not their ability to earn it. NPOs must use their income to further their exempt purpose, not to benefit private interests, like a for-profit company. So go out there and make some money, my nonprofit friends! Generate revenue, and save it for your next brilliant program idea.

You can’t earn a good salary while working for a nonprofit.
“Oh. You work for a non-profit? How do you pay your bills?” Nonprofit jobs are critically important to civil society, and employees deserve fair-market wages. Don’t feel guilty earning a good salary at a nonprofit, or paying your people well. Just ensure wages are “reasonable,” and document the compensation-setting process, should you ever be questioned.  And know that the work you’re doing is often its own reward.

All 501(c)(3) organizations are public charities.
By default, 501(c)(3)s are considered private foundations, unless they show that they are publicly supported to be classified instead as a public charity (more fundraising opportunities, less taxes, etc.).[1] To do so, an NPO must meet the public support test. Once you qualify as a public charity, be sure to monitor your level of public support (reported on your 990’s Schedule A), to avoid being reclassified as a private foundation in the future. [2]

Key Compliance Issues

Complete all of your state and federal filings! In Illinois, you are required to file annually, in addition to the general compliance list.:
Ø  Illinois Secretary of State’s Not-For-Profit Annual Report
Due: Annually before the first day of the month of incorporation, $10
Ø  Illinois Attorney General’s AG-990, if you solicit contributions
Due: Six months after end of fiscal year, $15
*If you earn more than $300,000, you are required to have an audit performed.
Ø  IRS 990, 990-EZ or 990-N (find out which one you are required to file here)
Due: 15th day of the fifth month after end of fiscal year, free
Ø  IRS 990-T, if you have Unrelated Business Income Tax

Formally recognize monetary or in-kind contributions over $250 (though that’s the requirement, consider recognizing all contributions). List the name of your organization, the date of receipt and amount of contribution, and a statement that no goods or services were provided in exchange for the donation (if you do provide something in return, list the value in your receipt letter).[3]

If you fundraise in other states, be sure to check with their Attorney General sites to see if you must register to solicit contributions in that state. States are cracking down on this, and not registering could cost you. A compilation of resources can be found on grantspace.org.

This short list is just the tip of the iceberg – nonprofit compliance is complex and ever-changing. Invest time up-front to understand the basics, and consult with a credible attorney along the way. A solid foundation will free you up to do what you really love – change the world!

Lindsey Fila serves as Finance Co-Chair for YNPN Chicago and Director of Administration at Resolution Systems Institute. She entered the non-profit sector after graduating with a Bachelor of Science in Business Management from the University of Illinois – Urbana-Champaign, and she believes that efficiency and collaboration is the key to success for nonprofits. In her free time, she enjoys exploring new restaurants and new music.


[1] http://www.irs.gov/pub/irs-tege/eotopicb03.pdf
[2] Organization excluded from being classified as a private foundation are described in IRC Section 509(a) – typically 509(a)(1) or 509(a)(2).
[3] http://www.irs.gov/pub/irs-pdf/p1771.pdf

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