Nonprofit Board Members – Choose Wisely

This post is taken from The Foundation Group's web site and was written by Greg McRay. The Foundation Group periodically posts very useful information regarding the creation and management of tax exempt organizations. They also offer their services on a fee paid basis. I can not speak to the services provided by The Foundation Group, although I believe that their postings often share valuable information.


Nonprofit Board Members – Choose Wisely











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Required Provisions for Organizing Documents When Seeking 501(c)(3) status

[The IRS has specific requirements for the structure of organizations seeking tax-exempt status. Below are two paragraphs from the IRS web site that provides instruction and information about creating tax-exempt organizations. Reviewing this information before filing organizing documents with your appropriate state authority may save you a lot of time and headache further down the road.]

"A charity's organizing document must limit the organization's purposes to one or more of the exempt purposes set forth in section 501(c)(3) and must not expressly empower it to engage, other than as an insubstantial part of its activities, in activities that are not in furtherance of one or more of those purposes. This requirement may be met if the purposes stated in the organizing document are limited in some way by reference to section 501(c)(3). In addition, assets of an organization must be permanently dedicated to an exempt purpose. This means that should an organization dissolve, its assets must be distributed for an exempt purpose described in section 501(c)(3), or to the federal government or to a state or local government for a public purpose. To establish that an organization's assets will be permanently dedicated to an exempt purpose, the organizing document should contain a provision insuring their distribution for an exempt purpose in the event of dissolution. Although reliance may be placed upon state law to establish permanent dedication of assets for exempt purposes, an organization's application can be processed by the IRS more rapidly if its organizing document includes a provision insuring permanent dedication of assets for exempt purposes. For examples of provisions that meet these requirements, see Sample Articles. [which may be found through the link provided at the IRS web site]

"If the organizing document does not contain these provisions, an organization should amend it before submitting its exemption application. State officials can provide more information about how to amend organizing documents."

[FOR MORE INFORMATION VISIT THE RELEVANT IRS WEB SITE]

All of the Blog Posts so far have dealt with for-profit organizations. At this point I want to have a few discussions about non-profit orgnizations, and particularly about tax-exempt organizations.

Creating a non-profit organization is not "Rocket Science." And because it is so easy, a lot of people start off on their own, only to find out later that not every non-profit organization will qualify for tax-exempt status from the IRS.

I often have people come to me after they have incorporated a non-profit corporation but can not get tax-exempt status because the corporation was not structured properly and the Articles of Incorporation and the By-Laws do not pass muster with the Department of the Treasury.

Creating a tax-exempt is not Rocket Science either, but it does take patience and attention to detail. The IRS will provide you with all of the information that you need if you will take the time to read what they have available, think about what they are telling you and follow their instructions.

Below, I have exerpted sections from a few of their web sites that can help with creatting an tax-exempt organization. at the end of each section I have the link to the corresponding IRS web page.

These exerpts are from three seperate pages:

1. Life Cycle of an Exempt Organization
2. Life Cycle of a Public Charity/Private Foundation
3. Life Cycle of a Public Charity

Reading these pages and following their various links will hopefully helpe you decide whether you can create a tax-exempt organization on your own, or whether you think you will need the help of an attorney. Since most people want their non-profit organization to be a "Public Charity" (A term that is defined in the IRS web site) I have provided a course of sites that lead to that area. In later posts I will post information about Private Foundations.

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Life Cycle of an Exempt Organization

Organizations that meet the requirements of Internal Revenue Code section 501(a) are exempt from federal income taxation. In addition, charitable contributions
made to some section 501(a) organizations by individuals and corporations are deductible under Code section 170. This website provides information about points of intersection between organizations and the IRS. The content includes explanatory information, and links to forms that an organization may need to file with the IRS. The materials cover five stages in an organization's life cycle:

http://www.irs.gov/charities/article/0,,id=169727,00.html

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Life Cycle of a Public Charity/Private Foundation

