Frequently Asked Questions About Pennsylvania Non-Profits By David M. Tkacik, Esq.
Question: Are non-profits in Pennsylvania legally required to have a Board? Answer: A non-profit – irrespective of form – must have a governing body.1 So the answer is yes and we advise having at least three directors on the Board. However, for the most part, the law allows a nonprofit organization to use whatever governing structure it wants. The relevant legal authority for this is 15 Pa.C.S. § 5721, a section of PA nonprofit code titled “Board of Directors.” That provision states that “Unless otherwise provided by statute or in a bylaw adopted by the members, all powers [of the non-profit] . . . shall be exercised by or under the authority of . . . a board of directors.” This means the members of the non-profit can enact bylaws (the internal governing regulations of a non-profit) that abrogate the Board and vest the Board’s function in some other governing entity. But a rose is a rose by any other name. Section 5721 also recognizes: “If any such provision is made in the bylaws, the powers and duties conferred or imposed upon the board of directors by this subpart shall be exercised or performed to such extent and by such other body as shall be provided in the bylaws.” In other words, whatever governs the non-profit instead of the Board must exercise and perform the Board’s responsibilities. Also, don’t forget that all non-profits must have a president, a secretary, and a treasurer, regardless of the title by which they are designated. This is why we recommend having a Board with at least three directors.
Question: What "grey areas" are there where legal or other counsel needs to be sought? Answer: Three important issues where a nonprofit should seek legal counsel are: i. Filing for incorporation – how one characterizes the non-profit plan is very important. ii. Payroll issues or other tax related inquiries. iii. Filing for tax exempt 501(c)(3) status Question: Do non-profits have to reinvest all of their “profits”? Answer: The term “nonprofit organization” consistently generates confusion. For one thing, the term does not refer to an organization that is prohibited by law from earning a profit (that is, an excess of revenue over expenses). In fact, it is quite common for nonprofits to generate profits. For example, the University of Pittsburgh Medical Center made $429 million through the first nine months of its fiscal year.2 Rather, the definition of nonprofit organization essentially relates to requirements as to what must be done with the profits earned.
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Hopkins, Bruce R., Nonprofit Law Made Easy, pg 13. (2005) “Nonprofit shouldn’t mean non profits UPMC defenders say,” Pittsburgh Post-Gazette, 05/10/2007, Fitzpatrick, Dan.
Nonprofit organizations are not supposed to engage in “private inurement.” Private inurement essentially means to undertake business for the purpose of making the owners rich. Instead, nonprofits are expected to devote their profits to their nonprofit purposes and activities.3
Question: What limits are there on salary? Answer: Salary cannot rise to the level of “private inurement.” As explained above, private inurement is essentially the pursuit of business for the sake of wealth creation. Compensation is “private inurement” when it is paid to an insider and it is unreasonable and excessive. This is a vague standard, but the determination depends on the material facts and the totality of the circumstances. Additionally, the compensation of an individual by a nonprofit organization must take into account the complete compensation package, not just the salary component. Bonuses, commissions, incentive compensation, fringe benefits, consulting fees, and retirement and pension plans must also be taken into account. Generally, the determining factors as to whether compensation is reasonable are: (1) The amount and type of compensation received by others in similar positions (2) The compensation levels paid in the particular geographic community (3) The amount of time the individual is spending in the position (4) The expertise and other pertinent background of the individual (5) The size and complexity of the organization involved (6) The need of the organization for the services of the particular individual (7) Whether the compensation package was approved by an independent board.4
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Hopkins, Bruce R., Nonprofit Law Made Easy, pg 6. (2005). Hopkins, Bruce R., 650 Essential Nonprofit Law Questions Answered, pg 107. (2005).
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