16 Ways Nonprofits Get into Legal Trouble

Starting a nonprofit can be scary, but it doesn’t have to be. If you are aware of potential legal troubles, you’re more likely to be able to avoid them altogether. Here is a summary of a few of the most important things to keep in mind as you are running your 501c3 nonprofit to help you stay out of trouble. 

  1. Do not forget to file your Form 990 for three years consecutively. If you do, your tax-exempt status may be automatically revoked.
  2. Do not lobby or participate in restricted political activity.
  3. Do not give loans from the nonprofit to individuals.
  4. Do not allow the nonprofit to benefit third parties (e.g., vendors, businesses, etc.) over the general public.
  5. Do not allow the nonprofit to benefit insiders in your organization over the general public.
  6. Do not pay yourself or staff an unreasonably excessive salary.
  7. Do not use nonprofit funds to pay your own personal bills.
  8. Do not avoid paying employment taxes.
  9. Do not under-capitalize the nonprofit bank account (Make sure you keep enough money in the nonprofit bank account to pay the bills of the nonprofit).
  10. Do not use your tax exemption (or let others use it) for non-charity related purposes.
  11. Do not use a name for your nonprofit that you do not own via a registered federal trademark.
  12. Do not mishandle funds by failing to use them in the way that you said you would.
  13. Do not involve people in your nonprofit that are dishonest.
  14. Do not file legal paperwork on behalf of your nonprofit if you do not know what you are doing. Hire a qualified nonprofit attorney.
  15. Do not throw away important documents, but keep good records (receipts, etc.) to document how funds are being used and how decisions are being made.
  16. Do not sign legal documents on behalf of your nonprofit unless you’ve had an attorney review them. 

Learning from others’ mistakes is a good way to avoid them. Now that you are aware of the 16 ways nonprofits get into legal trouble, you’ll be able to easily avoid them. 

At Chisholm Law Firm, we have a 100% success rate for our clients. 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.

And remember – it shouldn’t be this hard to be a superhero. 


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