IRS Form 1023For nonprofit organizations, navigating the process of establishing tax-exempt status can be a challenging experience, but the benefits are more than worth the effort. Contributors being able to deduct donations from your taxes, being exempt from income and property taxes and having access to funding through grants, for example, are just a few of the many benefits of being granted tax-exempt status.

Filing for tax-exempt status involves the completion of IRS Form 1023, which covers section 501(c)(3) of the tax code. It may be helpful to have the assistance of an attorney or tax professional when completing this form, as it likely demands a greater understanding of the law than most people are likely to have. Some of the key aspects of the application include outlining the structure of your organization, along with descriptions of your organization’s history, activities and accurate and thorough financial records.

Receiving a successful approval for tax-exempt status may seem like an event worth celebrating, and it is. But there are also steps you need to take to protect your nonprofit status. One of these is establishing and maintaining a clear corporate structure. For nonprofits, there are two basic options: leaving decision-making to the board of directors, or allowing members to play a role in the process. Regardless of which option your nonprofit corporation chooses to adopt, roles must be clearly indicated and followed.

Another key element of maintaining tax-exempt status is keeping accurate records of your nonprofit organization’s activities. This helps protect the limited personal liability of the directors, and is simply a good business practice in general. Some of the records you will want to keep organized and well maintained include meeting minutes and records pertaining to major decisions the corporation makes. Accurate and thorough financial and tax records should also be maintained.

There are also a number of rules nonprofit organizations need to follow to preserve their tax-exempt status. Many of these relate to political activities, the distribution of profits and the distribution of assets in the event of the corporation’s dissolution. For instance, nonprofits are barred from making political campaign contributions, and their ability to lobby for legislation is severely limited.

As far as profits are concerned, no nonprofit can be set up to operate for its members’ personal financial benefit. And because the structure of tax-exempt organizations prevents them from owning their assets, those assets cannot simply be distributed to its members if the corporation dissolves. Nor can they be sold. Instead, they must be donated to another tax-exempt organization.

Not surprisingly, it can be easy for any nonprofit organization to find itself in legal trouble due to poor recordkeeping, engaging in inappropriate activity or failing to abide by the rules of its structure. To ensure you understand these issues and remain compliant with the law, consult an experienced attorney.

Tom Bolt serves as Managing Attorney of BoltNagi PC and advises many U.S. Virgin Islands nonprofits.  He serves on several local and national nonprofit boards.