By James Gilmer
As the end of the year approaches, it’s time to take stock of your nonprofit’s compliance requirements of the past year and also to begin planning for the year ahead. Nonprofits are held to high standards of government regulation and public oversight, so staying compliant is critical to keeping your nonprofit running smoothly.
Nonprofits are commonly required to manage multiple requirements across federal and state government agencies, and also to maintain documentation in the event of an inquiry or audit. Compliance can be generally grouped into two categories: filings that are submitted to government agencies and records that should be kept internally.
The following is a brief overview of the tasks that most nonprofits must complete at the end of the year. Keep in mind that not all of these items will apply to all organizations and that this list is not exhaustive.
Your nonprofit is required to file reports periodically with the Secretary of State in which it is incorporated and any states it is qualified as a foreign corporation. The annual report updates the public records with changes to your nonprofit’s address, registered agent, and leadership each year. Report due dates vary by state, so pay attention to your state’s deadline and check if you have filed your most recent report. If your nonprofit is registered in multiple states, make sure you have adequate systems in place to track the various due dates. Failure to file periodic reports can incur steep penalties and result in your nonprofit’s registration being revoked.
Your nonprofit is also required to maintain a registered agent in each state where it has registered to do business. If you have appointed individuals, make sure they are aware of their appointment and can reliably serve as your nonprofit’s agent. If you have appointed a registered agent service company, make sure you renew your service.
Lastly, conduct a review to see if qualification (Secretary of State registration) is necessary in any other states. Common reasons include hiring a new employee, purchasing property, opening a physical location, and as required to meet state charitable solicitation requirements.
State Fundraising Compliance
Depending on your state and fundraising activities, your nonprofit may be required to register with the state’s Attorney General for charitable solicitation (a.k.a. fundraising). You generally have to renew this registration annually, so make sure you have filed this year in each state. Failure to register or renew can again lead to strict penalties. Most importantly, your donors can and do search state databases to see whether your charity is legitimate.
Fundraising registration and renewal is a complex topic, and your individual requirements will vary depending on your finances and activities. For more state-specific information, you can review this Fundraising Compliance Guide. At the end of the year, review your fundraising activities, including specific initiatives and all states in which you ask for contributions. Having done so, it is possible you need to register in one or more states, or to file a renewal shortly after your fiscal year ends.
IRS Compliance and Form 990
Every year, your nonprofit must file a return with the IRS, known as the “990.” There are several versions of the 990 return, and the form you file depends on your organization’s revenue. It updates the IRS with changes to your leadership, contact info, mission, activities, and finances.
IRS Form 990 is due each year exactly four months and fifteen days after the end of your fiscal year. For nonprofits on a calendar year, this is May 15th. Failure to disclose your organization’s information in full, or failure to file at all can lead to a loss of your hard-earned federal tax exemption and/or penalties that accumulate daily. By the way, if you have incorporated in this fiscal year, and you have yet to receive your 501(c)(3) determination, you still must file IRS Form 990, or you can jeopardize becoming tax exempt from the outset.
Internal Compliance and Recordkeeping
It’s important to keep thorough records of meetings, and changes to your organization, leadership, and activities. Not only will good recordkeeping help you stay organized, but it may come to your defense in the event of an audit. Your individual list will vary, but here is a brief list of items to review annually:
- Hold annual board meeting, and keep minutes
- Ensure bylaws are in place and up to date
- Review all policies, including conflict of interest and executive compensation policies
- Conduct financial performance review and reporting
- Create and approve next year’s budget
- Hold elections for officers and directors
Not only does the IRS want you to keep good records, but your donors may as well. For instance, if you apply for a grant, or are trying to gain the support of a prominent donor, they may request records, including financial statements. Being able to readily produce such records help your donors to feel secure in their gift to a responsible, compliant organization.
The Value of Compliance
We’ll admit, “end of year compliance” is a bit of a misnomer. Compliance responsibilities are ongoing, from constant recordkeeping to staggered due dates of government applications and renewals, so make sure you have the right people and systems in place to manage it all. However, many of these activities coincide with preparing the 990, so the end of the year is a logical time to conduct a full review of compliance and plan for the year ahead. With a proactive approach to meeting the requirements briefly outlined in this article, your nonprofit will set itself up for success in the year ahead.
Staying compliant adds tremendous value to your organization. Staying in good standing with the state and the IRS will avoid loss of tax exemption, and loss of limited liability protection for the officers and directors. Perhaps most importantly, donors, foundations, and other contributors want to give to responsible, credible, and fully registered organizations. By choosing to stay compliant, you make choosing your organization much easier for them!
James Gilmer is a compliance specialist for Harbor Compliance, which establishes 501(c) nonprofits and helps them stay compliant. Harbor Compliance assists charities in every state and several countries abroad. James serves on the Board for two nonprofits in Lancaster, Pennsylvania.