13.8 Legal & Ethical Considerations

Tax-Exempt Status

Nonprofits that obtain tax-exempt status from the IRS, such as those classified under 501(c)(3), are exempt from paying federal income taxes. This status allows them to use more of their resources for their mission rather than taxes, and it also makes donations to these organizations tax-deductible for donors. However, there are restrictions that come with this benefit. One major limitation is the restriction on political activity—501(c)(3) nonprofits cannot participate in political campaigns or endorse candidates for public office. While they are allowed to engage in nonpartisan activities like voter education, they must remain neutral when it comes to elections.  

Lobbying and Advocacy Rules

Nonprofits often engage in advocacy to promote their mission and influence policy, but it is important to understand the difference between advocacy and lobbying. Advocacy involves raising awareness and educating the public or policymakers on issues that align with the nonprofit’s mission. Lobbying, however, is more specific and involves attempting to influence legislation. While nonprofits can engage in some lobbying, there are limits. For example, 501(c)(3) organizations can only dedicate a small portion of their resources to lobbying activities, and exceeding these limits could jeopardize their tax-exempt status. However, other nonprofit types, like 501(c)(4) social welfare organizations, have more flexibility in their lobbying efforts.  

Ethical Standards

Nonprofits are expected to operate according to high ethical standards, ensuring they maintain the public’s trust. This includes avoiding conflicts of interest, where personal interests might influence decisions that should benefit the organization. Board members and staff must act in the best interests of the nonprofit at all times. Ethical fundraising practices are also critical. Nonprofits should be transparent with donors about how their contributions will be used and should avoid using deceptive tactics to raise money. In addition, ethical donor relations require nonprofits to honor the intent of donor contributions and use the funds in ways that align with both the donor’s wishes and the organization’s mission. These ethical obligations help maintain credibility and accountability within the nonprofit sector.