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 “…

I recently completed the MNpS program at ASU and have a successful career in association management. Throughout the program, the overwhelming focus was on charities. Yes, 501(c)(3) organizations make up the majority of the nonprofit sector, but there are 29 types of 501(c) organizations. As the Executive Director of the Arizona Parks and Recreation Association, I seemed to be the only inhabitant on the 501(c)(6) island. I found this surprising since nearly every career path in the world has a trade association or individual membership association dedicated the to uniting that industry, distributed among 501(c)(3)s, 501(c)(4)s and 501(c)(6)s.

What many people consider nonprofit organizations are 501(c)(3)s and include charitable, religious, scientific or literary organizations. Contributions to these groups are tax deductible, which is not the case in other nonprofit organizations. Some associations fall into this category, but are limited on the amount of lobbying they can do on behalf of their members. 501(c)(4)s are sometimes referred to social welfare leagues and have more freedom in political activities. 501(c)(6)s include business leagues, chambers of commerce, real estate boards, boards of trade and professional football leagues. Many trade associations fall into this category.

My point is that associations are a critical piece of the nonprofit sector. Best selling author, Jim Collins referred to associations as “the hidden glue of our…

Question: I am the interested in starting a public charity, and I want to legally protect my influence and ability to control the affairs of the organization.  How can I do this?

I get this question or some variation of it fairly regularly, and my response is a quite lengthy description on the nature of public charities and the reality that nonprofit organizations of this type do not have owners, by design, making it impossible to legally protect an individual’s control of an organization.

Short answer:  You can’t.

Long answer: Public charities are an IRS designation of organizations that are organized and operated for exempt purposes.  Exempt purposes can span a wide variety of activities intended to improve the common good.  The organized and operated requirements for charitable organizations are very specific, including a prohibition of private benefit, so private ownership is not an option.

That being said, I can empathize with the desire to control the affairs of an organization as a founder who has the initiative and follow through to turn a vision into a reality. Like other successful…

I make my living working for an organization that is used as a metaphor in business writing all the time – the symphony orchestra. Most of the time the orchestra metaphor is used as an example of a high functioning team made up of specialists in pursuit of excellence.

Sometimes it is pointed to as an example of the limits of hyper specialization and silos (because, for instance, the timpanist cannot offer much to the cellist in terms of solving playing problems and vice versa).

Today the metaphor is a little out of fashion and, as more than one observer has wryly noted, as a metaphor for organizations it is probably most enjoyed by those who see themselves as conductors of organizations. Nonetheless, as it relates to organizations I am pretty confident that the metaphor of the symphony orchestra will persist.

Why?

Because the show – the performance work that an orchestra does – is a pretty amazing feat of human coordination. It’s a stage full of people, putting years of training and practice on display in a complex and often dazzling dance of sound over time – all in order to tell a story together.

It really is, as I sometimes call it, ‘the human coordination show’. But behind the human coordination show of an orchestra are real organizations with all the challenges of complexity and human fumbling that any organization faces. Sometimes these organizations are high functioning, sometimes they are not.

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Welcome to Research Friday! As part of a continuing series, we invite a nonprofit scholar, student, or professional to highlight current research reports or studies and discuss how they can inform and improve day-to-day nonprofit practice.

In the coming decades, over 40 trillion dollars will change hands. While a large portion of this wealth will be designated for charitable giving, the people who will inherit this wealth—and direct the charitable giving—are relatively small in number. They are called "next gen major donors," and according to a recent report issued by the Johnson Center at Grand Valley State University and 21/64, they will "have tremendous influence on the direction of and support for efforts to improve local communities and solve global problems over the next several decades."

"Next gen major donors" are defined as people aged 21 to 40 who are persons of wealth and are involved with their families' philanthropic activities. The report, titled …