Organizations that meet the requirements of Internal Revenue Code section 501(c)(3) are exempt from federal income tax as charitable organizations. In addition, contributions made to charitable organizations by individuals and corporations are deductible under Code section 170. Every exempt charitable organization is classified as either a public charity or a private foundation. Generally, organizations that are classified as public charities are those that (i) are churches, hospitals, qualified medical research organizations affiliated with hospitals, schools, colleges and universities, (ii) have an active program of fundraising and receive contributions from many sources, including the general public, governmental agencies, corporations, private foundations or other public charities, (iii) receive income from the conduct of activities in furtherance of the organization’s exempt purposes, or (iv) actively function in a supporting relationship to one or more existing public charities. Private foundations, in contrast, typically have a single major source of funding (usually gifts from one family or corporation rather than funding from many sources) and most have as their primary activity the making of grants to other charitable organizations and to individuals, rather than the direct operation of charitable programs.

http://www.irs.gov/charities/charitable/article/0,,id=136459,00.html

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Life Cycle of a Public Charity

During its existence, a public charity has numerous interactions with the IRS – from filing an application for recognition of tax-exempt status, to filing the required annual information returns, to making changes in its mission and purpose. The IRS provides information, explanations, guides, forms and publications on all of these subjects – they are available through this IRS Web site. The illustration below provides an easy-to-use way of linking to the documents most charities will need as they proceed though the phases of their “life cycle.”

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[Bloger's Note: Below are the topics to which the site links for further information.]
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• Starting Out Organizing Documents
• Required Provisions
• Sample Organizing Documents
• Governance and related topics
• Bylaws
• State law requirements
• Employer Identification Number
• Application Form
• Online EIN Application
• Charitable Solicitation
• Initial State Registration
• Periodic State Reporting
• State Charity Offices
• Help from the IRS
• Applying to IRS
• Requirements for Exemption
• Application Forms
• Exemption Application
• Group exemption
• User Fee
• Power of Attorney
• Disclosure of Applications
• IRS Processing
• While You Wait
• Rulings and Determination Letters
• Advance Rulings - Publicly Supported Organizations
• Help from the IRS
• Application Process Step by Step
• Customer Account Services
• Publication 4220, Applying for 501(c)(3) Tax-Exempt Status
• Publication 557, Tax-Exempt Status for Your Organization

http://www.irs.gov/charities/charitable/article/0,,id=122670,00.html


Tax Information for Charities & Other Non-Profits

TAKE A NUMBER

Do you have employees? Do you operate your business as a corporation or a partnership? Do you file any Employment, Excise, or Alcohol, Tobacco and Firearms tax returns:?

If the answer to any of these questions is “Yes,” then you need an Employer ID Number [EIN] from the Internal Revenue Service. Most business people know what an EIN is and how it functions, yet many small business owners do not bother to get one. Operating much like a personal “Social Security Number” it is a means by which the federal government keeps track of the revenues of interest that passes through your business.

The brief list of conditions that make an EIN is not exhaustive. The IRS requires you to have an EIN If you withhold taxes on income, other than wages, paid to a non-resident alien or if you have a Keogh plan.

Also, your business is required to have an EIN if it is involved with Trusts[ except certain grantor-owned revocable trusts], IRAs, Exempt Organization Business Income Tax Returns, Estates, Real estate mortgage investment conduits, Non-profit organizations, Farmers' cooperatives or Plan administrators.

This link will take you the SBA’s site on EINs for a fuller briefing on who needs an EIN and when. It will also tell you how to apply for an EIN and how to close out an account with the IRS and discontinue your EIN.

MARKETING PLANS

[Below are some tips from the SBA on Developing a Market Plan]


A sound marketing plan is key to the success of your business. It should include your market research, location, the customer group you have targeted, competition, positioning, the product or service you are selling, pricing, advertising, and promotion.

"You're in business to serve a customer need," says Derek Hansen, founder of American Capital Access. "If you're not sensitive to customers, don't know who your customers are, how to reach them, and, most of all, what will convince them to buy your product or service, get help."

