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Union Leader: KNOW THE LAW - Non-Profits Sharing Profits - 12/2009

Written by: Rolf Goodwin

This question was answered by Rolf Goodwin of the McLane Law Firm

Question:  Three actually.  1)  If a non-profit group runs a fund-raiser, can all the members share in the proceeds?  2) Can the proceeds be used for expenses of the group?  3)  Is the amount charged by a non-profit group for business sponsorship advertisements in the group’s events deductible by the business?

Answer:  Non-profit groups can not generally distribute their funds among their members.  Instead, they must in most circumstances spend their money for their non-profit purposes.  In this case, a sports team ran a fundraiser.  The group can spend the funds on costs of the group’s activities, such as paying a coach, purchasing equipment, or attending or hosting competitions.  It may not distribute the proceeds out to those members who raised the money.  The idea is that the people who paid the money thought they were giving money to the non-profit;  the person they handed the money to was acting on behalf of the whole group, not on his or her own behalf.

Many non-profits sell advertising as a means of raising money.  The business that buys the advertising cannot deduct the cost of the advertising unless and to the extent that the amount paid exceeds the fair market value of the advertising.  In that case the excess may be a contribution to the non-profit.  The non-profit and the business would need to determine the fair market value of the advertising so that the non-profit can give the required receipt to the business for the contribution.

Non-profit entities in New Hampshire are subject to at least three levels of regulation, each of which requires attention by volunteers and staff.  First, all New Hampshire non-profits are regulated as “charitable trusts”.    The state’s Charitable Trust division website includes two publications that will be helpful for any citizen involved in a non-profit.  They are “In the Name of Charity” and “Guidebook for Directors of New Hampshire Charitable Trusts and Non-Profit Organizations”, both of which may be found at http://doj.nh.gov/charitable

Second, there are plenty of tax pitfalls facing non-profits, even if they are not big enough to be required to file the annual Form 990.  The IRS maintains a website with interactive tutorials on basic tax issues for volunteers.  It may be found at http://www.stayexempt.org.

Third, whether the non-profit is incorporated or not, it is subject to state statutes dealing with non-profits in addition to the charitable trust statutes.  For purposes of our questions, perhaps the most important will be the “pecuniary benefit” law, that requires specific record-keeping and disclosures if a board member, officer or family member engages in any transaction with the non-profit.  The most important state statutes dealing with non-profits are described in the home page of the Charitable Trust division.

Rolf Goodwin is an attorney in McLane’s non-profit entities group.  He can be reached at 603-628-1176.

Know the Law is a bi-weekly column sponsored by The McLane Law Firm
We invite your questions of business law.  Questions and ideas for future columns should be addressed to: Know the Law, The McLane Law Firm, P.O. Box 888, Manchester, NH 03101 or emailed to
[email protected].

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