Baylor Law SchoolBaylor Law SchoolNonprofit OrganizationsNonprofit Organizations

Spring 2004 CourseSpring 2004 Course

Introduction & OverviewPrepared By:

Darren B. Moore

Bourland, Wall & Wenzel,

A Professional Corporation

Attorneys and Counselors

City Center Tower II

301 Commerce Street, Suite 1500

Fort Worth, Texas 76102

(817) 877-1088

(817) 877-1636 (facsimilie)

E-mail: dmoore@bwwlaw.com

©Bourland, Wall & Wenzel, P.C.

NONPROFIT ORGANIZATIONSSPRING 2004

INSTRUCTORS:Darren B. Moore: State Law IssuesMichael V. Bourland/Michelle Coleman-Johnson: Federal Tax Considerations

REQUIRED MATERIALS: All required materials will be provided to you during the course or accessible at www.bwwlaw.com.

You will need access to (but do not need to purchase) the Internal Revenue Code and the Texas Non-Profit Corporation Act.

Administrative Matters

The Baylor Law School attendance policy applies to this course.

When you arrive for each class session, you are expected to have read the designated assignment and completed any assigned exercise unless directed otherwise. The University and Law School Honor Code apply. Contact information:

Darren B. Moore(817) 877-1088 (Office)(817) 801-0132 (Home)(817) 247-4704 (Cell)dmoore@bwwlaw.com

Why study the law of nonprofits?

• Large market sector

• Participation on boards, etc.

• Tax exempt planning

• Estate Planning

• Other

Purposes of Course

• Gain familiarity with different structures of nonprofit organizations

• Understand planning involved in choosing appropriate structure

• Learn the basics of organization and operation under the Texas Non-Profit Corporation Act

• Learn how to recognize and advise nonprofit organizations on major tort liabilities

• Learn how to recognize and evaluate risk and advise nonprofit organizations on how to best limit exposure through the use of audits, planning and insurance

• Gain a familiarity with charitable immunity and its application

• Gain familiarity with basic tax issues such as tax exemption, unrelated business income tax, etc.

• Learn the tax rules related to various tax-exempt entities

• Gain a basic familiarity with charitable giving

Course Schedule1. February 12 - Class One: Introduction to nonprofit organizations; Organization

2. February 19 - Class Two: Governance

3. February 26 - Class Three: Liability Primer

4. March 4 - Class Four: AG Oversight; Land Ownership

5. March 11 - Class Five: Hot Topics in Nonprofit Sector; Mid-term Exam

6. March 18 - Spring Break

7. March 25 - Class Six: Overview of Federal Tax Considerations/Income Tax Rules Relating to Tax-Exempt Organizations

8. April 1 - Class Seven: Public Charities

9. April 8 - Class Eight: Foundations – Part I

10. April 15 - Class Nine: Foundations – Part II

11. April 22 - Class Ten: Putting It All Together/Review

12. April 2__- Final Exam (_:__ p.m.)

Nonprofit Sector

• Many earn profit• May or may not be

tax-exempt• Charitable, religious,

educational (and many more)

• Take up where business and gov’t fail

• ***Nondistribution Constraint***

Example Nonprofits• Provision Capital Foundation• Revelation World Outreach Ministries• The Center for the Research of Early Christian Documents• Metro Baptist Network• The Ark Training Center• Cho-Yeh Camp and Conference Center• Riverbend Retreat Center• Tarrant Baptist Association, Inc.• Churches• Family Foundations• City Missions• Community Foundations• NFL• Pew Charitable Trust• AFCA• Political Organizations

Nonprofit Sector

0

50

100

150

200

250

Amountin

billionsof

dollars

Dues,fees &charges

Contributions

Government

Other

• Estimated to generate revenues exceeding 15% of nation’s gross national product

• Nonprofits include unions, lodges, fraternities, sports clubs, and even Harley associations!

• NFL – spends less than 1% of its $35 million budget on charitable activities, pays comm’r $1.5 million/ year and spends $1.5 million/ year to lease its office speace

• Motion Picture Academy – spends around $6 million for Oscars

• An estimated 1.2 million organizations are tax exempt (not counting churches!)

• Since 1970 has grown 4X as fast as the rest of the economy

• Estimated to control property worth more than $850 billion (not including churches!)

Source: America’s Nonprofit Sector in Brief, unpaginated (1998), an update and revision of Virginia A. Hodgkinson et al. NONPROFIT ALMANAC 1996-1997 156, 159, 160 (1996).

Registered Nonprofit Organizations by Total Assets (Texas)

0.00%

10.00%

20.00%

30.00%

40.00%

50.00%

60.00%

70.00%

80.00%

90.00%

Lessthan

$100,000

$250K-$499,999

$1-5 mil. $10-$100mil.

Number of RegisteredOrganizations

Assets Reported onForm 990

Source: National Center for Charitable Statistics, Urban Institute

Doesn’t include most religious congregations.

