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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?

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

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?

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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 501(c)(3) organization is

To be tax-exempt under section 501(c)(3) of the Internal Revenue Code, an organization must be organized and operated exclusively for exempt purposes set forth in section 501(c)(3), and none of its earnings may inure to any private shareholder or individual.

Specifically,

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.

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.

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user6726's answer addresses the situation in the USA. In Germany, the situation is similar:

In Germany, the official criterion for a charitable organization is Gemeinnützigkeit (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.

In Germany, "Gemeinnützigkeit" is granted (and possibly revoked) by the revenue service (Finanzamt). The conditions are laid out in Abgabenordnung §52f:

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.

English:

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.

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.

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".

In practice, the rules are usually:

  • The work that is compensated must be required for the charity's stated purpose.
  • The compensation must be "appropriate", i.e. more or less the usual market rate for the work.
  • 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).

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.

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I suppose I'll add charity requirements for the UK:

The relevant law is the Charities act 2013.

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)

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)

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