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