Legal Advice for Nonprofits: Compliance and Governance

The mission is everything. It’s the beating heart of every nonprofit organization, driving the work to protect the environment, uplift communities, advance social justice, and feed the hungry. But in the passionate pursuit of this mission, it’s dangerously easy to view legal compliance and governance as a dry, bureaucratic obstacle—a stack of paperwork that distracts from the "real work." This perspective is not just risky; it’s a fundamental misunderstanding of what makes an organization resilient, trustworthy, and ultimately, effective. In today’s landscape, marked by global instability, rapid technological change, and heightened public scrutiny, robust legal hygiene is not a constraint on your mission; it is the very framework that allows it to thrive and endure.

Strong governance and diligent compliance are the bedrock of donor confidence, community trust, and operational integrity. They protect the organization from existential threats and ensure that every dollar and every hour of effort directly serves the public good. This guide will walk you through the critical legal areas that modern nonprofits must master to secure their future.

The Unshakeable Foundation: Corporate Governance

At its core, governance is about how your organization is directed, controlled, and held accountable. It’s the system of rules, practices, and processes that dictates the relationship between the board, management, and stakeholders.

The Board of Directors: Fiduciary Duties and Beyond

Your board of directors is legally and ethically responsible for the stewardship of the organization. This responsibility is encapsulated in three primary fiduciary duties:

• Duty of Care: Board members must act with the care that an ordinarily prudent person in a like position would exercise under similar circumstances. This means showing up to meetings prepared, asking probing questions, reviewing financial statements, and making informed decisions. It’s about active engagement, not passive attendance.
• Duty of Loyalty: This duty requires board members to put the interests of the nonprofit above their own personal interests. They must avoid conflicts of interest and never use their position for private gain. Any potential conflict must be disclosed, and the affected member should recuse themselves from related discussions and votes.
• Duty of Obedience: Board members must ensure the organization obeys all applicable laws and regulations and remains true to its stated mission as outlined in its governing documents. Straying from the mission without proper legal steps can jeopardize tax-exempt status.

Essential Governance Documents: Your Organizational Blueprint

These are not documents to be filed away and forgotten. They are living guides that demand regular review.

• Bylaws: Your organization's internal operating manual. They should clearly define board structure (number of members, terms, officers), meeting procedures (quorum, voting), and committee functions. Outdated bylaws can paralyze an organization during a crisis.
• Conflict of Interest Policy: This is your primary tool for managing the Duty of Loyalty. A strong policy requires annual disclosure forms from board members and key staff, outlines the process for reviewing and addressing conflicts, and demonstrates to the IRS and donors that you are committed to ethical operations.
• Whistleblower Policy: A critical policy for fostering a culture of accountability. It provides a safe, confidential mechanism for employees and volunteers to report suspected illegal or unethical conduct without fear of retaliation. This is a key component of risk management.

Maintaining Your Tax-Exempt Status: An Ongoing Obligation

Securing 501(c)(3) status from the IRS is a major achievement, but it’s a conditional one. The IRS can, and does, revoke this status for organizations that fail to comply with the rules.

The Perils of Private Inurement and Excessive Benefit

The absolute prohibition against "private inurement" is the cornerstone of tax-exemption. No part of the organization's net earnings may unduly benefit any individual or private shareholder. This means salaries for staff must be reasonable, not excessive. Contracts with board members or their businesses must be thoroughly vetted, disclosed, and demonstrably fair to the organization. The "intermediate sanctions" rules allow the IRS to penalize individuals who receive excessive benefits, even without revoking the organization's status.

Lobbying vs. Political Campaign Intervention: Knowing the Line

This is a hot-button issue where many nonprofits get into trouble.

• Lobbying: Attempting to influence specific legislation. 501(c)(3) public charities are permitted to engage in a limited amount of lobbying. You can elect to measure this under a "substantial part test" or, more safely, under the "expenditure test" by filing IRS Form 5768. This provides clear, mathematical limits on lobbying spending.
• Political Campaign Intervention: This is an absolute prohibition. Your organization may NOT participate or intervene in any political campaign on behalf of (or in opposition to) any candidate for public office. This includes endorsements, donations, and even statements that could be construed as supportive or oppositional. The rules around voter education and candidate forums are strict and must be carefully navigated with legal counsel.

