If you are trying to start a nonprofit organization then more than likely at some point you will read the following: “The organization must not be organized or operated for the benefit of private interests, and no part of a section 501(c)(3) organization’s net earnings may inure to the benefit of any private shareholder or individual.”
So what does this all mean? To understand you have to look at the following terms:
What is private benefit?
Private benefit occurs when an individual or organization receives a benefit—monetary or nonmonetary—from a 501(c)(3) organization. A tax-exempt organization that provides a substantial amount of private benefit may risk losing its tax-exempt status. (This does not include paying reasonable salaries or providing services to individuals as part of an organization’s exempt-function activities.)
What is inurement?
Inurement occurs when an “insider” of an exempt organization receives any of an organization’s net income or inappropriately uses any of its assets for personal gain. An insider is a person who has a personal and private interest in the activities of an organization. Examples are officers, directors, and key employees. Any amount of inurement, no matter how small, can jeopardize an organization’s tax-exempt status. (This does not include paying reasonable salaries or providing services to individuals as part of an organization’s exempt-function activities.)
What is the difference between private benefit and inurement?
Inurement is a subset of private benefit and deals specifically with insiders, while private benefit can be to both insiders and outsiders. Both terms describe situations in which an exempt organization’s income or assets are inappropriately diverted for private gain rather than used for a public purpose.
DISCLAIMER: This information is not intended to provide legal or accounting advice, or to address specific situations. Please consult with your legal or tax advisor to supplement and verify what you learn here.
