Nonprofit Organizations

Both are tax-exempt under IRC 501(c)(3), but the IRS treats them very differently. Public charities receive broad public support and face fewer restrictions on operations and investments. Private foundations are typically funded by a single donor, family, or corporation and are subject to strict rules on self-dealing under IRC 4941, minimum distribution requirements under IRC 4942, excess business holdings under IRC 4943, and jeopardizing investments under IRC 4944. Private foundations also pay a small excise tax on net investment income. Many organizations that start as private foundations eventually convert to donor-advised funds or public charity status to reduce administrative burden and compliance risk.

Public charities may engage in lobbying as long as it does not constitute a substantial part of their activities. The IRS applies either a vague substantial part test or, for organizations that elect it under IRC 501(h), the more predictable expenditure test. Under the IRC 501(h) election, a charity may spend up to 20 percent of its first $500,000 of exempt-purpose expenditures on lobbying, with a separate cap on direct lobbying. Political campaign activity supporting or opposing candidates is entirely prohibited for IRC 501(c)(3) organizations. Rules differ significantly for IRC 501(c)(4) social welfare organizations and IRC 501(c)(6) trade associations, which have more latitude for advocacy. Ward and Smith advises nonprofits on structuring advocacy activities to stay within applicable limits.

Unrelated Business Taxable Income (UBTI) arises when a nonprofit regularly conducts a trade or business not substantially related to its exempt purposes, as defined under IRC 512. Common examples include certain advertising revenue in publications, rental income where significant services are provided, and debt-financed income. UBTI is taxed at corporate rates and reported on IRS Form 990-T. Under the Tax Cuts and Jobs Act of 2017, each unrelated business activity is now treated separately for loss netting purposes, increasing the tax exposure for organizations with multiple activities. Substantial unrelated business activity can also raise questions about whether the organization remains primarily operated for its exempt purpose. Ward and Smith advises nonprofits on structuring revenue-generating activities to minimize UBTI exposure.

Under the NC Nonprofit Corporation Act, N.C.G.S. Chapter 55A, nonprofit board members owe three fiduciary duties: the duty of care (informed, attentive decision-making consistent with what a reasonable person would exercise in similar circumstances); the duty of loyalty (placing the organization’s interests ahead of personal interests); and the duty of obedience (adherence to the organization’s mission and governing documents). Conflicts of interest must be disclosed and managed through a written policy. Executive compensation deemed excessive by the IRS can trigger intermediate sanctions under IRC 4958, including excise taxes on both the recipient and the board members who approved it. Ward and Smith advises boards on governance practices that protect both the organization and its directors from personal liability.

Yes. Nonprofits may own real estate for use in exempt activities. Property used directly for exempt purposes may qualify for property tax exemption in North Carolina under N.C.G.S. Section 105-278.7. Financing options include conventional lending, tax-exempt bond financing for qualified IRC 501(c)(3) organizations, New Markets Tax Credits for projects in eligible census tracts, and USDA Community Facilities loans for rural organizations. Real estate acquired with restricted grant funds may also be subject to donor restrictions that limit future disposition. Ward and Smith handles real estate acquisition, financing, and compliance work for nonprofits from initial due diligence through closing.

Dissolution of a North Carolina nonprofit requires a board resolution (and in many cases member approval), followed by filing articles of dissolution with the NC Secretary of State under N.C.G.S. Chapter 55A, Article 14. The organization must notify creditors, wind up business affairs, and distribute remaining assets consistent with its governing documents and the cy pres doctrine: remaining assets of a dissolved public charity must go to another tax-exempt organization with a similar mission, not to directors or members. The IRS must also be notified via a final Form 990. Failure to follow proper dissolution procedures can leave board members personally exposed to creditor claims.

Nonprofits are subject to most of the same federal and state employment laws as for-profit employers, including the Fair Labor Standards Act, Title VII, the Americans with Disabilities Act, and the Family and Medical Leave Act. However, several provisions apply differently: very small nonprofits may fall below FLSA or Title VII coverage thresholds; religious organizations may have broader exemptions from antidiscrimination requirements; and volunteers, though not employees, can create liability under certain circumstances. Nonprofits that receive federal funding through grants also face additional compliance requirements tied to that funding. Ward and Smith advises nonprofits on both standard employment compliance and the specific issues their sector creates.

Most organizations seeking IRC 501(c)(3) status apply using IRS Form 1023 (the standard application) or Form 1023-EZ (a streamlined version for organizations with projected annual gross receipts of $50,000 or less and assets of $250,000 or less). The IRS target processing time for Form 1023 is generally three to six months for complete applications, though complex applications or those with unusual purposes can take longer. The application requires detailed descriptions of planned activities, financial projections, governance documents, and compensation information. Errors or incomplete submissions frequently generate IRS questions that delay approval. Ward and Smith prepares IRC 501(c)(3) applications and advises on the organizational structure and governance documents that support a clean approval.