Starting a Nonprofit Organization

Starting a Nonprofit Organization

Daniel A. Hershey
August 15, 2012

A Service
Of: Sponsored by:

INTEGRATED PLANNING
Advising nonprofits in: www.synthesispartnership.com
• Strategy
• Planning (617) 969-1881
• Organizational Development info@synthesispartnership.com

A Service
Of: Sponsored by:

www.mission.do

A Service
Of: Sponsored by:

Today’s Speaker

Daniel A. Hershey
Executive Director
Hurwit & Associates Hosting:
Assisting with chat questions:
Jamie Maloney, Nonprofit Webinars Sam Frank, Synthesis Partnership

A Service
Of: Sponsored by:

Dan Hershey
dhershey@hurwitassociates.com
(617) 630-6900

Copyright © 2012 Hurwit & Associates. All Rights Reserved. 5


Outline of Topics

1. Nonprofit Organization
a. State Level: Nonprofit Corporation
b. Federal Level: Tax-Exempt Entity under IRC § 501(c)
2. Governance
a. Structure
b. Composition
3. Bylaws
a. Structure and Composition
b. Legal Purpose Statement
c. Board of Directors vs. Voting Membership
d. IRS Language, Other Provisions
e. Liability & Indemnification
4. Articles of Incorporation
a. Creates Legal Entity
b. Liability Protection / Corporate Shield



Outline of Topics (continued)

5. Application for Recognition of Exemption (IRS Form 1023, 1024)
a. Two Critical Pieces: Statement of Activities & Budgets
b. Charitable Purposes
c. Completing the Form
6. Additional Filings & Exemptions
a. State Income & Sales Taxes
b. Charitable Registration
c. Foreign Registrations
d. Annual Compliance
7. Commencing Operations
a. Board Meeting Minutes
b. Resolutions
c. Corporate Book
8. Insurance
a. General Liability, Directors & Officers Liability
b. Other Types
c. Resources


Outline of Topics (continued)

9. Fiscal Sponsorship
a. What is it?
b. Pros and Cons
c. Resources
10. Additional Policies
a. Off Bylaw vs. On Bylaws
b. Revised IRS Form 990
c. Conflict of Interest, Executive Compensation, Whistleblower,
Document Retention & Destruction
11. Internet Resources



Nonprofit Organization

• No legal definition of the term “nonprofit
organization”
• State Level: Nonprofit Corporation
– Defined by statute in each state
– To create a nonprofit corporation, file Articles of
Incorporation with Secretary of State
– Many states require that Bylaws be ratified at
time of incorporation
– Articles of Incorporation basically mirror the
bylaws



Nonprofit Organization (continued)

• Federal Level: Tax-Exempt Organization
– Exempt from Federal Income Taxes
– Plus possible deductibility for donor
contributions
– Defined under IRC § 501(c)
– What type of 501(c) entity are you?



Tax-Exempt Organization Reference Chart
Internal Revenue Code Section:

501(c)(2) Title 501(c)(3) Organizations: Charitable, Educational, 501(c)(4) Civic 501(c)(5) Labor 501(c)(6) Prof.
Holding Religious, Scientific Organizations Agricultural Business
Corporations Organizations Organizations

501(c)(7) Social Clubs
501(c)(8) Fraternal Assoc.
Public Private Private 501(c)(9) VEBA’s
Charities Operating Foundations ..…501(c)(25) Title Corps.
Foundations

509(a)(1) Public 509(a)(2) Public 509(a)(3) Public
Charities – Gifts, Charities – Gross Charities –
Grants and Receipts, Supporting
Contributions Earned Revenues Organizations

Type I Supporting Organizations: Type II Supporting Organizations: Type III Supporting Organizations:
“Subsidiary” of supported Legally connected to supported Operates independently of supported
organization (majority of board organization (by board overlap, other organization
appointed by supported organization) formal organizational ties)

