Key Takeaways:
- Nonprofits can sell products and charge for mission-related services, but leaders should understand when revenue could trigger unrelated business income tax (UBIT).
- Unrestricted donations can generally be used for any permissible charitable purpose, including salaries and operating costs, while donor restrictions must be honored if the donation is accepted.
- Organizations can often begin operating before receiving their 501(c)(3) determination letter, but fundraising and charitable solicitation rules may still vary by state.
- Churches are generally not required to file Form 1023 or Form 990, though formal IRS recognition can still be helpful in some cases.
- Governance problems like board member removal or entity classification mistakes are usually fixable, but the right process depends on state law, bylaws, and clear documentation.
Most nonprofit problems do not start with bad intent. They start with unanswered questions.
Can we sell something to raise money? Can we charge for services? Do donors need to know if gifts pay salaries? Can we fundraise before our 501(c)(3) is approved? What if we were classified incorrectly? And what happens when a board member needs to go?
In this “Ask an Attorney” episode of 501c Suite, Olivia Froedge is joined by Charitable Allies managing attorney Robert Miller to answer the kinds of real questions nonprofit leaders ask all the time but rarely get answered clearly. Instead of abstract legal theory, the conversation focuses on day-to-day nonprofit operations, practical risk reduction, and the rules leaders need to understand to move forward with confidence. Note: information in the video and this article are not specific legal advice, but are legal education. For specific legal advice, reach out to a nonprofit attorney to speak about your specific situation.
Can a Nonprofit Sell Products?
Generally, yes, nonprofits can sell products to support their charitable work, though they cannot operate exactly like for-profits do. If the item or service a nonprofit is selling is directly related to its charitable mission, it is program service revenue (sometimes called fee-for-service).
However, Robert explains that nonprofit leaders should also understand unrelated business income tax, often called UBIT if they are planning on selling a good or service not directly related to the mission. The basic concept is that nonprofits can earn revenue beyond donations and grants, but some earned income may be taxed if it is not sufficiently related to the organization’s exempt purpose and does not fall within an exception. Merchandise like t-shirts or mugs with the organization’s logo, for example, is often a practical and familiar way to both raise funds and spread awareness.
Nonprofits need to handle proceeds from sales differently than for-profit organizations. For advice on a specific circumstance, talk with a nonprofit attorney.
Can a Nonprofit Charge for Services?
Yes, nonprofits generally are allowed to
charge for services related to their mission. This is one of the most common nonprofit misconceptions. Many leaders assume that because they are tax-exempt, they cannot charge people for mission-related services. That is not true.
Robert gives several examples of nonprofits that charge for what they provide, including low-income housing organizations or therapy programs that use a sliding scale fee based on income. Charging a fee does not automatically make an organization less charitable.
There is not one rigid IRS rule that says every nonprofit must charge below fair market value in every circumstance. The answer depends on the organization’s purpose, the people it serves, and the context in which it operates. Still, Robert notes that a practical rule of thumb for many charitable organizations is to use reduced pricing or a sliding scale, especially when serving lower-income communities.
For nonprofit leaders, the bigger point is this: charging for services can be permissible, but the structure should make sense in light of your mission.
Do Donors Need to Be Told If Donations Go to Salaries?
No, there is no legal rule that states donors need to be informed if a portion of their donation goes towards paying staff or contractors.
If a donor makes an unrestricted gift, that money can usually be used for any permissible nonprofit purpose, including salaries, insurance, and other operating costs. Donors do not have to be told in advance that part of their contribution may support payroll.
However, the situation changes if the donor places a restriction on the gift and the nonprofit accepts it. If a donor says their gift cannot be used for overhead or must go to a specific program, the organization is then responsible for honoring that restriction.
In many nonprofits, staff are the people making the mission happen. Paying your staff fairly is a good thing!
Can You Fundraise Before 501(c)(3) Approval?
In some states, you can start fundraising while waiting on your determination letter to arrive. Robert explains that once an organization is incorporated at the state level, it legally exists and can begin operating. If the IRS later approves its Form 1023, that tax-exempt recognition generally dates back to the incorporation date. It’s called retroactive tax exemption.
