Compliance Tips for Nonprofits

Nonprofits are held to an expectation of transparency for everything from marketing their mission to the use of their financial privileges. Regulations in place to prevent nonprofits from exploiting these financial privileges are especially important. As a nonprofit leader, it’s your responsibility to abide by them.

In this guide, we’ll explore the best way to approach compliance and devise a plan to maintain it. However, you can’t develop this plan until you understand the requirements. Let’s begin with the elements of compliance.

Elements of nonprofit compliance

The task of filing paperwork can seemingly take away from your main focus—your nonprofit’s mission. However, it’s a necessary first step in maintaining compliance and, therefore, ensuring you can continue to further your mission. You can’t check your compliance if you don’t know what rules you need to follow, so let’s look at six elements of nonprofit compliance that your organization must draft or file.

Articles of incorporation

Before gaining 501(c)(3) status, your organization must be a qualifying entity. A popular entity choice is a corporation since it legally separates the organization’s founders from the organization itself. To establish a nonprofit corporation, you’ll need to file the Articles of Incorporation. For this application, you’ll have to include information such as:

• the name of your corporation;
• the name and address of your registered agent;
• what type of corporate structure your organization will have; and,
• the names and addresses of your board of directors.

File the Articles of Incorporation in the state where your organization bases its operations. Set aside time to make amendments to the application where necessary, especially if you use a state-wide template.

Bylaws

Just as your organization must follow external compliance requirements, there should be rules in place for its internal governance. Bylaws are the rules governing your organization’s board of directors—they establish a plan for how your organization will run.

Your bylaws are a legal document, so crafting them carefully is crucial to setting your nonprofit up for success. Focus on high-level governing issues and make sure you’re familiar with every detail. Remember, these laws are not only the building blocks for a nonprofit but also dictate how your organization will be governed.

Form 1023

After becoming a qualifying entity, your organization will need to apply for tax-exempt status. Form 1023 is an application for recognition of tax exemption that your organization submits to the IRS. The application can be up to 100 pages long after including all the required attachments, so this compliance task will likely require extra time.

The form provides an examination of your organization’s purpose, proposed activity, and governing structure. It’s how the IRS checks for conflicts of interest or unfair advantages within your organization’s leadership, so it’s an important part of establishing credibility as well. View it as an opportunity to share the legitimacy of your funding goals and mission—explain why your organization is so important!

Budgeting and record-keeping

Nonprofits must record their financial transactions to ensure compliance with state and federal accounting rules. Accounting records, donations, corporate documents, and any record of your organization’s activities must be tracked in a process called nonprofit bookkeeping. Some nonprofits choose to outsource bookkeeping since it must be maintained regularly and may require financial expertise.

Form 990

After obtaining 501(c)(3) nonprofit status, your organization is required to file Form 990, an annual tax return that reports your organization’s overall accomplishments in a given year. The document is extremely thorough, including sections that cover:

• public charity status;
• schedule of contributors;
• supplemental financial activity;
• activities outside of the U.S.;
• grants;
• compensation;
• noncash contributions; and,
• assets.

Of course, these are just some of the sections that require a nonprofit’s attention when filing Form 990. Be sure to fully report the prior year’s financial activities, leaving out no detail.

Charitable solicitations registration

Aside from federal filings and the general structure of your nonprofit, you’ll also need to ensure you follow state-specific requirements. Before making their case for support to donors, nonprofits must register to fundraise if their marketing efforts target one of the 40 states that require it. This application is called charitable solicitations registration, and it allows nonprofits to solicit donations.

Solicitation includes almost any type of fundraising, whether you’re directly writing a donation letter or subtly placing a link to your donation page on social media. That’s why it’s important to register in your nonprofit’s state before asking for donations. This registration might be filed multiple times if it’s required in your nonprofit’s state and other states in which you target donors.

How to maintain compliance

A list of applications is only helpful if you know when and how to follow them. This is why it’s important to establish a plan for compliance that your nonprofit can incorporate into its regular operations. For example, Kwala’s guide to board reports suggests including important operational updates in your board reports so that everyone is on the same page. Share the compliance schedule with them and include upcoming applications to keep your organization’s leaders looped in.

Consider what information you’ll need to submit, how you’ll keep track of those details throughout the year, and what changes you should make to comply. Follow these steps:

1. Gather your nonprofit’s information. If it isn’t already written out and organized, gather important information about your nonprofit. For example, you might record contact information for your board of directors, revise your bylaws, or craft a compelling mission statement.
    
2. Compile your applications and documents. Create a clear list of compliance documents and applications you’ll need. Once you get started, it should be fairly easy to develop a running list of applications to renew.
    
3. Designate a compliance monitor. Choose someone to stay on top of your compliance task timeline so that you don’t miss a thing. If no one in your organization is experienced enough to do this or if you don’t have the staff capacity to add this to someone’s workload, consider hiring a professional.
    
4. Watch out for compliance law changes. Find sources of information that will keep you up-to-date on compliance regulation changes. Check these laws frequently to make sure nothing has changed.
    
5. Offer training to staff members that want to know more about compliance. Keeping your staff members in the loop is another important part of your compliance plan. Having the whole team involved can ensure that compliance is a regular part of every team member’s daily activities.

If you decide to hire a professional, make sure you communicate your nonprofit’s specific circumstances to the expert and ask about what compliance services they offer. For example, Foundation Group offers nonprofit formation services that include nonprofit incorporation and 501(c)(3) tax exemption. After choosing an expert to work with, schedule a consultation to describe your nonprofit’s corporate structure and mission to best outsource this process to a third party.

By organizing your documents and delegating compliance management, your nonprofit can focus on what really matters—your mission. Develop a compliance plan today to standardize the process so that it doesn’t take away from your important work.