A corporation is a legal entity with a life of its own, although it is not human.
The corporate veil is a legal concept that separates the officers and directors of a corporation from the legal person itself. This legal theory provides limited liability for officers and directors as they act on behalf of the corporation.
However, criminal activity and certain irregularities in the management of companies can, in turn, compromise this protection. Pierce the corporate veil is the term used when a legal action penetrates or pierces this shield as a result of litigation.
The incorporation of a non-profit organization allows for limited liability of the “veiling” theory. Incorporation also offers a sustainable corporate life and the structure of a centralized organization. Nonprofit corporations may qualify for both state and federal tax breaks. When a nonprofit organization is not properly incorporated, federal or state agency benefits will not be granted.
Nonprofits generally have a positive public image. The facts show that they do good things, but things can go wrong. Company negligence may arise and cause this limited liability to be tested in court.
Legal protections can disappear just as easily for a non-profit organization as for a for-profit company.
Life in an association
The very nature of a non-profit organization expressed in its mission and purpose suggests that best practices should be employed in all areas of management. The conduct of officers and directors should never exceed the managerial limits expected of this type of organization.
Government agencies, industry and the legal community are increasingly focusing on the activities of nonprofit groups. When volunteers, deliberately or not, act outside of the proper management responsibilities of a tax-exempt entity, they invite government scrutiny and possible sanctions and eventual dissolution.
The greatest risk for a nonprofit organization is distributing profits or net profits to officers, directors, or members. Nonprofits cannot issue ownership shares because there are no owners. Nonprofit executive management is only part of the service commitment. The excess of receipts over expenditure in the coffers of the association must be devoted solely to the purpose for which the association was created.
Eligible financial and compensatory problems
Non-profit organizations enjoy a great deal of financial freedom. A non-profit corporation may have paid employees, pay consultants for services rendered, purchase real estate and make investments. Officers and directors may be reimbursed for legitimate out-of-pocket expenses in the performance of their corporate duties. Travel, accommodation, and meals are typical reimbursable expenses when incurred as part of the nonprofit’s activities.
Officers and directors may also be compensated for their attendance at meetings, as their expertise is essential to the voluntary management of the organization.
There are other acceptable financial ventures in which nonprofits can be involved. Some examples are: property and real estate ownership, particularly when it comes to hosting the organization, rental income, magazine advertising income, and sponsorship of trade shows and events.
The IRS has a category for nonprofit organizations that generate high trade show revenue and magazine revenue. They are labeled non-profit taxpayer organizations and are taxed on the net income remaining after all related expenses have been paid by the association.