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 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 Cloer 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.
Can a Nonprofit Sell Products?
Yes. Nonprofits can sell products to support their charitable work.
That includes common examples, such as merchandise, event items, and other products that help generate revenue for the organization. However, Robert explains that nonprofit leaders should also understand unrelated business income tax, often called UBIT.
The basic concept is that nonprofits can earn revenue beyond donations, 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.
That does not mean product sales are automatically a problem. In fact, many common nonprofit sales are perfectly manageable. Merchandise with the organization’s logo, for example, is often a practical and familiar way to both raise funds and spread awareness.
Can a Nonprofit Charge for Services?
Also yes.
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, social service groups, and therapy programs. Charging a fee does not automatically make an organization less charitable.
Where things become more nuanced is pricing.
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?
Not as a general legal rule.
If a donor makes an unrestricted gift, that money can usually be used for any permissible nonprofit purpose, including salaries, staffing, 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.
This part of the conversation is especially useful because it clears up a common source of confusion. Salaries are not somehow outside the mission. In many nonprofits, staff are the people making the mission happen. Paying them is often part of carrying out the work, not separate from it.
Can You Fundraise Before 501(c)(3) Approval?
Sometimes, yes.
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.
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.
Then there is the state law layer.
Many states require charitable solicitation registration before fundraising, and some require an IRS determination letter before registration can be completed. Others have exceptions, especially for very small fundraising activities. 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 soliciting funds.
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?
For small nonprofits, it usually doesn’t happen very often.
Robert explains that audit frequency often depends on size, state law, donor expectations, and how complex the organization’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.
The practical point here is that audit decisions should be based on legal obligations, organizational size, and financial complexity, not guesswork.
Do Churches Have to File Form 1023 or Form 990?
Generally, no.
Churches are in a special category under federal tax law. They are typically not required to file Form 1023 to be recognized as tax-exempt, and they also generally do not have to file 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?
This is another question that comes up more than many leaders expect.
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.
That mistake matters because private foundations face more burdensome rules, spending requirements, and different annual filings, including Form 990-PF.
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.
How Do You Remove a Board Member?
Carefully, and according to the rules.
Robert explains that board removal is governed by both state law and the organization’s bylaws. 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.
The final lesson here is an important one: 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.
Final Thoughts
This episode works because it meets nonprofit leaders where they actually are: in the gray areas of everyday decision-making.
Most leaders are not looking for complicated legal theory. They are looking for practical clarity on how to run their organizations well, reduce risk, and stay focused on mission. That is exactly what this Ask an Attorney format delivers.
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.
CEO at Charitable Allies
As the CEO, Olivia Froedge (Cloer) leads the Charitable Allies team in serving over 2,000 nonprofit organizations nationwide. With previous experience as the COO and 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.
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