Now that you know the benefits associated with 501c3 nonprofits let’s discuss one more thing you need to know: the laws governing 501c3 nonprofits.

Why is this important?

You need to know this because future blog posts discussing avoiding legal pitfalls when starting a 501c3 will keep referring to these government agencies.

In essence, there are a lot of different regulatory agencies that nonprofits have to comply with. However, here is an overview of the most important ones.

The key is not to feel overwhelmed. Instead, pay careful attention to upcoming blog posts discussing specific things you need to do and avoid, to prevent liabilities and legal repercussions.

As long as you follow and adhere to the general principles outlined in the blog posts, you will be in a successful position to avoid any liability.

The most important laws governing 501c3 nonprofits

#1. Federal Law and the I.R.S.

The term “federal” usually relates to things concerning all 50 states. Thus, federal laws apply to 501c3 nonprofits in each state regardless of which state you live in.

On the federal level, the Internal Revenue Service governs tax-exempt nonprofits. The I.R.S. is the division within the federal government that reviews applications for tax-exempt status and approves nonprofits that qualify.

The department that oversees this process is the Tax Exempt and Government Entities division which manages the entire process and handles compliance matters.

#2. State Law

State law is the next body of laws you need to be aware of.

On the state level, nonprofits must follow the laws within their state, which usually means registering their nonprofit within the state to operate and fundraise.

They are also responsible for making sure they follow the rules relating to property taxes, sales taxes, and not offending the attorney general’s regulations against fraudulent activities that could harm consumers.

#3. Local and municipal regulations

In addition to federal and state law, nonprofits need to be mindful of local and municipal regulations.

These laws governing 501c3 nonprofits often relate to your local, city, and county government laws.

If required by their local government or municipality, nonprofits will need to apply for:

Any occupational licenses for home offices
Signage regulations for specific neighborhoods or areas
Permits for events
Any other similar requirements

#4. Sarbanes-Oxley

Next, the legislation passed by Congress also governs nonprofits.

Named after the bill’s sponsors, Sarbanes Oxley is a law designed to help regulate publicly held companies to prevent fraud.

The two main parts of Sarbanes Oxley that apply to 501c3 nonprofits include:

Requirement that you cannot retaliate or punish the whistleblowers because they choose to report questionable activities within your nonprofit. Under this law, nonprofits cannot get rid of, hide, or change any evidence or documents that could hurt an investigation.
Nonprofits can benefit from the guidelines included within the law that encourage organizations to have an independent audit or auditing committee. Just make sure that the firm you hire is not involved in performing other financial or recordkeeping services for the nonprofit so that you avoid any conflicts of interest.

#5. The Pension Protection Act (P.P.A.)

Lastly, nonprofits should be familiar with the Pension Protection Act (P.P.A.). P.P.A. legislation changed some of the rules relating to tax-exempt nonprofits in a way that has affected hundreds of thousands of nonprofit organizations.

Under the P.P.A., tax-exempt organizations with $25,000 or less in gross receipts need to file an annual nonprofit return. If they do not do this for three years in a row, they risk an automatic tax-exempt status revokement.

This law is essential because it means that even if you have a small nonprofit – you still need to stay on top of the annual filings to avoid losing your tax-exempt status and having to reapply.

Knowing the laws governing 501c3 nonprofits is essential for founders

There are cases where nonprofit founders have fallen victim to this change in legislation. The law added reporting requirements for small nonprofits when passed.

Nonprofits that did not actively work with a nonprofit attorney won’t know about the change until they receive a letter from the I.R.S. stating that they had taken away their nonprofit’s tax-exempt status for failure to file their annual report.

It can get scary for nonprofit founders to learn that they had lost their tax-exempt status because of something they did not know. The solution for this involves spending time and money, filing everything all over again, and applying.

Though you will get approval, it’s better to avoid spending all that time and money filling everything and applying by learning everything possible about nonprofit compliance in the first place.

Nonprofits still have to follow civil and criminal laws and other statutes and ordinances, which are not listed because, quite frankly, there are too many.

This blog post shares the most important laws – and encourages you to meet with your nonprofit attorney to make sure you are in compliance or if you want to explore all of them in more detail.

Now that you have a good overview of many laws that govern 501c3 tax-exempt nonprofits let’s discuss some fundamental principles to starting a 501c3 nonprofit in the next blog post!