Things People Think Are Allowed In Nonprofits But Aren’t

When running a nonprofit, some leaders, especially those that are new to the nonprofit sector, assume they have wide latitude in how they operate.  After all, nonprofits exist to serve a mission, right?  While that’s true, there are clear legal boundaries set by the IRS, state regulators, and nonprofit law.  Here are some of the most common “surprising” restrictions that can catch organizations off guard.

Making Loans or Giving Benefits to Board Members or Staff

It might seem harmless to lend money to a board member for a personal project or give staff a perk “because they deserve it.”  However, this is considered private inurement.  Nonprofits cannot use their funds to benefit insiders, including board members, officers, or key staff, beyond reasonable compensation for services.  Violating this rule can lead to IRS penalties, repayment obligations, and even loss of tax-exempt status.

Endorsing Political Candidates

Some nonprofit leaders assume they can support candidates whose platforms align with their mission.  This is a common misconception.  Under IRS rules, 501(c)(3) organizations are strictly prohibited from participating in political campaigns for or against candidates.  Violating this rule can trigger fines and jeopardize tax-exempt status.  Nonprofits can, however, engage in nonpartisan voter education and issue advocacy on policy issues.

Using Nonprofit Funds for Personal Expenses

It may be tempting to cover a board or staff member’s personal expenses and “reimburse later,” but this is never allowed.  Nonprofit funds must be used exclusively for mission-related purposes.  Any misuse can be treated as embezzlement or private benefit.  Clear accounting and reimbursement policies are essential to prevent even accidental misuse.

Distributing Profits to Owners or Shareholders

Unlike a for-profit business, a nonprofit cannot distribute profits to anyone.  Surpluses must be reinvested in the organization’s mission.  Leaders who think their organization can share earnings among founders or investors risk running afoul of the IRS and state regulations.  This is one of the most fundamental distinctions between nonprofits and for-profits.

Ignoring Donor Restrictions

Not all donations are created equal.  Some gifts come with specific restrictions for programs, scholarships, or capital projects.  Using restricted funds for other purposes, even temporarily, is a violation of donor intent and can create legal and reputational risk.  Nonprofits must maintain careful accounting to honor these restrictions.

Skipping Required Filings Because “We’re Small”

Many small organizations think that IRS forms or state registrations don’t apply to them.  In fact, all nonprofits (except churches) must file annual returns, including small nonprofits, or risk losing their tax-exempt status after three years of not filing.

Paying Volunteers Without Following Rules

Giving volunteers a small stipend, gift card, or reimbursement might seem like a simple way to say thanks.  But improperly classifying these payments can create taxable wage obligations and violate labor laws. Nonprofits must carefully distinguish between volunteers and paid staff and follow all payroll and tax rules for compensation.

Nonprofit leaders sometimes focus so much on mission-driven work that they assume anything that seems “good” is allowed.  But nonprofits operate under strict legal and ethical guidelines to ensure funds are used appropriately, operations are transparent, and the organization’s exempt status is protected.

A strong board, clear policies, and proper financial oversight are the best ways to avoid surprises and keep the focus where it belongs: advancing your mission.