Building Resilience for Nonprofits

By Coleman Scroggins, Apex Law Group

Resilience is essential infrastructure. The IRS, under political pressure, is targeting charities serving vulnerable populations, including threatening the tax-exempt status of missions[1] once deemed unquestionably charitable, like immigrant support[2], LGBTQ+ rights[3], reproductive access[4], diversity[5], and education[6].

To avoid being blindsided, nonprofits must build resilience into the foundation of their architecture.[7]

1. Internal Strategy

First, avoid knee-jerk reactions. Don’t cancel programs just because of rhetoric. Wait for terminated contracts, passed laws, denied renewals. And while you can, attempt to build flexibility into your operations.

• Payroll reserves. Funding delays often led to payroll cuts, the most damaging and demoralizing outcome. Staff layoffs halt services and create knowledge gaps that can take years to rebuild. Build a payroll reserve to cover at least one to three months of operations to avoid immediate harm during disruptions.

• Written Process. When staff leaves, critical operations can unravel if knowledge is undocumented. Turn individual know-how into institutional knowledge by documenting procedures. This allows others to step in quickly and maintain continuity.

• Governance. Good governance is both stewardship and risk management. Start with staggered board terms to avoid full turnover. Enforce meaningful conflict-of-interest policies and ensure board members understand finance, compliance, and the organization’s mission. Establish clear internal policies for reimbursement, whistleblower protection, document access, and contract review.

• Funding. Restricted funds limit the ability to respond to crisis. Negotiate flexible language into gifts or grants whenever possible, including the right to reallocate or repurpose funds in emergencies. When considering endowments, favor board-designated funds (quasi-endowments) that can be amended if needed.

• Data. Nonprofits are a source of public confidence, and that is reflected in the sensitive data they hold on donors and beneficiaries. Restrict internal access to sensitive information and revisit your data policies. Leaks or breach can damage credibility and relationships and put vulnerable people into scrutiny.

• Solidarity. Don’t overlook the power of advocacy, lobbying (as allowed under IRS restrictions), or judicial action.[8] If a 501(c)(3), consider making the 501(H) election to give more freedom to speak out, organize, and defend your mission. Educate your board and staff on what counts as lobbying versus nonpartisan advocacy, and incorporate it into your strategic planning.

1. Explore Hybrid Models

If parts of your mission are politically sensitive or high-risk, don’t house everything under one 501(c)(3). Hybrid structures can shield your core entity from reputational or legal fallout.

1. Private Operating Foundations

Unlike public charities, private operating foundations are typically funded by a small group of insiders and use their own resources to direct charitable activities. This means fewer disclosure requirements related to outside donations, less dependency on grant cycles or public fundraising, and more autonomy in setting strategies. While they still face IRS oversight and must meet operational tests, private operating foundations can act more decisively and insulate programs from immediate political pressure.

• Investment

Nonprofits may invest, but must proceed with caution. Investments must align with both the organization’s mission and its legal obligations. Investments take many forms, including reserve accounts, traditional portfolios, or endowments. In all cases, the Board should adopt a written investment policy that addresses risk tolerance, ethical screening, and oversight responsibilities. Successful investing also means seeking expert guidance when needed and making informed, mission-driven decisions.

1. Fiscal Sponsorship; Dual Entity

Fiscal sponsorship can insulate your nonprofit by housing high-risk programs under a separate umbrella. If a project becomes a target, it can be wound down without destabilizing the entire organization.

Dual-entity structures, such as pairing your nonprofit with a for-profit, are also helpful in this regard. For-profits rarely draw political attention for the same activities. Already common in the healthcare space,[9] this model allows you to pursue business activities, partnerships, and advocacy work through a separate entity. For-profits are often less scrutinized for similar activities, and they can access financing and capital that nonprofits cannot.

• Risks

While dual structures offer flexibility, they carry risks. The IRS watches closely for private benefit violations, conflicts of interest, and improper resource sharing. Poorly planned arrangements can jeopardize your exempt status as easily as political scrutiny can. Engage legal counsel early and set clear boundaries.

