10 Ways to Preserve Your Limited Liability Protection
Incorporating your nonprofit is not enough to protect you from being personally sued. You will also need to follow these rules regarding how you run your nonprofit to make sure you do not lose the limited liability protection. Limited liability protects you from being penalized as an individual instead of a nonprofit. Here are ten things you can do to preserve your limited liability protection.
1. File your annual report.
You must file an annual report with the state you incorporated each year to maintain “active” status. You will need to file between January 1st and May 1st of every year. A nonprofit’s first annual report will typically be due the calendar year after you formed the nonprofit. In most states, you can file the report online, and in some states, there are costly penalties if you don’t file the report on time. A filing fee is required.
2. File your nonprofit tax return.
Make sure you file your Form 990-N, Form 990 Postcard, and Form 1023 with the IRS each year. Failing to file these forms with the IRS can result in you personally owing taxes and being legally obligated to pay them.
3. Keep good records.
Keep your receipts, bank statements, returned checks, contracts, invoices, etc., for your records. We recommend investing in financial management software to keep track of your transactions.
4. Don’t mix your money.
Open a separate bank account for the nonprofit. Pay yourself in the form of a check instead of making arbitrary cash transfers and withdrawals from your nonprofit account. Personal expenses should come from your account. Pay nonprofit expenses from your nonprofit account. If the board decides to make a loan, make a promissory note with interest and write a check payable to your nonprofit. Purchase different color checks to distinguish the two nonprofits.
5. Sign on behalf of the nonprofit.
Avoid signing contracts with your name. Instead, use a signature block when you are contracting on behalf of the nonprofit. It should look like this:
Chisholm Law Firm Foundation, Inc., nonprofit
It’s: Executive Director
6. Put it in writing.
Have written contracts for transactions that plainly state your policies.
7. Write a resolution.
Document significant nonprofit actions by writing a resolution on behalf of the nonprofit ratifying the decision. Keep resolutions in your corporate minute book.
8. Choose your nonprofit’s name carefully.
Avoid forming multiple nonprofits whose names are too similar to your current nonprofit. If you do, you can risk causing your existing nonprofit to be held liable for the actions of the other nonprofits. If the nonprofits all share similar management teams, recordkeeping, have similar names, etc., the opposing party could argue that they are merely “alter egos” of the current nonprofit and deserve to share liability.
9. Keep money in the nonprofit account.
Make sure you keep sufficient funds in the nonprofit’s bank account to meet current obligations and bills – even before paying yourself. Otherwise, the account may be considered undercapitalized, another legal argument for “piercing the veil” and holding the individuals running the nonprofit responsible for its actions.
10. Vote on major decisions.
Make sure you vote as a board before making significant decisions that affect your nonprofit, like hiring staff, taking out bank loans, buying property, dissolving the nonprofit, etc.
Preserve Your Limited Liability
Preserving your limited liability protection can be complex. You need the right team with the right expertise to help you on this journey. Our team has helped thousands of people start and grow nonprofits that impact the world. If you want the best for your nonprofit, look no further than Chisholm Law Firm. Our clients have a 100% success rate for nonprofit filings and trademark filings*.
You can rest assured that your nonprofit is in the best hands and that we’ll get everything done right the first time. Call us today to schedule your free consultation.
It shouldn’t be this hard to be a superhero.
*Past results do not determine future outcomes.