Cook & Cook
How Does Limited Liability Affect a Nonprofit?
Limited liability entities are often formed (at least in part) to protect the assets of for-profit business owners from the financial obligations of a particular business. In the case of a nonprofit, however, the entity is generally not permitted to have owners who are entitled to the profits of the organization. Rather, any profits earned by a nonprofit must be reinvested. So if a nonprofit cannot have owners who are entitled to its profits, why is it beneficial for a nonprofit to be structured as a limited liability entity, and whom does it protect?
While limited liability can protect the personal assets of owners of a for-profit business from creditors of the business, it can also protect the personal assets of both those who manage for-profit businesses and/or those who manage nonprofits from the debts that such businesses or nonprofits may incur. In the case of a nonprofit, this may include the board of directors, officers, members, etc.
Perhaps one of the most compelling benefits associated with the concepts of nonprofits is the potential for a nonprofit to be recognized as tax-exempt by the Internal Revenue Service (IRS), which means it is not required to pay federal income taxes on profits that it earns.
Although some people equate the term “nonprofit” with “tax-exempt”, they are not the same. In particular, “nonprofit” is a term associated with state law, while “tax-exempt” is a term associated with federal tax law. Nonprofits are not automatically tax-exempt; rather, they must apply for recognition of tax-exempt status with the IRS.