Nonprofit Briefs: What is the ‘corporate veil’? | Business


A corporation is a legal entity with a life of its own, albeit not one that is human.

The corporate veil is a legal concept that provides a separation of the officers and directors of a corporation from the corporate entity itself. This legal theory provides limited liability to the officers and directors as they act on behalf of the corporation.

However, criminal activity and certain corporate mismanagement, on their part, can compromise this protection. Piercing the corporate veil is the term used when legal action penetrates or pierces this shield as a result of litigation.

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Incorporating a nonprofit allows limited liability from the “veil” theory. Incorporation also offers a long-lasting corporate life and the structure of a centralized organization. Nonprofit corporations can receive both state and federal taxation relief. When a nonprofit is not properly incorporated, federal or state agency benefits will not be granted.

Nonprofits generally have a positive image on the part of the public. Facts demonstrate that they do good things, but things can go wrong. Corporate negligence can occur and cause this liability to be tested in the courts.

Legal protections can go away just as easily for a nonprofit as they do in the case of the for-profit business.

Life inside a nonprofit

The very nature of a nonprofit expressed in mission and purpose suggests best practices should be employed in all areas of management. Conduct of the officers and directors should never overstep the managerial boundaries expected of this type of organization.

There is a growing focus on the activities of nonprofit groups by governmental agencies, industry and the legal community. When volunteers, willfully or otherwise, act outside the appropriate management responsibilities of a tax exempt entity, they invite government scrutiny and possibly penalties and potential dissolution.

The greatest risk to a nonprofit is distributing profits or net to the officers, directors or earnings members. Nonprofits cannot issue shares of ownership because there are no owners. The nonprofit executive leadership are only stakeholders in the commitment to service. The excess of revenue over expenses in the association coffers must be devoted only to the purpose for which the nonprofit was created.

Permissible financial, compensatory issues

Nonprofits are allowed great breadth of financial freedom. A nonprofit corporation can have paid employees, compensate consultants for services rendered, purchase real estate and make investments. Officers and directors can be reimbursed for legitimate out-of–pocket expenses as they perform their corporate duties of service. Travel, lodging and meals are typical of reimbursable expenses when incurred in the business of the nonprofit organization.

Officers and directors can also be compensated for meeting attendance because their expertise is essential to the volunteer management of the organization.

There are other acceptable financial ventures in which nonprofits can be involved. Some examples are: real estate and building ownership, especially when it is to house the organization, rental income, magazine advertising revenue and trade show and event sponsorship.

The IRS has a category for nonprofits that have high revenue producing trade shows and magazine revenue. They are labeled taxpaying nonprofits and are taxed on the net revenue remaining after all related expenses are paid by the association.

The Nonprofit Resource Center was founded by Dr. Frederick J. Herzog. He can be reached via email to fherzog@tampabay.rr.com or by phone, 847-899-9000. Visit the website at the nonprofitresourcecenter.com.

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