Hybrid models also create paths for earned income such as training, consulting, or product sales that support your mission. These models offer more flexibility and allow you to partner with for-profit social enterprises or mission-aligned vendors in ways that traditional nonprofits often can’t.

Not all revenue is exempt from tax just because your organization is. The IRS imposes UBIT on income from activities that are not substantially related to an organization’s exempt purpose.

UBIT exceptions include dividends, interest, and royalties. For organizations with real estate, rental income from real property is also exempt, if not debt-financed and the organization does not provide significant services. In some cases, sales or service income may also be excluded from UBIT if conducted by volunteers or for the convenience of members.

1. Final Thoughts

A well-run organization prepares for crisis. Whether a sudden funding loss, public backlash, or regulatory inquiry, the most resilient nonprofits are those that have invested early in strong internal structures. That includes updated governance, flexible financial policies, reliable documentation, and leadership that knows how to navigate uncertainty. If your organization is ready to strengthen its foundation, we are here to support that work.

[1] Reuters, Jan. 2025. https://www.reuters.com/legal/trump-cannot-use-new-executive-order-skirt-sanctuary-cities-ruling-judge-says-2025-05-09/#:~:text=May%208%20%28Reuters%29%20,administration%20from%20doing%20just%20that

[2] CBS News. Trump administration suspends some funding for refugee resettlement groups, memo says. Jan. 2025. https://www.cbsnews.com/news/trump-administration-suspends-some-funding-for-refugee-resettlement-groups-memo/#:~:text=Hours%20after%20taking%20office%2C%20Trump,interests%20of%20the%20United%20States; National Immigrant Justice Center. Leading with Cruelty: Eight Impacts of Trump’s First Day Executive Orders. Jan. 2025. https://immigrantjustice.org/staff/blog/leading-cruelty-eight-impacts-trumps-first-day-executive-orders#:~:text=Nevertheless%2C%20Trump%20now%20has%20ordered%3A

[3] NAFSA. Executive and Regulatory Actions Under the Second Trump Administration. Feb. 2025. https://www.nafsa.org/executive-and-regulatory-actions-trump2admin#:~:text=2025,authorizing%20statutes%2C%20regulations%2C%20and%20terms; Trump’s anti-trans executive orders: What they are and where they stand. SAGE USA, Jan. 2025. https://19thnews.org/2025/03/trump-anti-trans-executive-orders/#:~:text=Although%20a%20federal%20judge%20has,Trump%20was%20sworn%20into%20office.

[4] Cha, A. E. The Washington Post, Mar. 2025. https://www.washingtonpost.com/nation/2025/03/31/planned-parenthood-title-x-funding/

[5] Reuters, Feb. 2025.  https://www.reuters.com/legal/us-judge-limits-trumps-ability-withhold-school-funds-over-dei-2025-04-24/#:~:text=April%2024%20%28Reuters%29%20,diversity%2C%20equity%20and%20inclusion%20efforts. Kamenetz, A. How school leaders are responding to Trump admin DEI order. NPR, Feb. 2025. https://www.npr.org/2025/04/17/nx-s1-5361196/trump-dei-school-leaders-response#:~:text=How%20school%20leaders%20are%20responding,or%20risk%20losing%20federal%20dollars

[6]Goldmacher, S. After Harvard, Liberal Donors and Groups Fear New Scrutiny From Trump. The New York Times, Feb. 2025. https://www.nytimes.com/2025/04/17/us/politics/harvard-trump-irs-liberals.html.

[7] KFF. Overview of President Trump’s Executive Actions Impacting LGBTQ+ Health. Kaiser Family Foundation. https://www.kff.org/other/fact-sheet/overview-of-president-trumps-executive-actions-impacting-lgbtq-health/#:~:text=policies%2C%20regulations%2C%20forms%2C%20communications%20or,%E2%80%9D

[8] https://www.axios.com/local/san-francisco/2025/02/21/trump-transgender-rights-lawsuit-executive-orders

[9]IRS, Topical Index to EO Continuing Professional Education Articles (1999). https://www.irs.gov/pub/irs-tege/eotopica99.pdf

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