How Does Limited Liability Affect a Nonprofit?

posted by
Steve Cook
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.


Only Two Things In Life Are Certain: Death & Taxes (Well, Maybe Not)

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.

Lost Your Tax-Exemption? What Next —

posted by Pat Lewis,
Senior Professional
in Residence
ASU Lodestar Center

The IRS has begun to revoke the tax-exempt status for those nonprofit organizations that have not filed some form of a 990 (information report) for three years. Guidestar estimates that 350,000 to 400,000 nonprofits are in danger of losing their exemptions. A large number of these organizations are smaller nonprofits that previously were not required to file an annual return because their gross revenues were $25,000 or less.[1] If your organization has not filed any of the 990 forms for three years it is likely you will soon receive a revocation notice.

How will I know if my organization has lost its tax-exempt status?
You will receive a notice from the IRS in the form of a letter, Notice CP120A.[2] A copy of this notice is posted on the IRS website and a list of organizations that have had their nonprofit status revoked.[3]