NPL 273 How to Form
a Nonprofit Corporation
I. What an NPO Is
a. Advantages
i. Tax exemption
ii. Tax-deductible contributions
iii. Obtaining grants
iv. Lower costs for some services
b. Disadvantages
i. Loss of control
ii. Limited purposes
iii. Limited lobbying
iv. Public scrutiny
c. Applicable Laws
i. State corporation laws
ii. State charitable solicitation laws
iii. Federal tax law—501(c)(3)
1. charitable purpose
a. religion
b. charity
c. science
d. public safety testing
e. literary
f. educational
g. preventing cruelty to children or animals
2. twin tests
a. organizational
b. operational
iv. Other types of organizations--Associations
1. civic and social welfare
2. employee associations
3. Labor organizations
4. trade associations
5. social clubs
6. cemetery association
7. veteran’s organizations
d. Prohibited Practices
i. No specific benefit (focus on community at large)
ii. No private inurement (“commercially reasonable” terms--no undue profits for private parties)
iii. Limited lobbying
iv. Limited commercial activity
II. Choosing a Type of NPO
a. Type of organization
i. Association
ii. Trust
iii. Corporation
1. protection from liability
2. eligibility for grants
3. procedural rules spelled out in law
b. Domestic vs. “Foreign”
c. Charitable vs. Noncharitable
d. Public charity vs. Private foundation
i. Automatic qualification (church, school, hospital, medical research, public safety, or foundation for one of above)
ii. Public support test (1/3 of total support from public support)
iii. Facts and circumstances (10% funding from public support and bona fide programs to attract public support; and 5 circumstances—percentage of public support, sources of support, makeup of governing body, benefits available to public, makeup of membership or audience)
iv. Private foundation (must distribute annual income, avoid self-dealing, avoid retaining business holdings, refrain from taxable investments, no lobbying, pay excise tax on investment income)
v. Private operating foundation (distribute 85% of income annually and meet support/asset/endowment test)
vi. Exempt operating foundation (10 years public support, broadly representative Board, no officers are disqualified individuals)
III. Start-Up Procedures
a. Define your purpose
b. Choose, search, and register your name
c. File articles of incorporation with the State
d. Write By-laws
e. Obtain Taxpayer ID number (IRS)
f. Hold Organizational Meeting (elect directors & officers, adopt bylaws, corporate seal & banking resolutions )
g. Establish Minutes book and bank account, and licenses (as needed)
h. File for IRS Charitable status
IV. Applying for Tax-Exempt Status
a. Charitable—IRS Form 1023
b. Noncharitable—IRS Form 1024
c. File within 15 months after incorporation
d. Apply for State tax exemption
V. Protecting Your Nonprofit Status
a. Private inurement—funds may not go to any particular person, may only be used for charitable purpose.
b. Excess benefits transactions
c. Lobbying
i. Substantial parts test (no more than 15% for lobbying)
ii. Expenditure tests (varying amounts, depending on organization income)
iii. Private foundations may not lobby at all
iv. No limit on noncharitable nonprofit organizationis
d. Political campaigning
i. Charities may not do this
ii. Noncharitable NPOs may do limited amount
iii. PACs have no limits.
e. Conflict of Interest and Self-Dealing—AVOID KEEPING CONFLICTS SECRET
f. Sources of income
i. Donations—public sources (not one or two big donors)
ii. Fundraising—money-making must be related to charitable activity
iii. UBIT (Unrelated Business Income Tax)
VI. Raising Money in an NPO
a. Soliciting Donations
i. Fundraisers
ii. Bequests
b. Charitable Solicitation Laws
i. Federal
ii. State
c. UBIT
i. May not regularly operate unrelated business, unless related to exempt function
ii. Various exempt activities (member benefit, done by volunteers, renting out donor list, selling donated items, low-cost gifts for donations, rents, etc.)
iii. IRS frowns on “associate memberships”
iv. Affinity programs (may be taxable if organization materially participates)
v. Corporate sponsorship may or may not be taxable
VII. Running an NPO
a. Day to Day Activities
i. Don’t mix personal and business matters
ii. Always use complete corporate name
iii. Always sign documents with corporate title
b. Corporate Records
i. Articles & Bylaws
ii. Minutes
iii. Finances
iv. Members
c. Meetings
i. Must hold annual meeting of Board of Directors
d. Annual Reports
e. Tax Returns
i. IRS Form 990
f. Employment Requirements
i. New hire reporting (to the State)
ii. Employment eligibility (to US Justice Dept.)
iii. Federal Tax Withholding (W-4)
iv. State Withholding
v. Unemployment Compensation tax
vi. Workers’ compensation insurance
g. Training
© 2004 A.J.Filipovitch
Revised 5 July 2004