It's Not Your Money: Understanding Nonprofit Assets

Many people in the nonprofit sector pour their heart and soul into the work they do, and sometimes that blurs the lines regarding ownership of nonprofit assets. Nonprofit assets belong to the organization, not to the people who lead it, including founders, executive directors, board members, and employees.

Regardless of who started the organization, who raised the funds, or who has managed the work for years, the assets held by a nonprofit organization are organizational assets and are subject to legal, regulatory, and fiduciary obligations. Organizations that operate without a clear understanding of this can run into both compliance and governance issues that put the organization and its leaders at risk.

What counts as a nonprofit asset

Nonprofit assets include cash and cash equivalents, as well as real property such as buildings and land, vehicles, equipment, furniture, technology, software, intellectual property, trademarks, and copyrights.

Donated goods, donated services with measurable value, and property received through bequests or planned gifts are also organizational assets.

Grant funds are assets that typically involve a grant agreement that specifies how and when those funds may be spent.

Each of these asset types carries obligations. Their use, transfer, sale, or disposal is governed by a combination of federal tax law, state nonprofit law, the terms under which the asset was received, and the organization's own governing documents.

For example, a vehicle donated for program use cannot simply be reassigned to personal use, and equipment purchased with grant funds cannot be sold without following the procedures required by the funder and applicable law.

Additionally, intellectual property developed by the organization belongs to the organization. That includes work completed by a staff member or volunteer who created it during working hours of the organization using the organization’s assets, including information or technology.

Ownership versus stewardship

Founders sometimes struggle with the concept of ownership versus stewardship. Many have invested years of personal time, significant professional credibility, and, in some cases, personal financial resources into building something that serves a real community need. It is not uncommon for this level of investment to produce a sense of ownership. The legal reality, however, is that stewardship and ownership are not the same thing.

When a nonprofit organization is granted tax-exempt status under Section 501(c)(3) of the Internal Revenue Code, it is recognized as an entity that operates for a charitable purpose and for the benefit of the public. Because nonprofits receive tax-exempt status in exchange for serving a charitable purpose, there are limits on how organizational assets may be used.

Private benefit and private inurement, meaning the use of organizational assets to benefit insiders, are strictly prohibited by the IRS and could lead to the significant penalties and the loss of the organization’s tax-exempt status.

A founder who built the organization, a board member who has served for a decade, and an executive director who has led growth for years are stewards of organizational assets. They are responsible for managing those assets in accordance with the organization's mission and legal obligations.

How nonprofit assets are misused

Several things can lead to compliance issues for nonprofits who don’t have clear policies regarding organizational and personal assets.

Compensation is one of the most common issues that can arise. Nonprofit leaders may receive reasonable compensation for services provided to the organization, and the IRS has established processes for determining what constitutes reasonable compensation. Organizations run into difficulty when compensation decisions are made informally, without board approval, or without reference to comparable data. In other words, a nonprofit board can’t just decide to pay a board member or the founder because the organization has extra cash on hand. There are specific steps to follow to ensure proper use of the organization’s assets for compensation.

Use of organizational property is another frequent issue. This includes using nonprofit vehicles for personal travel, occupying property owned by the nonprofit without a formal and fair rental arrangement, and using organizational equipment, technology, or intellectual property for personal purposes. Each of these situations involves using an organizational asset for a purpose that benefits an individual, which is precisely what nonprofit law prohibits.

Disposing of assets is another significant risk area. Selling organizational property, transferring assets to related parties, or redirecting funds from one purpose to another without proper authorization, board approval, and attention to any applicable donor or grant restrictions can lead to legal consequences.

Why nonprofit asset use is facing greater scrutiny

Nonprofits are operating in an environment of increasing scrutiny. The IRS, state attorneys general, grant-making foundations, and the public are all paying closer attention to how nonprofit organizations manage their assets.

The IRS has recently updated and published Technical Guides designed to help their agents identify compliance issues within exempt organizations. These resources also provide insight into the types of issues regulators are reviewing and the areas receiving increased attention during audits or reviews.

It is important to note that not knowing the rules is not a defense. Telling the IRS that an organization was unaware of the rules is like telling a police officer that you did not see the speed limit sign. The sign exists regardless of whether you noticed it, and the legal obligation exists regardless of whether the organization's leadership was familiar with it.

What nonprofit leaders should remember

Nonprofit leaders who want to protect their organizations should approach asset-related decisions with a clear framework.

Before any decision involving organizational assets, ask these questions:

• Is the decision consistent with the organization's mission and governing documents?

• Does the decision comply with applicable federal and state laws?

• Does the decision respect any donor or grant restrictions on those assets?

• Has the decision process followed the organization’s governance and financial policies?

Documentation is also important. Board minutes, compensation studies, conflict-of-interest disclosures, and written policies governing asset use all serve important functions and demonstrate that the organization takes its obligations seriously and that decisions were made through an appropriate process.

If your organization is unsure about a decision regarding a specific asset, consult your legal counsel before proceeding with the decision. It is much better to delay the decision and ensure it’s in compliance than rush a decision and create problems for the organization.

Good governance starts with good guidance

Nonprofit Solutions Law works with nonprofit organizations on governance, compliance, and the legal questions that arise as organizations grow and evolve.

If your organization has questions about asset management, compensation, or related compliance issues, reach out for a consultation.