Alan K. Veatch, Partner, Carlile Patchen & Murphy LLP
The relationship and interaction between Ohio law governing not-for-profit organizations, and provisions of the Internal Revenue Code governing tax-exempt and charitable organizations can be confusing, and is often misunderstood. Many people assume that one necessarily means the other, which is not the case. The Ohio Revised Code sets forth rules for establishing and operating a not-for-profit corporation under Ohio law. The linchpin of not-for-profit status in Ohio is that the “net earnings” of the corporation may not be distributed or used for the benefit of private individuals (or privately-owned entities), i.e., the corporation’s “earnings” may be used only in furtherance of its non-profit purposes. Likewise, any payment of compensation for services rendered to the organization (e.g., to employees) must be “reasonable”.
Ohio law also specifies whether the stated purpose of a non-profit corporation qualifies as “charitable”. For example, a non-profit that operates a local public food pantry would be considered “charitable”, but the high school baseball booster club likely would not. Although they are both non-profit and tax-exempt, the “charitable” distinction is an important one. Most non-profit organizations are required to register with the Ohio Attorney General’s Office, and those that qualify as “charitable” must also file an Annual Report (and pay the accompanying fee).
Non-profit corporations are also distinguished by whether or not the organization has “members”. That high school baseball team booster club from the previous examplelikely has players’ parents and other supporters of the program as its “members”, who in turn elect or appoint officers (president, secretary, treasurer, etc.) to operate the organization. Many non-profit organizations, however, have no members. Instead, they are governed and operated by a Board of Directors or Trustees.Those individuals who serve on the Board or as Officers of a non-profit corporation also owe a fiduciary duty to the entity, and therefore assume responsibility for the corporation’s compliance with applicable laws.