charity
How do non-profit corporations legally pay their CEOs if laws say you can&#39;t?
<p>I read that CEOs of many charitable organizations can make a pretty penny; however, this directly contradicts everything that is known about charities, which state that legally you cannot use any of the money raised/created for anything but charitable purposes. If that's true, how do CEOs make money?</p>

<p>And if I stated a non-profit, obviously that would imply that I could pay myself too.</p>

<p>But how is this contradiction explained in the eyes of the law? It can't be both ways. You can't have the CEO pulling money from the NPO and lining his pockets legally, but then say all of it is for "charity by law" and that nobody is getting paid anything for what they're doing. What are the "real" laws here?</p>

<p>Your assumption about charities, "that legally you cannot use any of the money raised/created for anything but charitable purposes" is incorrect. For example, a charitable organization can have an office, and can pay rent for that office; it can pay a janitor to clean up, a secretary to do correspondence, and a CEO to run the operation. The basic generalization for a <a href="https://www.irs.gov/charities-non-profits/charitable-organizations/exemption-requirements-section-501-c-3-organizations" rel="noreferrer">501(c)(3) organization</a> is</p>

<blockquote>
  <p>To be tax-exempt under section 501(c)(3) of the Internal Revenue Code,
  an organization must be organized and operated exclusively for <a href="https://www.irs.gov/charities-non-profits/charitable-organizations/exempt-purposes-internal-revenue-code-section-501c3" rel="noreferrer">exempt
  purposes</a> set forth in section 501(c)(3), and none of its earnings may
  inure to any private shareholder or individual.</p>
</blockquote>

<p>Specifically, </p>

<blockquote>
  <p>A section 501(c)(3) organization must not be organized or operated for
  the benefit of private interests, such as the creator or the creator's
  family, shareholders of the organization, other designated
  individuals, or persons controlled directly or indirectly by such
  private interests. No part of the net earnings of a section 501(c)(3)
  organization may inure to the benefit of any private shareholder or
  individual. A private shareholder or individual is a person having a
  personal and private interest in the activities of the organization.</p>
</blockquote>

<p>Accordingly, the organization cannot be created with the purpose of benefiting John Smith, or the board of directors of the organization, or shareholders. This does not preclude spending money to operate the charity.</p>

<p><a href="https://law.stackexchange.com/a/18936">user6726's answer</a> addresses the situation in the USA. In Germany, the situation is similar:</p>

<p>In Germany, the official criterion for a charitable organization is <strong>Gemeinnützigkeit</strong> (literally: "useful to the public"). If an organization is recognized as "gemeinnützig", it is exempt from some taxes, and can receive fines imposed in criminal trials.</p>

<p>In Germany, "Gemeinnützigkeit" is granted (and possibly revoked) by the revenue service (<em>Finanzamt</em>). The conditions are laid out in <a href="https://www.gesetze-im-internet.de/ao_1977/__52.html" rel="nofollow noreferrer">Abgabenordnung §52f</a>:</p>

<blockquote>
  <p>Eine Körperschaft verfolgt gemeinnützige Zwecke, wenn ihre Tätigkeit
  darauf gerichtet ist, die Allgemeinheit auf materiellem, geistigem
  oder sittlichem Gebiet selbstlos zu fördern. Eine Förderung der
  Allgemeinheit ist nicht gegeben, wenn der Kreis der Personen, dem die
  Förderung zugute kommt, fest abgeschlossen ist, zum Beispiel
  Zugehörigkeit zu einer Familie oder zur Belegschaft eines
  Unternehmens, oder infolge seiner Abgrenzung, insbesondere nach
  räumlichen oder beruflichen Merkmalen, dauernd nur klein sein kann.</p>
</blockquote>

<p>English:</p>

<blockquote>
  <p>A corporation shall serve public-benefit purposes if its activity is
  dedicated to the altruistic advancement of the general public in
  material, spiritual or moral respects. It shall not be deemed an
  advancement of the general public if the group of persons benefiting
  from such advancement is circumscribed, for instance by membership of
  a family or the workforce of an enterprise, or can never be other than
  small as a result of its definition, especially in terms of
  geographical or professional attributes.</p>
</blockquote>

<p>So in Germany a charity is allowed to pay its employees, including its CEO. However, it is not allowed to set it up in a way that only the employees, or only the CEO receive money - that would violate  the second phrase.</p>

<p>Of course, there is a large gray area where the charity uses some funds for its stated purpose, and some (large) part as pay. Whether that is okay is an individual decision of the revenue service (and ultimately the courts), because it is hard to formulate a general rule about how much overhead cost is "too much".</p>

<p>In practice, the rules are usually:</p>

<ul>
<li>The work that is compensated must be required for the charity's stated purpose.</li>
<li>The compensation must be "appropriate", i.e. more or less the usual market rate for the work.</li>
<li>The compensation must be duly authorized. It must be permitted by the organization's bylaws, and approved by the appropriate people (usually also specified in the bylaws).</li>
</ul>

<hr>

<p>As an aside, in Germany, there is the "DZI-Spenden-Siegel", a certificate for financially responsible charities. One of its conditions is that spending for administration (including salaries) and advertising does not exceed 30% of revenues. It does not have legal force.</p>

<p>I suppose I'll add charity requirements for the UK:</p>

<p>The relevant law is the Charities act 2013.</p>

<p>The only requirements to establish a charity is that it has a charitable purpose (e.g. alleviation of poverty, advancement of education, advancement of religion etc), and that it fulfills the public benefit requirement (pretty complicated, but basically the charity has to directly benefit the general public in a substantial way)</p>

<p>I'm not aware of any laws limiting how much employees of a charitable organisation can be paid, but in principle its okay for a charity to hire people to help it carry out its charitable purpose (this includes hiring CEOs)</p>