Effective marketing, planning, and promotion begins with current information about the marketplace. Visit your local library, talk to customers, study the advertising of other businesses in your community, and consult with any relevant industry associations. This interactive tool will help you assess your marketing strengths and weaknesses.

Once you have all the necessary information, write down your plan:

1. Define your business:
Your product or service
Your geographic marketing area - neighborhood, regional, or national
Your competitionHow you differ from the competition - what makes you special
Your price
The competition's promotion methodsYour promotion methods
Your distribution methods or business location

2. Define your customers:
Your current customer base - age, sex, income, and neighborhood
How your customers learn about your product or service - advertising, direct mail, word of mouth, Yellow Pages
Patterns or habits your customers and potential customers share - where they shop, what they read, watch, and listen to
Qualities your customers value most about your product or service - selection, convenience, service, reliability, availability, and affordability
Qualities your customers like least about your product or service - can they be adjusted to serve your customers better?; prospective customers whom you aren't currently reaching

3. Define your plan and budget:
Previous marketing methods you have used to communicate to your customers
Methods that have been most effective
Cost compared to sales
Cost per customer
Possible future marketing methods to attract new customers
Percentage of profits you can allocate to your marketing campaign
Marketing tools you can implement within your budget - newspaper, magazine, Yellow Pages, radio or television advertising, direct mail, telemarketing, and public relations activities such as community involvement, sponsorship, or press releases
Methods of testing your marketing ideas
Methods for measuring results of your marketing campaign
The marketing tool you can implement immediately

The final component in your marketing plan should be your overall promotional objectives: to communicate your message, create an awareness of your product or service, motivate customers to buy and increase sales, or other specific targets. Objectives make it easier to design an effective campaign and help you keep that campaign on the right track. Once you have defined your objectives, it is easier to choose the method that will be most effective.

Learn more at the SBA Marketing Site for Small Businesses

[In its efforts to help small businesses become successes, the SBA has provided some valuable lessons in “Target Marketing. Below is a segment taken directly from an essay on that topic.”]
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Target Marketing

It's important to remember that the focus of marketing is people. If you're concentrating your efforts on your product or profit only, you'll miss the mark. The term target market is used because that market - that group of people - is the bull's eye at which you aim all your marketing efforts.

So, don't forget that a market is people - people with common characteristics that set them apart as a group. The more statistics you have about a target market, the more precisely you can develop your strategy. The table below shows some examples of market segments (or groups).

To read the SBA’s entire essay on Target Marketing, go to that segment of their “Market and Price” series of essays.

TARGET MARKETING

WHEN IS THE PRICE RIGHT?

[This is an excerpt from the SBA’s web page “Understanding Marketing” In its "Market and Price" Section. The entire essay can be found using the link at the bottom of the page. If you are in business, you are in business to sell something, be it a product or a service. Knowing what the market is willing to pay for that product or service can be the key to your business survival.]
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What Is Marketing?


General Definition

In plain and simple terms, marketing activities and strategies result in making products available that satisfy customers while making profits for the companies that offer those products. That's it in a nutshell!

Marketing produces a win-win situation because:

Customers have a product that meets their needs and
Healthy profits are achieved for the company. (These profits allow the company to continue to do business in order to meet the needs of future customers.)

Stated another way, focus on what the customer wants is essential to successful marketing efforts. This customer-orientation must also be balanced with the company's objective of maintaining a profitable volume of sales in order for the company to continue to do business. Marketing is a creative, ever-changing orchestration of all the activities needed to accomplish both these objectives.

How Are The Customer And Business Objectives Met?

The American Marketing Association's definition of marketing is: the process of planning and executing the conception, pricing, promotion, and distribution of ideas, goods, and services to create exchanges that satisfy individual and organizational objectives.

You see in the above definition that the process of marketing begins with discovering what products customers want to buy. Providing the features and quality customers want is a critical first step in marketing. You'll be facing an uphill battle if you provide something you want to produce and then try to convince someone to buy it.

The marketing process continues with setting a price, letting potential customers know about your product, and making it available to them.

Read More about “Market and Price”