Functionally Integrated: Supporting Non-Functionally Integrated:
organization is an integral part of, Supporting organization provides,
Copyright © 2012 Hurwit & Associates. All Rights Reserved. carries out important functions of, is funds, grants to supported
11
responsive to supported organization organization


Governance

• Liken it to the “genetic structure” of the organization
• Each nonprofit will be different
• How will board be organized?
– Number of directors
– Control over corporation
– Who nominates and elects successors
– Voting rights



Governance (continued)

• Board composition may be an irrevocable decision
– Can amend/restate articles of incorporation
– Can expand, change purposes
– Can re-file IRS Form 1023
– But once board members are chosen and given
authority, it is very difficult to rescind that power
• Type of board and who sits on the board are very
important decisions to be made
• Not the focus of this presentation, but definitely
worth careful consideration and careful strategizing



Traditional Nonprofit Organizational Structure
Board of
Directors

Fundraising Budget and Nominating Other: Ad Hoc or
Committee Finance Committee Program
Committee Committees

-CEO-
Executive Director
(or President)

-COO- Asst. Director -COO- Asst. Director
Asst. Director -CFO-
Asst. Director Planning/ Asst. Director Human
Development Asst. Director
Operations Marketing PR/Community Resources
(or Vice Finance
(or Vice (or Vice Affairs (or Vice
President) (or Vice
President) President) (or Vice President)
President)
President)



Bylaws

• Written to address number of different audiences
– Internal use (e.g. What constitutes quorum?)
– General public (e.g. Are directors indemnified?)
– Government regulators (e.g. What happens to
assets upon dissolution?)
– Should be written with this in mind
• Governance
– Establishes board of directors
– Mechanisms of how that body works
– In plain English, show how board of directors can
take an action and oversee the organization



Bylaws (continued)

• Legal Purpose Statement
– Broadest statement possible (don’t exclude
anything that is legally permissible)
– Not a mission statement, nor statement of goals
and objectives
– Example:
The corporation is organized exclusively for charitable, religious, educational
and scientific purposes, including, for such purposes, fostering improvement
in public education, preparing disadvantaged children for success in school,
and in general supporting and promoting the benefits of early intervention
and parental participation in childhood education. The corporation may, as
permitted by law, engage in any and all activities in furtherance of these
purposes which may lawfully be carried on by a corporation formed under the
laws of [state] and which are not inconsistent with the corporation's
qualification as an organization described in Section 501(c)(3) of the Internal
Revenue Code.



Bylaws (continued)

• Board of Directors vs. Voting Membership
– Self perpetuating board – existing board
nominates, elects new members and holds all
powers of the corporation
– Voting membership – nominates and elects the
board; board conducts business of corporation
(most common example: church)



Bylaws (continued)

• Models of board composition (continued)
– Self perpetuating board of directors is most
common model (60-75% of nonprofits)
– Voting membership may have specific rights
protected by state statute
– Important clarification: corporate voting
membership vs. supporting “membership” for
fundraising purposes (e.g. public radio)
– Specify in bylaws if you don’t intend to have a
voting membership



Methods of Appointment to Nonprofit Boards

Election: Election:
Board of Directors By voting membership,
By Board of Directors
or Trustees constituents, or
through nominating
community base
committee (self-perp.)

Ex Officio Appointment: Appointment:

Public officials and By Trust or Will
others who serve by
virtue of their position



Bylaws (continued)

• IRS Language, Other Provisions
– Restrictions on Activities, Dissolution, Conflict of
Interest: standard “boiler plate” language to
satisfy IRS requirements
– Corporate Transactions, Books and Records: also
standard language; satisfy state authorities;
establish how organization will operate at state
level
• Personal Liability
– establish right of individual not to be sued by
corporation (gives people confidence when
joining BOD)



Bylaws (continued)

• Indemnification
– Corporation indemnifies or “holds harmless”
selected classes of people
– Supplements corporate shield of protection,
extends to selected classes of people
– “Shall” vs. “May” indemnify
– Typically recommend “shall” (to reassure
directors)
– Which classes of people indemnified (e.g.
directors, officers, employees)
– Must weigh risks inherent in activities of
organization vs. insurance costs to extend
indemnification to more classes (e.g. volunteers)


