NPL 273 Introduction to Nonprofit Leadership

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

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