New Nonprofit Formation: Training Employees on Compliance

Nonprofit compliance requirements allow organizations to fulfill their missions. Learn how to equip your employees with the training to maintain compliance.

Business Team Training Listening Meeting Concept

The early stages of nonprofit formation are characterized by legal preparations, such as applying for 501(c)(3) status and planning the organization’s operational structure. It’s a critical time to communicate your values to potential employees and clearly establish policies that align with the various requirements with which nonprofits must comply.

When everyone works together to maintain compliance in their individual roles, the nonprofit as a whole will successfully fulfill its mission and the expectations of a tax-exempt organization. In this guide, we’ll review three important compliance training topics to cover with new employees:

  • Adherence to bylaws
  • Financial integrity
  • Donation solicitation requirements

Give your nonprofit a strong foundation by establishing how your employees will maintain compliance in their day-to-day tasks.

Compliance with Bylaws

According to Foundation Group’s guide to starting a nonprofit, one of the first things you’ll do in nonprofit formation is establish your bylaws. These governing rules will determine how your board of directors will lead your organization and safeguard your nonprofit against conflicts of interest.

Everyone in your organization should know these bylaws for accountability purposes and operational best practices. Your bylaws should do the following:

  • Address high-level governing issues. Don’t confuse your bylaws with the office policy handbook. Instead of covering company-wide employee policies, your bylaws guide the organization’s leadership. They should lay out the expectations for the organization’s purpose, the board’s structure, the process for handling conflicts of interest, and other general governing policies that apply to the nonprofit’s leadership. 
  • Be relevant to the time and your organization’s circumstances. Your organization will frequently change, just as the environment of the nonprofit world will. Through regular review of your bylaws, you’ll ensure they stay updated and relevant to your organization’s operations. For example, if you launch a new program, your bylaws should be amended to reflect how the board of directors will manage that initiative.
  • Guide your operations. As you construct high-level, relevant bylaws, ensure they’re actionable expectations for your nonprofit’s operation. Don’t leave anything up to interpretation. Ensure your bylaws address your organization’s specific actions and how to approach certain situations.
  • Comply with state corporate law.  Nonprofits are governed according to their bylaws, but those bylaws need to be consistent with both state and federal law.  New organizations will have their bylaws reviewed for federal compliance by the IRS. You may wish to seek the counsel of an attorney or another expert familiar with state nonprofit corporate law to ensure compliance at that level.

In addition to guiding internal operations, your organization’s leadership is also largely outward-facing, meaning they’ll represent the nonprofit to your supporters and community. Compliance with bylaws is not only an important topic for ethical training but also for cultivating public trust.

Train new employees to familiarize themselves with the bylaws and understand the importance of accountability. By working under the nonprofit’s leadership, they’ll have the unique perspective to consider potential improvements to the bylaws or how the leadership team could adhere to the bylaws more closely. 

Financial Transparency

Another key area that benefits from accountability and transparency is financial activity. According to Astron Solutions’ guide to employee retention, successful organizations provide open communication between staff members and supervisors. Since nearly every nonprofit department deals with incoming donations and outgoing expenses, all employees should be trained to keep accurate and thorough financial records.

Aside from internal integrity, financial transparency must also translate to the organization’s annual reports. Your nonprofit’s financial information must be filed through Form 990 annually in order to maintain its 501(c)(3) status. The form requires the following information to be submitted to the IRS:

  • Income: Thoroughly track every donation and grant received by your nonprofit. You’ll need to know more than just dollar amounts; keep track of different types of donations, such as restricted versus unrestricted.
  • Expenses: Note how every dollar was spent by your organization (and be prepared to justify how that expenditure aided your overall mission). Establishing a bookkeeping and accounting strategy from the startup of your nonprofit gives you a significant headstart in managing your finances properly.
  • Donor data: Since donors are responsible for your nonprofit’s income, you’ll need to keep accurate records of their donations and involvement. For example, you may need to provide a list of your biggest contributors.
  • Charitable programs: You’ll need to bridge the gap between income and expenses by explaining how donations aid your charitable purposes. Keep track of information about all your activities, such as program descriptions and the number of people served through the activity.

Even if you hire an expert to manage your nonprofit bookkeeping needs, your nonprofit’s leaders and staff are still responsible for keeping accurate and organized records throughout the fiscal year. After all, every staff member will have a role in your finances in some way. For example, your marketing team will spend money on promotional materials and your human resources department will manage the hiring of new staff members. 

Provide best practices for managing finances and make the training specific to each role. By personalizing training with staff members’ specific responsibilities in mind, you’ll prepare them for the situations they’ll encounter and motivate them to apply what they learn. As an added bonus, appealing to their individual roles can liven employee orientation, keeping new hires engaged during training.

Donation Solicitation Training

As a nonprofit organization, you’ll fund your programs and fulfill your mission through charitable donations. However, there are certain rules to follow when it comes to leveraging marketing resources and requesting donations. 

For example, suppose your nonprofit receives the $10,000 Ad Grant offered by Google to create search engine ads for its website. In that case, your marketing team will have to follow certain rules to maintain eligibility. Make these rules known in training, and ensure new hires have the knowledge needed to follow them. 

In addition to your nonprofit’s external resources, you’ll also need to complete the necessary state-level registrations to legally ask for donations for your newly incorporated organization. All states except for the following 10 require nonprofits to register for charitable solicitations before actively requesting donations:

  • Arizona
  • Delaware
  • Idaho
  • Indiana
  • Iowa
  • Montana
  • Nebraska
  • South Dakota
  • Vermont
  • Wyoming

Not only should you comply to avoid legal penalties, but also to garner the trust of potential donors. Compliance when asking for donations is crucial to ensuring you get the support you need since public trust can significantly impact fundraising efforts.  

Compliance training is important as you establish how your new nonprofit will run, but it should also be regularly revisited and prioritized throughout the life of your organization. Properly train and encourage your current and future employees to remain attentive to compliance requirements and any changes in compliance-related activities.

Greg is the founder and CEO of Foundation Group, one of the nation's top providers of tax and compliance services to nonprofits. Greg and his team have worked with tens of thousands of nonprofits for over 25 years, assisting them with formation of new charities, plus tax, bookkeeping, and compliance services. He is credentialed as an Enrolled Agent, the highest designation of tax specialist recognized by the Internal Revenue Service. Based in Nashville, Tennessee, Greg and company work with charities and nonprofits all across the country and worldwide.