Articles of Incorporation

• Incorporation
– Establishes legal entity at the state level
– Creates corporate shield of protection against
liability (protect personal assets)
• Once bylaws are set, incorporating is the easy part!
– Articles of Incorporation “parse” key elements of
the bylaws
• Once incorporated, essentially “open for business”
– Obtain EIN (employer identification number)
– Open bank account
– Starts requirement for annual state filings
– Not yet tax-exempt (27 month clock begins)



Application for Recognition of Exemption
(IRS Form 1023 or 1024)
• Form contains a lot of technical jargon that can seem
complex but there are essentially 2 key pieces:
– Narrative Statement of Activities (Part IV)
– Proposed Budgets (Part IX)
• Statement of Activities
– This is where you “sell your story” to the IRS and
make your case for tax-exempt status
– NOT a copy of your legal purpose statement
– NOT a philosophical or mission statement
– Do NOT make judgments, opinion statements
– DO be specific (opposite of corp. purpose stmt.)
– DO give the “who, what, when, where, why,
how” of your specific charitable activities


Application for Recognition of Exemption (continued)

• Statement of Activities (continued)
– Is a “good faith” statement of intent
– Not legally required to fulfill all activities listed
– Not strictly limited to activities listed
– In future, can easily supplement activities; but
material change in direction may be more
involved
• Projected Budgets
– Do NOT overestimate numbers
– Do NOT show large deficits or surpluses
– DO reflect programmatic expenses as outlined in
statement of activities
– Again, not legally obligated to meet these amts.



• KISS!
– More information is not necessarily better
– The less you say, the less chance you have of
tripping yourself up
– Don’t inundate the IRS examiner
– Can easily supplement activities, but materially
changing direction may be more involved




• Charitable Purposes
– Will I qualify for tax-exempt 501(c)(3) status?
– Primary purpose must fit into one of several
categories
– 4 main categories
1. Charitable
2. Educational
3. Scientific
4. Religious




• Charitable Purposes (continued)
– “Charitable” category is the most extensive
category of 501(c)(3) organizations
– Some of the most common charitable purposes
are:
1. Relief of poor, distressed
2. Civil, human rights orgs.
3. Promote social welfare, public works
4. Promotion of health
5. Promotion of arts
6. Environmental preservation, protection




• Other types of organizations that don’t fit neatly into
one of the 4 main categories but that still qualify for
501(c)(3) status are:
1. Cruelty prevention
2. Amateur sports
3. Literary
4. Others (fairly obscure e.g. public safety
testing, cooperative hospital service
organizations, charitable risk pools)




• Charitable Purposes (continued)
– If your primary purposes fit into one of the
aforementioned categories, still may not qualify
for 501(c)(3) status
– Must also:
1. Benefit broad sector of general public
2. Not conduct excessive lobbying activities
3. NO political campaign activities
4. NO private benefit (“private inurement”),
even upon dissolution of organization
5. Primary activity must not be a commercial
activity (e.g. casino that donates all of its
profit to charity)


State Level Filings & Compliance

• State Income & Sales Tax Exemptions
– Both are state specific
– Income Tax exemption automatic in many states;
may need to file copy of IRS determination letter
– Sales Tax exemptions may or may not be
available
– Sales Tax exemption may be available both as
purchaser and retailer of goods
– See www.hurwitassociates.com for specific
requirements in your state



State Level Filings & Compliance (continued)

• Charitable Registration
– Required to conduct fundraising in most states;
again very state specific
– May need to register in multiple states
– Key Factors:
• Amount raised
• Nature of fundraising activity (active vs.
passive; one-time vs. recurring)
• Who conducts activity (volunteer, staff, paid
fundraiser)
– Discuss with an attorney or other advisor
– See www.hurwitassociates.com for specific