But there is an important catch: while that retroactive treatment matters legally, the organization does not yet have its determination letter in hand during that waiting period. That means leaders should be careful about how they speak to donors. An organization generally should not represent donations as tax-deductible before it is actually recognized.
Fundraising before getting the determination letter is usually only recommended in states that allow it.
Many states require charitable solicitation registration before fundraising, and some require an IRS determination letter before registration can be completed. Some states have exceptions, especially for very small amounts of money. As Robert points out, some states are focused more on getting organizations into compliance than on punishing them immediately, but the best practice is still to understand the rules before asking donors for money.
This is also where fiscal sponsorship can be useful. If a new project or startup nonprofit does not yet have its own 501(c)(3) approval, an existing exempt organization may be able to accept donations on its behalf and regrant funds under a proper fiscal sponsorship arrangement.
How Often Should a Nonprofit Get an Audit?
How often a nonprofit needs an audit depends on the size of the nonprofit, state laws, and how complex the nonprofit’s financial activity is. Some states require audits once a nonprofit reaches certain revenue thresholds, often around $1 million, though the exact rules vary.
For smaller nonprofits, an audit every three to five years may be enough unless a funder, regulator, or other circumstance requires more frequent review. For larger nonprofits, audits may happen every year or every other year, especially when there are more transactions, more moving parts, or state registration rules that require them.
Do Churches Have to File Form 1023 or Form 990?
That said, some churches still choose to file Form 1023 anyway. Why? Formal recognition can make things easier with large donors, grantmakers, vendors, or institutions that want to see an IRS determination letter or confirm exempt status through IRS records.
So while a church can often operate as tax-exempt without filing, there may still be strategic reasons to seek formal recognition.
What If a Nonprofit Was Classified Incorrectly?
Sometimes an organization is mistakenly classified as a private foundation when it should have been a public charity. Robert explains that this can often be fixed by filing Form 8940 and showing the IRS that the organization has actually been operating like a public charity the whole time, including meeting the relevant public support requirements. We have more details on converting from a private foundation to a public charity here.
Private foundations face more burdensome rules, spending requirements, and different annual filings, including Form 990-PF, so being categorized incorrectly is a problem that needs to be solved as soon as possible.
Just because “foundation” is in an organization’s name does not mean it is a private foundation. Many organizations with “foundation” in the title are still public charities like most community foundations.
How Do You Remove a Board Member?
Board members can usually be removed by following the procedures in your bylaws and your state’s laws. Some states allow removal with or without cause. Others are more restrictive. That means there is no one-size-fits-all answer.
In general, organizations should review their bylaws, give any required notice, allow the director an opportunity to respond when appropriate, and follow the meeting and voting procedures required for removal.
Note: disagreement alone is not always a reason to remove someone. Healthy boards need thoughtful disagreement. Removal is usually about conduct, fit, governance breakdown, or more serious issues. You can read more about removing board members voluntarily and involuntarily in this free resource.
Learn More and Stay Connected
If you’re looking for reliable answers to your nonprofit’s most important legal questions, visit charitableallies.org for free resources, guides, and case studies designed to support nonprofit sustainability.
Subscribe to 501c Suite so you never miss an episode, and share it with a fellow nonprofit leader or board member who could use a trusted legal ally.
As the COO, Olivia Froedge (previously Olivia Cloer) oversees operations of the firm, including HR, client intake, marketing, operations, client education, and fundraising. With experience as the Interim CEO of Charitable Allies (June 2025-July 2026), Olivia led the organization to serve over 500+ nonprofits in one year. With previous experience as the Director of Marketing and Operations, Olivia led marketing, operations and automation efforts that led to the organization doubling in size within 3 years. Olivia joined the Charitable Allies team in 2020 after her last role serving as the Director of Development for a nonprofit. She has a passion for bringing business savvy to the nonprofit sector so they can serve great causes more effectively. She holds a Bachelor's Degree in English and Communications from DePauw University. She is also a Mitch Daniels Leadership Fellow and a Certified Salesforce Administrator.
Latest posts by Olivia Froedge
(see all)
