Tax Exempt or Nonprofit Organizations require specialized counsel to guide them through the maze of requirements mandated by the Internal Revenue Services.  Section 501 (c) of the Internal Revenue Code specifies the purposes for which tax exempt organizations can be organized and defines the parameters under which they must operate.  Many people mistakenly assume that a Nonprofit can not make money, but that is not actually true – a Nonprofit can make money, it just can not have owners and distribute those earnings to individuals.  This is called the private inurement rule and means that all the money earned by or donated to the Nonprofit must be used for it’s tax exempt purpose.  This may be for religious, educational, scientific or other charitable purposes.

This does not mean that employees of the Nonprofit can’t be paid competitive wages.  On the contrary, a Nonprofit can pay reasonable wages to it’s employees similar to for profit businesses and can provide benefits in the same manner as taxable entities.  While most Nonprofits are supported primarily by donations, it is permissible for Nonprofits to engage in a trade or business, so long as the trade or business is related to it’s tax exempt purpose, and does not utilize debt financing related to real estate.  If the trade or business is not related to the tax exempt purpose of the Nonprofit or it uses debt financing on real estate investments, it can create what is called Unrelated Business Taxable Income or UBTI which means that the Nonprofit will have to pay tax on that income.

There are many requirements and potential issues for the unwary in the world of Nonprofit Organizations so make sure you have experienced competent counsel if you plan to set up a Tax Exempt –  Nonprofit organization.