Registered Nonprofit Organizations by Total Assets (National)

0.00%

10.00%

20.00%

30.00%

40.00%

50.00%

60.00%

70.00%

80.00%

90.00%

Lessthan

$100,000

$250K-$499,999

$1-5 mil. $10-$100mil.

Number of RegisteredOrganizations

Assets Reported onForm 990

Source: National Center for Charitable Statistics, Urban Institute

Doesn’t include most religious congregations.

Registered Nonprofit Organizations by IRC Subsection (Texas) (2003)

(c)(1)(c)(2)(c)(3)(c)(4)(c)(5)(c)(6)(c)(7)(c)(8)(c)(9)(c)(10)(c)(12)(c)(13)(c)(14)(c)(15)(c)(16)(c)(17)(c)(19)(c)(25)(c)(27)(c)(40)(c)(50)Other

Source: National Center for Charitable Statistics, Urban InstituteDoesn’t include most religious congregations.

Registered Nonprofit Organizations by IRC Subsection (National)(2003)

(c)(1)(c)(2)(c)(3)(c)(4)(c)(5)(c)(6)(c)(7)(c)(8)(c)(9)(c)(10)(c)(11)(c)(12)(c)(13)(c)(14)(c)(15)(c)(16)(c)(17)(c)(18)(c)(19)(c)(20)(c)(40)(c)(50)Other

Source: National Center for Charitable Statistics, Urban InstituteDoesn’t include most religious congregations.

Registered Texas Nonprofits by County (2003)

Dallas

Tarrant

Harris

Travis

Bexar

All Others

Source: National Center for Charitable Statistics, Urban InstituteDoesn’t include most religious congregations.

Registered Nonprofits by IRS Ruling Date Since 1950s

1950s1960s

1970s1980s

1990s

0

5000

10000

15000

20000

25000

Source: National Center for Charitable Statistics, Urban InstituteDoesn’t include most religious congregations.

Formation – TexasConsiderations

• Speed of establishing• Concerns with limited

liability• Sophistication & goals of

organizers• Financial resources of

organizers• Type & scale of activities

to be conducted

• Capacity to sue & be sued

• Capacity to contract• Permanence• Ease of dissolution/

amendment• Governance• Tax considerations• Duties of directors• Federal tax

considerations

501(c)(3) StatusIRS recognizes 3 organizational forms

for tax-exempt organizations

• Nonprofit unincorporated association– Typically a default

• Nonprofit Corporation– Most common

• Charitable Trust (covered in T&E)– Oldest form (Statute of Uses – 1601)

Nonprofit Unincorporated Associations

PRO’sRelatively easy to

establishFlexible/informalTexas Uniform

Unincorporated Nonprofit Association Act

CON’s Few established rules Case-law not well-

established Difficulty with

charitable immunity Potential issues with

lenders

Nonprofit Unincorporated Associations

Unincorporated association, other than one created by a trust, consisting of three or more members joined by mutual consent for a common, nonprofit purpose

Governed by the Texas Uniform Unincorporated Nonprofit Association Act (since 1995) (1396-70.01)

Separate legal entity

Formation not governed by statute (usually have Constitution, Articles of Association, or Bylaws)

Powers: Promote aims and purposes and advance members’ interests by all legitimate and legal means (not necessarily charitable, e.g. trade association, unions)

Nonprofit Unincorporated Associations

Rights

• Sue or be sued

• Sue or be sued by a member

• Acquire, hold, encumber, transfer real or personal property without the need for trustees (requires filing a statement of authority in the county clerk’s office)

• Be a beneficiary of a trust, contract, will, life insurance

• Can apply for 501(c)(3) status

• Can apply for property tax exemption

Nonprofit Unincorporated Associations

Dissolution

o If inactive for 3+ years (or shorter if spelled out in governing documents), property to be transferred according to associational rules or to a similar nonprofit

o If seeking 501(c)(3) confirmation, property must be pledged to charitable purposes such that upon dissolution assets will pass to another qualified entity

o If seeking ad valorem exemption, must pledge assets for charitable use and have a dissolution clause in governing documents (same as 501(c)(3) rules)

o For charitable immunity must pledge assets for charitable purposes and have dissolution clause (same as 501(c)(3) rules)

o Chapter 126 of CPRC governs receivership for local religious congregation if the above aren’t accomplished

Nonprofit Corporations

PRO’s Well-established rules Well-established case-

law Internally flexible Extensive powers as an

entity

CON’s Cost to set up & run Rules to follow Giving up religious

freedom??? Even where funded

entirely by a single individual, must have at least three directors (IRS will request non-related)

Subject to Texas franchise tax unless granted exemption

Nonprofit Corporations

A corporation whose income may not be distributed to its members, directors, or officers in the form of dividends or otherwise (note: salaries paid must be reasonable)

May be organized for any lawful purpose (certain prohibited purposes: 1396-2.01(B))

Governed in Texas by the Texas Non-profit Corporation Act

Note: While purposes are broad, care should be taken if later applying for 501(c)(3) recognition (in which case must be organized exclusively for charitable, educational or religious purposes)

