Prohibited Activities by Nonprofit Organizations

Operating a nonprofit corporation can give you a lot of freedom compared to operating a for-profit corporation. For one, you can simply do whatever your organization was created to do, without worrying about whether you’re pleasing shareholders. For another, you can get a tax-exempt status that will protect you from the burden of the corporate income tax. However, that status isn’t absolute, and if you engage in any prohibited activities, your nonprofit status can be revoked.

Nonprofit corporations are governed under federal law by Section 501c(3) of the Internal Revenue Code, which dictates what activities a nonprofit may engage in, and what are considered “prohibited activities.” The first of these prohibited activities is straightforward: nonprofit organizations are not allowed to turn a profit for those who own or operate it. Anyone with a personal or private interest in the organization (be they employees, officers, directors, or so on) cannot “substantially benefit” from the activities of the organization, aside from what they’d gain from drawing a paycheck.

Another one of the prohibited activities is engaging in political campaigning. Nonprofits organized under 501c(3) cannot campaign for, or against, any candidate for elected office. Their employees and representatives are also similarly restricted from campaigning for or against candidates, at least in their official capacity. Similarly, 501c(3) nonprofits can only engage in a limited amount of political lobbying, such that it does not constitute a substantial portion of the organization’s activities. (Anyone who wants to create an organization specifically for political advocacy should instead look into a 501c(4) “social welfare” organization, which is permitted to engage in political activity to a greater extent.)

Finally, nonprofits are expected to further whatever purpose or purposes they said they were founded to advance. Additionally, they must notify the IRS if there is any substantial change in their operating purpose. This is to avoid the possibility of a nonprofit using their status as a shield for a different, undisclosed purpose. Failure to remain within these boundaries constitutes a prohibited activity, which can result in the suspension or revocation of nonprofit status.

If you need any help starting your nonprofit organization, or have questions about applying for tax-exempt status, you’ll need an attorney who thoroughly understands not-for-profit law and their tax implications. The non-profit law attorneys at Wingate, Kearney, & Cullen, LLP have offices in Brooklyn and Long Island, New York.  The firm is experienced in incorporating religious and nonprofit organizations and applying for tax-exempt status. For more information or to schedule a consultation, call (718) 852-5900 or fill out our contact form.