• Foreign Registrations
– May be required if incorporated in one state and
“conducting business” in another state
– “Conducting business” defined differently in
each state; not necessarily by statute
– Key Factors:
• “permanent, continuous, regular” activity
• Is the activity vital to organization’s business
or merely incidental
– If contemplating operations in another state or
states, consult an attorney




• Annual Compliance
– Federal: IRS Form 990-N, 990-EZ or 990 (990-PF
for Private Foundations)
– See www.irs.gov/charities to determine which
form should be filed
– State: Exemption Renewals, Charitable
Registration Renewals, Annual Reports
– See www.hurwitassociates.com for annual filing
– If in doubt, contact appropriate state office (DOR,
Attorney General, Secretary of State)



Commencing Operations

• Meeting Minutes
– Document that a given action was taken in
accordance with bylaws, state/federal laws
– Organizational meeting minutes – special
minutes to document organizational meeting of
corporation; includes banking resolutions,
director & officer elections, adoption of bylaws
– Regular meeting minutes include:
• Summary of last meeting
• Agenda for current meeting
• Vote tallies, resolutions from current meeting
• List of items for next meeting
– File meeting minutes in corporate book


Commencing Operations (continued)

• Resolutions
– Method by which board of directors/trustees
takes an action on behalf of corporation
– Actions requiring a board resolution:
• Amending bylaws, articles of incorporation
• Business transactions with board members
(conflicts of interest)
• Corporate transactions (mergers, dissolution)
• Sales or purchases of assets
• Banking transactions (loans, endowment
transactions)



Commencing Operations (continued)

• Corporate Book
– Used to store critical corporate information
regarding the nonprofit including:
• Articles of Incorporation and any
amendments or restatements
• Bylaws and amendments
• IRS Determination Letter
• Initial & Annual Compliance filings (IRS Form
990, state filings)
• Organizational Meeting Minutes
• Regular Meeting Minutes
– Maintained by Clerk/Secretary



Insurance

• Protects the assets of the Corp., Directors & Officers
• Two main types of concern to nonprofit:
– General Liability
– Directors and Officers Liability
• Other types:
– Professional Liability
– Business Automobile
– Workers Compensation
– Property
• Useful resources:
– www.nonprofitrisk.org
– www.insuranceformynonprofit.org
• Find independent agent, consult attorney


Fiscal Sponsorship

• What is it?
– An existing 501(c)(3) organization sponsors a new
project that does not yet have 501(c)(3) status
• Pros:
– Circumnavigate IRS application for exemption
– Begin accepting tax-deductible donations quickly
– Benefit from name recognition of sponsor
• Cons:
– Lack of control, visibility, independence; fees
• Resources:
– Foundation Center
(http://foundationcenter.org/getstarted/faqs/html/fiscal_agent.html)

– Tides Center (http://www.tidescenter.org)


Additional Policies

• Nonprofits make use of many additional policies to
ensure efficient operation and good governance
– e.g. personnel policies, investment policies, data
privacy policies
• Off Bylaw vs. On Bylaw
– These policies should be maintained off of the
bylaws
• IRS Form 990
– Revised form requires much more information
on governance
– Conflict of Interest, Executive Compensation,
Whistleblower, Document Retention &
Destruction Policies


Internet Resources

• www.irs.gov/charities
• www.stayexempt.org
• www.hurwitassociates.com
• www.boardsource.org
• www.foundationcenter.org
• www.nonprofitrisk.org
• www.compasspoint.org
• www.tides.org
• www.councilofnonprofits.org
• www.afpnet.org (for the Charleston Principles)
• www.independentsector.org


Thank you!
Dan Hershey
dhershey@hurwitassociates.com
(617) 630-6900


Find listings for our current season
of webinars and register at:

NonprofitWebinars.com

A Service
Of: Sponsored by:

Starting a Nonprofit Organization

Recommandé

Recommandé

Contenu connexe

En vedette

En vedette (18)

Plus de 4Good.org

Plus de 4Good.org (20)

Dernier

Dernier (20)

Starting a Nonprofit Organization