Non Profit Organization

[chefman]

I work with a non-profit company that helps repair credit. I realize getting a bond for the company is not possible due to the fact there are not actual owners of the company. What if the President/CEO of the company is willing to personally indemnify? Would that make it possible to get a bond?

[marietta68]

I work with a non-profit company that helps repair credit. I realize getting a bond for the company is not possible due to the fact there are not actual owners of the company. What if the President/CEO of the company is willing to personally indemnify? Would that make it possible to get a bond?

Corporate indemnity can and is taken for non-profits. Underwriters are looking for at least a break-even operating statement when they consider bonds for tax exempt organizations; operating losses year after year can't be sustained.

Personal indemnification won't work due to the requirements for maintaining non-profit status. Because no individual is permitted to "benefit" from the corporate assets, it's not possible to perfect indemnity in the event of a claim. In fact, the assets of the company can be distributed outside the entity only when it's dissolved, and then, the assets must go to another non-profit in order to maintain tax exempt status. I'm not a lawyer nor a tax advisor, but my understanding is that the entire tax exempt status becomes vulnerable when funds are moved outside the non-profit organization - that means that all the taxes that were not payble would suddenly become due.

[Carboholic]

So how would indemnification be handled for a non-profit organization?

[marietta68]

So how would indemnification be handled for a non-profit organization?

There should be the usual corporate officers who'll sign on behalf of the entity - in the same way officers would sign for a for-profit corporation. The surety company will weigh the principal's financial strength against the nature of the bond liability when it underwrites the bond/account.

[Carboholic]

But don't sureties also require that the agreement be signed not only on behalf of the company, but individually as well?

[marietta68]

But don't sureties also require that the agreement be signed not only on behalf of the company, but individually as well?

No, not always - for instance, there are no personal guarantees given/required for bonds written for publicly traded companies (think GE or United Airlines). If individual shareholders are responsible for any debt of the entity, then personal indemnity is necessary. If the entity is closely held, that is, if it's owned by just a few people, personal indemnity will probably be necessary. In these circumstances, it's easy to track the beneficial relationship between the business and its owners. But in the case of the non-profit, as already stated, the owners cannot benefit from its operating results - an unusually high salary will most definitely be detected by the IRS resulting in loss of tax exempt status and assessment of tax liability, plus possible fines.

[Carboholic]

Because personal indemnification is not possible, does that make it difficult for non-profits to get approved for bonding?

[marietta68]

It really depends upon the type of bonding needed. Patient trust bonds, consumer credit counseling bonds are the two that come immediately to my mind, and in my experience, stable organizations that have been in business long enough to have several years of audited financial statements are going to be desirable business. Notice that I've qualified my answer with a request for audited financials - compilations or reviews probably won't get you anywhere with a bond company (based only on my experience).