Do Nonprofit Organisations Have Limited Liability?

Do Nonprofit Organisations Have Limited Liability?

Do Nonprofit Organisations Have Limited Liability?

One of the most distinct differences between a nonprofit and a business is that a nonprofit does not operate intending to make surplus money, apart from what is needed to fund their cause and pay their expenses, such as salaries and overheads. 

While a nonprofit solely functions for the betterment of communities and societies through money contributed by nonprofit donors and funds, similar to corporations, nonprofit charities enjoy the privileges of limited liability. 

Whether you are a nonprofit finding individual donors to support your cause, an individual seeking volunteer opportunities or simply looking to find a charity to donate to, it is important to know the legal responsibilities of the nonprofit you are working for or supporting. 

What Is a Liability?

Liability refers to the financial obligations of a business or organisation. It’s a claim on an organisation’s assets because of debt. 

What is Limited Liability?

Limited liability is a condition that states that the losses or debts that an owner, founder or shareholders of a business or organisation incurs do not extend to their personal assets. It’s a legal relationship that separates the owner of the entity from the entity itself. 

Do Nonprofits Have Limited Liability?

Nonprofit organisations that work towards furthering their mission ‌have limited liability, so in the case of debt overload or failure of payment, the nonprofit board of trustees and or directors will not be personally liable for the debts and obligations of the charity. In case the charity cannot pay back bank loans, payroll and other accounts payable, the creditors would seize only the charity’s assets while the personal property and assets of the board members will not be affected and cannot be claimed. 

Are All Nonprofits Limited Liability?

Not every charity or nonprofit organisation has limited liability as it’s granted, depending on the size and the functions of a charity. I.e. a small group of people gathering together to feed the homeless who aren’t legally registered as a charity it won’t have limited liability status. 

Advantages of Limited Liability 

  • Organisations with limited liability have fewer regulations and compliance requirements than general partnerships, corporations and proprietorships. 
  • A limited liability can have an unlimited number of members who are individuals and/or trusts and corporations. 
  • Members, board of directors and trustees are protected from personal liability as creditors can’t seize any personal assets such as houses, cars and savings accounts. 
  • Efficient management structure. Members, not the owners or founders of the nonprofit, usually manage limited liability organisations. 

Disadvantages of Limited Liability 

  • Maintaining a limited liability organisation usually costs more than general partnerships. 
  • Difficulties in ownership transfer. In a limited liability organisation, all members must agree on adding new members or to altering ownership.

How is Profit Used by a Nonprofit Organisation?

How is Profit Used by a Nonprofit Organisation?

How is Profit Used by a Nonprofit Organisation?

Although a nonprofit organisation differs from a business, as it’s not structured or designed to make money for its founders or members, much similar to a business, a Nonprofit Organization does make a profit in certain instances. The surplus made by a nonprofit organisation is usually exempted from tax treatments as the core values and aims of nonprofit organisations are to further social causes by providing sustainable solutions, support and aid to the public. Being transparent about profit allocation can help an organisation or charity in several ways by helping to connect with individuals looking to find charity work, attracting skilled employees for volunteer opportunities, along with donors and sponsors. 

So how is profit used by a nonprofit organisation? Keep reading to find out. 

How Do Nonprofit Organisations Make a Profit?

Related Activities 

Profits made through related activities include money that is generated through contributions from nonprofit donors and volunteers, along with funds raised through charity auctions, dinners, raffles, etc. 

Nonprofit Donors 

Well established nonprofit organisations tend to receive much of their funding from independent donors and volunteers. Therefore, charities and organisations need to spend time developing and maintaining good relationships existing donors while finding new donors to encourage consistent donations that will help run operations smoothly. Volunteers who are keen on finding charity work also tend to make generous contributions while lending their valuable time to help out. 

Grants from governments and corporations 

Another common way to collect funding is through grants given by corporations and governments. Even though getting a grant approved may be a lengthy process that involves a lot of paperwork and time, many organisations think it’s a worthy effort as it provides much-needed money that can be used to run new programs and campaigns that help benefit people and communities in need. 

Non-related Activities 

This includes profits generated through means that are not directly linked to the organisation’s mission and vision. I.e. The nonprofit organisation has a vacant building that is only used seasonally to host charity events. Therefore, the space is rented to a local retailer during the off-season. The money generated through this is deemed as profit made through non-related activities. This will not be exempted from tax unless the profit made is a very small amount. 

How Is Profit Used by a Nonprofit Organisation? 

The tax exemptions granted by the government depend on whether the profit was generated through related or non-related means. While a small profit generated through non-related means doesn’t nullify the tax exemption, it’s a legal requirement that all profits made through related and non-related means are used for the betterment of the organisation’s cause and mission. 

As profits made by a nonprofit cannot be used for personal benefit or be distributed amongst founders and directors, a large sum of the money generated is used to cover overheads and operational expenses such as rent, electricity and employee salaries. The remaining sum of money is used by the organisation to improve its services and functionalities in order to better help the communities and persons it has pledged to aid and support.