Doing good while reading good — join the Nonprofit Good News-Letter.
Challenge 41 in the series 50 Reasons Why It Is Hard to Run a Nonprofit
A small nonprofit in Pennsylvania wants to send a direct mail fundraising appeal to donors in neighboring states. Before they can drop a single letter, they need to register as a charitable solicitor in each state where they'll be asking for money. Forty states plus the District of Columbia require this, each with its own form, its own fee, its own renewal schedule, and its own definition of what counts as "solicitation."
That's before they file their federal Form 990, their state corporate annual report, their state charitable organization annual report, their employment tax filings, their donor acknowledgment letters (which have their own IRS rules about what language is required), and whatever additional reporting their funders demand.
And they have two staff members.
The regulatory framework for nonprofits operates on at least three levels simultaneously — federal, state, and sometimes local — and none of them talk to each other.
At the federal level, most 501(c)(3) organizations must file some version of IRS Form 990 annually (churches and certain really small organizations are exempt, but the vast majority are not). Miss three consecutive years and your tax-exempt status is automatically revoked. The IRS revoked 1,200 organizations in 2024 alone for missed filings. Reinstatement requires reapplying for exemption — a process that can take months and cost thousands of dollars.
At the state level, the picture gets worse. Forty states and the District of Columbia require charitable solicitation registration. Thirty-seven accept the Unified Registration Statement, which helps — but the remaining states require their own forms. Add corporate annual reports, state tax exemption renewals, and employment law compliance, and a nonprofit operating in multiple states faces a compliance calendar that could fill a wall.
For large organizations with compliance departments, this is manageable. For a nonprofit with an annual budget under $500,000 — which describes the majority of the sector — it's a tax on time and attention that directly competes with program delivery.
The dollar cost of compliance is only part of the problem. The bigger cost is opportunity cost — the hours your executive director spends navigating registration portals instead of building programs, writing grants, or meeting with community partners.
I've worked with nonprofit leaders who estimate they spend 10-15% of their executive time on compliance-related tasks. For a small organization, that's the equivalent of losing a month of leadership capacity every year to paperwork.
I put "host of regulatory considerations" on the list of 50 challenges in Managing Your Nonprofit for Resilience because it's one of those problems that's invisible until it isn't. Nobody notices compliance until you miss a filing, lose your exemption, or get a letter from a state attorney general.
The challenge has gotten harder, not easier. The regulatory environment for nonprofits has intensified in recent years — stricter IRS filing requirements, increased state scrutiny of charitable solicitation, and new reporting obligations around executive compensation, lobbying activity, and donor privacy. Each new requirement is individually reasonable. Collectively, they create a compliance burden that small organizations were never structured to carry.
Most nonprofits treat compliance as a necessary evil — something you do to avoid getting in trouble. That framing guarantees you'll always be playing defense.
The reframe: an organization that knows its regulatory landscape cold has a real advantage. You can expand into new states faster because you already understand the registration process. You can respond to funder due diligence requests immediately because your documents are organized. You can take on government contracts that smaller, less-organized competitors can't touch.
Compliance infrastructure is organizational infrastructure. Building it once — properly — saves years of scrambling.
Invest in a compliance calendar. Every filing, every renewal, every deadline in one place. This can be a spreadsheet. It doesn't need to be software. What it needs is an owner — one person whose name is on it — and a review schedule.
Use shared services. State nonprofit associations often offer compliance resources, group filing programs, and legal clinics. The National Council of Nonprofits maintains a state-by-state compliance guide. These exist because the sector knows the burden is disproportionate.
Know when to outsource. Form 990 preparation, multi-state registration, and employment law compliance are areas where a specialist — a nonprofit CPA, a compliance service, or a pro bono attorney — pays for itself in time saved and mistakes avoided. The cost of getting it wrong almost always exceeds the cost of getting help.
Build compliance into your grant budgets. Most funders will accept reasonable compliance and administrative costs as part of a grant budget. If you're not including them, you're subsidizing compliance out of program dollars — which is exactly the kind of structural underinvestment that makes nonprofits fragile.
Compliance is one of those areas where the difference between a reactive organization and a proactive one shows up fast. I write about building that kind of operational backbone — including compliance systems — in Nonprofit Good News Premium.
Create a list of every regulatory filing your organization is required to make — federal, state, and local. Next to each one, write the due date and the name of the person responsible. If you can't complete the list, that itself is the finding. You're operating in a compliance environment you don't fully understand, and that's a risk.
This is part of an ongoing series based on the 50 challenges outlined in Appendix 1 of Managing Your Nonprofit for Resilience (Wiley, 2023). Each post names one challenge clearly and offers a practical reframe with steps you can take this week. For deeper coverage of nonprofit strategy, risk, and resilience — including tools you can put to work immediately — check out Nonprofit Good News Premium.