Nonprofit vs Tax Exempt n n n Nonprofit

Nonprofit vs. Tax Exempt n n n Nonprofit status is determined by STATE law, which governs organizing documents. Tax exempt status is governed by FEDERAL law. Thus, all tax-exempt organizations are nonprofit, but not all nonprofits are necessarily tax-exempt. © MAP for Nonprofits - 2004 1

Common Types of Tax-Exempt Organizations n n n n 501(c)(3) Charitable, religious, and educational organizations 501(c)(4) Civic leagues and social welfare organizations 501(c)(5) Labor/agricultural/horticultural organizations 501(c)(6) Business and professional leagues 501(c)(7) Social and recreational clubs 501(c)(8) Fraternal beneficiary societies 501(c)(19) Veterans organizations © MAP for Nonprofits - 2004 2

Alternatives n n n Become a new non-profit (without 501 c 3 status) Become a new nonprofit with 501 c 3 status Become a project of a professional fiscal sponsor Become a project of an existing non-profit Register as a for-profit company Stay informal 3

Why Become a 501 C 3? n n n n Exemption from Federal income tax Tax-deductible contributions Possible exemption from state income, sales, and employment taxes Reduced postal rates Charitable gambling Exemption from Federal unemployment tax Autonomy © MAP for Nonprofits - 2004 4

Types of Charitable Organizations n n n Educational Charitable Religious Scientific Literary Amateur Athletics © MAP for Nonprofits - 2004 5

Process n Incorporate n n n Name Address Incorporator Name first Board? Required IRS language Board Action in Writing © MAP for Nonprofits - 2004 6

Organizational Test n n Articles of Incorporation must: Limit its purposes to one or more of the exempt purposes listed in Code section 501(c)(3) and Not permit the organization to engage in a nonexempt activity. Further, assets of the organization must be permanently dedicated to an exempt purpose. © MAP for Nonprofits - 2004 7

Bylaws n n n n Purpose Membership? Size and composition of board Meetings Quorum Officers Committies Conflict of Interest © MAP for Nonprofits - 2004 8

Policies n n n Conflict of Interest Whistleblower Document Retention/Destruction Financial (Audit? ) Employment © MAP for Nonprofits - 2004 9

Application to IRS for Charitable Status n n n Narrative Description Board Three year Projected Budget Fundraising Plan User Fee Can be 4 -5 months before IRS begin review © MAP for Nonprofits - 2004 10

Public Charity vs. Private Foundation n n The primary difference is the 501(c)(3)’s source of financial support. Generally, a public charity has a broad base of support while; A private foundation has very limited sources of support. In addition, there are different tax rules that apply to each. For example, private foundations are subject to excise taxes that are not imposed on public charities. © MAP for Nonprofits - 2004 11

What can jeopardize charitable status? n n n activities that can jeopardize that status are: Private benefit/inurement, Lobbying, Political campaign activity, and Activities generating excessive unrelated business income (UBI). © MAP for Nonprofits - 2004 12

What is Private Inurement? n n The concept of inurement takes the notion of private benefit further. Code section 501(c)(3) states that no part of an organization’s net earnings may inure to the benefit of a private shareholder or individual. That is, prohibited from allowing its income or assets to accrue to insiders. © MAP for Nonprofits - 2004 13

Private Inurement (cont. ) n Prohibited inurement or private benefit does not include n n reasonable payments for services, other payments that further tax-exempt purposes, or payments for the fair market value of real or personal property. An “insider” is a person who has a personal and private interest in the activities of the organization. n Examples of typical insiders are officers, directors, and key employees © MAP for Nonprofits - 2004 14

Lobbying n activity designed to influence legislation n if it contacts, or urges the public to contact, a member or employee of a legislative body to propose, support, or oppose legislation, or if the 501(c)(3) advocates or opposes legislation. If its lobbying activities are substantial, a 501(c)(3) may fail the operational test (discussed earlier) and risk losing its tax-exempt status. The IRS uses two tests to determine whether lobbying is substantial: n n The substantial part (facts and circumstances) test and The expenditure test. © MAP for Nonprofits - 2004 15

Political Activity n n directly or indirectly participating or intervening in any political campaign on behalf of or in opposition to any candidate for public office. This includes making contributions to political campaign funds or making public statements for or against the candidate. © MAP for Nonprofits - 2004 16

Reporting n State n n n Secretary of State Attorney General IRS 990 n 990 EZ n 990 N n 990 PF § 990 plus Form 1023 open to public inspection n © MAP for Nonprofits - 2004 17

Eight Board Responsibilities n n n n Strategic planning Monitoring and evaluating Managing finances Fundraising Ambassadorship Hiring and overseeing the CEO Board leadership and development Creating positive organizational climate © MAP for Nonprofits - 2004 18

Duty of Care n Maintain an active role in the organization’s affairs n n n Attend board meetings Read minutes, review officer performance, review salaries Be familiar with books and records © MAP for Nonprofits - 2004 19

Duty of Care n n Protect and manage charitable property properly n Use consistently with donor restrictions n Invest in accordance with legal requirements Protect organization’s exempt status Investigate allegations of officer or employee theft or mismanagement, in some circumstances report misconduct Assist organization in obtaining resources © MAP for Nonprofits - 2004 20

Duty of Care n Directors are entitled to rely on: n n Information, opinions, reports, statements, including financial statements Prepared by the organization’s: n n Officers & employees Counsel, accountants, investment advisors, other professionals Committees formed by board of directors Cannot delegate ultimate responsibility © MAP for Nonprofits - 2004 21

Duty of Loyalty n Nonprofit directors have an absolute duty of complete, undivided loyalty to the organization they serve (not to be mistaken with a duty of loyalty to the founder or executive director of the organization) © MAP for Nonprofits - 2004 22

Duty of Loyalty Act at all times in best interests of organization n Avoid conflicts of interest n Organization typically should not lend money to director n Director should not divert corporate opportunity for personal gain n © MAP for Nonprofits - 2004 23

Duty of Care Discharge duties in good faith n In a manner the director reasonably believes to be in the best interests of the organization n Must use care of ordinarily prudent person in like circumstances n Establish committees n © MAP for Nonprofits - 2004 24

Fiscal Sponsor n What is a Fiscal Sponsor? n an organization that has already established its corporate and tax-exempt status and who is willing to be a "parent organization" to a group that wants to apply for a grant or solicit funds for a specific nonprofit purpose. © MAP for Nonprofits - 2004 25

Why have a Fiscal Sponsor n n Cost to Funder of administration Expenditure Responsibility Support that recipient doesn’t have Continuum of role © MAP for Nonprofits - 2004 26

Considerations § Ability of Fiscal Sponsor to handle funds n Affect on tax exempt status of Fiscal Sponsor n Ability of Fiscal Sponsor to administer n Fees to be charged n How funders will view role of Fiscal Sponsor © MAP for Nonprofits - 2004 27

Fundraising/Funding n n n Individuals Government Foundations Events Membership © MAP for Nonprofits - 2004 28

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