Nonprofit Corporations

Rights/Powers

Perpetual existenceSue and be sued in the corporate namePurchase, lease, own (sell, convey, donate)

property in the corporate nameLend money (prohibition to directors)ContractMake donations for public welfareFor other powers see 1396-2.02

Nonprofit CorporationsEstablishing a Texas Nonprofit Corporation

• Choose a name (note: certain restrictions, 1396-2.04)

• Draft & adopt Articles of Incorporation (will control over bylaws to extent of a conflict)

• Submit AoI to Secretary of State with $25 filing fee ($50 for expedited service)

• File an assumed name certificate if applicable

• Meet to adopt bylaws, appoint directors & officers, establish bank accounts, etc. (practically done by using a Unanimous Consent in Lieu of Organizational Meeting)

• File Form SS-4 with IRS to obtain a federal tax ID number if paying any wages

• If applicable, write state comptroller to request exemption from franchise tax (e.g., Nonprofit corporation organized for religious purposes exempted – Tax Code s 171.058)

• If applicable, write chief appraiser to apply for property tax exemption (e.g., place of religious worship exempt – Tax Code s 11.20)

• If applicable, transfer real property by deed and personal property by bill of sale

• If applicable, change all existing contracts and accounts to reflect the new corporate name (e.g. lease agreements, employment contracts and contracts for services and utilities)

Nonprofit CorporationsArticles of Incorporation

1. Name of corporation2. Statement of nonprofit purpose3. Period of duration4. Purpose or purposes (take care if applying for tax exemption)5. If the corporation is to have no members, a statement to that effect6. If management is to be vested in the members (e.g. a congregational church), a statement to that effect7. Any other provision not inconsistent with law8. Street address of the registered office9. Name of the registered agent10. Number of directors constituting the initital board with names and addresses11. Name and address of each incorporator12. Dissolution clause

Issuance of a Certificate of Incorporation begins the corporate existence and is conclusive evidence that conditions precedent have been met (except in suit by AG for involuntary dissolution)

Additional Provisions (as applicable)1. Language providing for indemnification of directors to extent permitted by law2. Additional language helpful with federal tax exemption3. Provision governing amendments (to change votes, etc.)

Nonprofit CorporationsAmending/Restating Articles

• Adopt a resolution approving proposed amendments (board or members)

• Prepare and file Articles of Amendment ($25)

• If the amendments are extensive, or if for some other reason the corporation desires to do so, may file Restated Articles of Incorporation (restate AoI in entirety – still file AoA)

Nonprofit CorporationsMerger/Consolidation

• Each corporation must adopt a Plan of Merger or Plan of Consolidation (members or board)

• File Articles of Merger or Consolidation ($50)

• In the case of a merger, one corporation designated as surviving corporation

• In the case of consolidation, the two corporations become a new corporation

• Separate existence of the various corporations cease

• The surviving corporation (merger) or new corporation (consolidation) has all rights, etc. of each merging or consolidating corporation and be responsible for all the liabilities and obligations of the merging or consolidating corporation

Nonprofit CorporationsDissolution

Voluntary Vote to adopt resolution to

dissolve (board or members) Cease to conduct affairs except to

winding up Mail notice of proposed dissolution

to each known creditor or claimant Adopt a Plan of Distribution Pay liabilities and obligations Return assets held with a

condition (e.g. fee simple determinable or right of reverter)

Distribute remaining assets for tax-exempt purposes

File Articles of Dissolution with SoS ($5)

Limited survival for three years

Involuntary Judicial decree Attorney General Secretary of State Limited survival for three years

May apply for reinstatement depending on reason for dissolution

Court may appoint receiver over assets

Nonprofit CorporationsDissolution Clause

• AoI“Upon the dissolution of the Corporation, the Corporation shall, after paying or making provision for the payment of all the liabilities of the Corporation, distribute all of the assets of the Corporation to <name a tax-exempt org.> or to another organization that is a qualified charitable organization under Section 501(c)(3) of the Internal Revenue Code of 1986, as amended, or corresponding section of any future federal code, which will be determined by action of the Corporation and shall require at least two-thirds (2/3) of the vote of <members or board members> present at a meeting at which a quorum is present, which is duly called and held in accordance with the Corporation’s adopted procedures.”

• Bylaws“This Corporation is organized and operated primarily for the purpose of engaging in <insert charitable, religious or educational purpose>. It is to be operated in a way that does not result in the accrual of distributable profits, realization of private gain resulting from payment of compensation in excess of a reasonable allowance for salary or other compensation for services rendered, or realization of any other form of private gain. The Corporation pledges its assets for use in performing its <charitable, religious, or educational> functions. It directs that on discontinuance of the Corporation by dissolution or otherwise, its assets are to be transferred to a charitable, religious, educational or other similar organization that is qualified as a charitable organization under Section 501(c)(3) of the Internal Revenue Code of 1986, as amended.

Next Week

• Read pages indicated on webpage covering governance (www.bwwlaw.com/baylor)