Can We Take a Salary from Our Nonprofit Organization?

Many individuals are passionate about the work their nonprofit organizations do, wondering whether they can receive a salary for their efforts. This question is not only common but also legally and ethically complex. In this article, we will explore the regulations, processes, and best practices surrounding compensation in nonprofit organizations, particularly those registered as 501(c)(3) entities.

Understanding Nonprofit Ownership

Firstly, it is crucial to clarify the concept of ownership in nonprofit organizations. No single individual or group has ownership over a nonprofit organization, specifically a 501(c)(3) entity. These organizations are structured as public trusts, meaning they serve the public interest rather than the personal interests of individuals. Key to understanding this is to recognize that the board of directors and the staff work collectively to fulfill the organization's mission.

The board of directors is responsible for overseeing the organization's operations and ensuring they align with the nonprofit’s mission. Additionally, the board has the authority to approve budgets and determine the compensation of its employees, including itself. It is essential to note that the board represents the membership, the community, and the general public.

Legal Aspects of Compensation in Nonprofits

While it is possible for members of the board of directors to receive compensation, the legal framework surrounding this is nuanced. According to U.S. law, particularly IRS guidelines, the board must officially authorize the salary. This authorization needs to be documented and transparent to ensure compliance with the Internal Revenue Service (IRS) rules.

There are also external legal considerations. For instance, board members who are also staff must adhere to specific jurisdictions and rules about their roles. These rules can vary significantly depending on the state or country where the nonprofit operates. Therefore, it is highly recommended that board members consult with a lawyer to ensure they comply with all legal requirements.

The Role of the Board of Directors

The board of directors plays a pivotal role in determining compensation policies. Typically, the board hires an executive director (ED) to oversee day-to-day operations. The ED often receives a salary, while the remaining staff's salaries are determined within the board-approved budget.

For smaller organizations, it is common for the founder to continue as the ED, combining visionary leadership with administrative responsibilities. The board's responsibility is to approve a comprehensive budget that includes salaries for all staff, ensuring that the organization can operate efficiently while staying true to its mission.

Compensation Based on Financial Projections

Compensation in nonprofits is not arbitrary; it is based on a thorough analysis of financial projections and a detailed understanding of the organization’s financial health. Most nonprofits, especially larger ones, operate on a fiscal year budget that includes projected revenues and expenses.

Compensation is often linked to the organization's income and expenses. For instance, the salary of the executive director or key staff members might be determined by a 'return on investment' analysis over a period of 3 to 5 years. This approach mirrors the financial strategies of for-profit organizations but focuses on long-term sustainability and public benefit.

Starting a Nonprofit Organization

If someone is considering starting a nonprofit organization, it is essential to be prepared for the extensive paperwork and legal and financial planning involved. Setting up a 501(c)(3) organization requires navigating a complex landscape of state laws, IRS regulations, and financial compliance.

To ensure a seamless process, it is highly recommended to consult with a legal professional who specializes in nonprofit formation and a certified public accountant (CPA) who can advise on tax and financial matters. This team can help navigate the myriad of regulatory requirements and paperwork involved in establishing a new nonprofit organization.

By adhering to the right legal and financial practices, nonprofit organizations can not only thrive but also maximize their impact in serving the public good.