Lawyers are quite good at putting the fear of God into their clients and friends. This tendency has even been reduced to the catchy term of laying out the “Parade of the Horribles.” In reality, for non-profits, there are some things you absolutely, positively should never do … and unfortunately, I know many of these directly from watching clients and friends step on these specific rakes and suffer the resulting pain.

• Don’t Skip Actually Incorporating

Incorporating is cheap. It is pretty easy now and you can even find cheap forms online if you want to save on legal fees. If you are acting as a non-profit, you will absolutely need governing documents so you may as well do it for real and get the benefit from some level of protection from personal liability where possible. Skip getting sued and losing your house part of public service and just file the incorporation papers.

• Don’t Let Your Corporation Lapse

Hello – you did the hard part and got the corporation papers drafted and filed and the incorporation approved. Now – don’t let it lapse! You would be amazed at how many people fall asleep at the switch, fail to timely file appropriate and required forms, and thereby lose their entity. The worst part is many of them have no idea they are running around without corporate protection because they were not paying attention to the forms in the first place.

• Be a Real Non-profit and Get the IRS Determination

Lots of people call themselves non-profits. A smaller number actually apply and obtain IRS approval to act as a non-profit.

Yes, there are some filings. Yes, it is a little work. Ok, maybe there is a sidestep way to partner with some other non-profit and avoid the need, but if you want to have impact, you really need to get set up correctly including non-profit status. For service-related entities, this is the only way to tap into donor networks making tax deductible contributions. Thinking through the application and regulatory process actually forces you to have a defined budget, business model, and appropriate initial governance framework that you really need as well.

• Like the Last One – Keep Your IRS Status!

Now that you have done even more work to get the determination letter, DON’T LET IT LAPSE. The means keeping up on your annual tax return filings. If you blow those off, the IRS will in fact terminate for IRS 501c status. The worst outcome is thinking you are free corporate entity and then finding you let the corporation lapse, you failed to file tax returns, and let the IRS status lapse. Are we starting to see why lawyers name things the Parade of the Horribles? (Footnote – this does in fact happen. If you go to the IRS website, they have a giant list of cancelled 501c organizations you can review).

• File Your Tax Returns

It is somewhat repetitive but file your 990s every year. For smaller non-profits, there is quite an easy short form filing that is super east and super quick to fill out. If that is too much work for you: shut down and close your entity immediately.

• Make Sure You are Registered to Solicit Donations

Most states require a specific registration to be allowed to ask people to donate money. The trigger for filing and the paperwork required vary considerably from state to state. You need to consider not just where the non-profit is, but where the donors are. Thus, if you are asking for money online it may trigger a need to evaluate this question in each and every state in the country.

• Get D&O (Directors & Officers) Insurance

Smaller non-profits on a shoestring may skip this but believe me it is not worth it. No good deed goes unpunished. I not only represent a lot of non-profits, but I have served on a lot of boards as a director (6 at once during one particularly insane period I will never repeat – do as I say, not as a I do, and avoid that). I would never serve as a director for a non-profit with no D&O insurance.

I like helping people, but I am not willing to risk my home by giving away my time, talent, and treasure. Insurance is there to protect people operating as board members and it will help you grow the board and the reach of your organization in addition to being a mission critical risk management issue.

Conclusion

Sometimes it is way better to learn from other people’s mistakes. This is one of those times. You will save your non-profit a lot of pain and heartache by avoiding the problems listed above.

If you have questions about starting a nonprofit organization, please feel free to reach out to Timothy Hughes at Bean, Kinney & Korman, P.C. at (703) 526-5582 or thughes@beankinney.com. Our firm practices in Virginia, Maryland, and the District of Columbia in addition to various other jurisdictions.

This article is for informational purposes only and does not contain or convey legal advice. Consult a lawyer. Any views or opinions expressed herein are those of the authors and are not necessarily the views of any client.