Non-profit organizations provide a foundation upon which individuals can come together to fulfill a charitable mission. These organizations are typically structured as non-stock corporations and have been granted tax-exempt status by the Internal Revenue Service. In addition to state and federal laws, they are bound by the governing documents of the organization, most notably, the charter and bylaws.
The oversight and governance of most non-profits is provided by its board of directors. These directors are typically elected by the organization’s members or by its existing board, and their role is to provide strategic direction to the non-profit, consistent with its underlying purpose and mission. Boards are generally composed of a diverse group of individuals who have the skill necessary to provide this strategic direction and oversight, or who have a keen interest in the non-profit’s work. These individuals have a fiduciary obligation to act in the best interest of the organization, and cannot engage in self-dealing or activities which would give rise to a conflict of interest.
Quite often, as a non-profit organization grows, the board of directors will hire a president or executive director for the organization, whose job is to run the day-to-day operations of the entity. Almost always, this paid officer works at the pleasure of the board.
Entities structured as non-stock corporations are not owned by any one person; rather, they might exist for the benefit of a particular group of people or industry, for the benefit of a certain cause, for the benefit of specific research or humanitarian outreach, or perhaps, for society at-large. In fact, the IRS provides for rather stringent regulations regarding the use and disposition of non-profit assets, including pertaining to cash donations.
While one or more individuals involved in the creation and organization of a non-profit may play a pivotal role in its growth and development, these people are not owners of the non-profit. Remember, a non-profit exists for the benefit of a particular cause, not for the monetary benefit of its founders, their family members, their friends, or even their cronies. One cannot own stock in a non-profit organization. Moreover, they are generally not guaranteed a permanent seat on the board of directors or a life-long contract as the organization’s president or executive director.
While there are strategic reasons for for-profit entities to organize and control a non-profit entity, individuals considering the organization of a non-profit should carefully evaluate the bases for its proposed creation. Specifically, if the entity is being created for one or more of the specific reasons provided for in the Internal Revenue Code, they should go for it. However, if the non-profit is being considered as a means of creating employment or job security, at the expense of donors or granting agencies, these job-seekers should think again. The legal consequences of organizing a non-profit entity for something less than legitimate objectives, and inappropriately using its assets and resources, can be staggering.
Paul Skalny is an attorney with the Business and Transactional practice group at Davis, Agnor, Rapaport & Skalny, LLC. For questions about this article, please do not hesitate to contact Paul.