The Annual Mandate: Form 990

Form 990 is far more than a tax return; it is your organization's public report card. It is scrutinized by donors, journalists, and watchdog groups. Filing an incomplete, inaccurate, or late return is a major red flag. Ensure your Form 990 accurately reflects your governance practices, compensation policies, and programmatic accomplishments. It is a powerful tool for transparency.

Navigating the Modern Risk Landscape

The operating environment for nonprofits is more complex than ever, introducing new layers of legal risk.

Data Privacy and Cybersecurity

Nonprofits hold a treasure trove of sensitive data: donor credit card information, client health records, volunteer details. A data breach is not just a tech problem; it's a legal, financial, and reputational catastrophe.

• Compliance: You may be subject to a patchwork of laws like the GDPR (for EU donors), CCPA/CPRA (for California residents), or HIPAA (if you are a health provider).
• Action Steps: Develop a written cybersecurity policy. Train staff on phishing scams. Use strong encryption for stored data. Have a clear data breach response plan that outlines notification procedures. Your donors' trust depends on your ability to protect their information.

Remote Work and Employment Law

The shift to hybrid and remote work models creates new legal challenges. Where an employee works can subject your organization to the employment laws of that state or even that city. This includes minimum wage, paid sick leave, anti-discrimination laws, and payroll taxes. You must be proactive in tracking employee locations and ensuring multi-state compliance.

International Operations and Global Sanctions

For nonprofits working across borders, the legal complexity multiplies. Sending funds or providing services in a country subject to U.S. economic sanctions (e.g., certain regions of Ukraine, Syria, Afghanistan) can lead to severe penalties from the Office of Foreign Assets Control (OFAC). You must have rigorous grantee vetting and fund-tracking procedures in place. Similarly, complying with anti-terrorism financing laws and the Foreign Corrupt Practices Act (which prohibits bribery of foreign officials) is non-negotiable.

Fundraising in the Digital Age: Legal Pitfalls and Best Practices

Fundraising is the lifeblood of most nonprofits, but the methods have evolved, and so have the regulations.

State Charitable Solicitation Registration

This is one of the most commonly missed compliance areas. If you solicit donations from residents of a particular state, you are likely required to register with that state's charity regulator before you ask for money. With online fundraising, you are effectively soliciting nationwide, which triggers registration requirements in most of the 40+ states that have them. Failure to register can result in fines, penalties, and an inability to solicit in that state in the future.

Transparency with Donors

The legal requirement to provide written substantiation for tax-deductible contributions over $250 is well-known. But today's donors expect more. Be clear about how their money will be used. If you are running a campaign for a specific project, honor that restriction. Misrepresenting the use of funds can lead not only to donor alienation but also to allegations of fraud and investigations by state Attorneys General.

Corporate Partnerships and Cause-Related Marketing

Partnering with a for-profit company can provide incredible reach and resources. However, these relationships must be structured carefully. The terms should be documented in a written agreement that addresses intellectual property use, how the partnership will be promoted, and the specific financial arrangement. Be wary of any partnership that might constitute a "joint venture" that could jeopardize your tax-exempt status by creating undue private benefit for the corporate partner.

Building a Culture of Compliance: A Strategic Imperative

Legal compliance cannot be the sole responsibility of one overworked executive director or a board member who happens to be a lawyer. It must be woven into the fabric of the organization.

• Prioritize Ongoing Education: Regularly train your board and staff on key legal topics: fiduciary duties, conflicts of interest, fundraising regulations, and data privacy.
• Embrace "Right-Sized" Policies: Your compliance program should be proportional to your organization's size and complexity. A small, all-volunteer group does not need the 100-page policy manual of a multi-million dollar foundation, but it absolutely needs a conflict of interest policy and clear financial controls.
• Invest in Expert Advice: The most cost-effective legal decision a nonprofit can make is to engage an attorney who specializes in nonprofit law. Don't wait for a crisis. Use counsel proactively to review contracts, advise on governance questions, and help interpret complex regulations. This is not an expense; it is a critical investment in your mission's longevity and impact.

In a world demanding greater accountability, your commitment to sound legal practices is a powerful statement to your supporters, your beneficiaries, and the world. It says that your mission is too important to be left to chance.