Starting a Nonprofit Organization

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Starting a Nonprofit Organization

Daniel A. Hershey

August 15, 2012


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Advising nonprofits in:

• Strategy

• Planning

• Organizational Development

www.synthesispartnership.com

(617) 969-1881

[email protected]

INTEGRATED PLANNING


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Today’s Speaker

Daniel A. Hershey Executive Director

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Dan Hershey

[email protected]

(617) 630-6900


Outline of Topics

Copyright © 2012 Hurwit & Associates. All Rights Reserved. 6

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


501(c)(3) Organizations: Charitable, Educational, Religious, Scientific

509(a)(1) Public

Charities – Gifts,

Grants and

Contributions

509(a)(2) Public

Charities – Gross

Receipts,

Earned Revenues

509(a)(3) Public

Charities –

Supporting

Organizations

Public

Charities

Private

Operating

Foundations

Private

Foundations

Type I Supporting Organizations:

“Subsidiary” of supported

organization (majority of board

appointed by supported organization)

Type III Supporting Organizations:

Operates independently of supported

organization

Type II Supporting Organizations:

Legally connected to supported

organization (by board overlap, other

formal organizational ties)

Functionally Integrated: Supporting

organization is an integral part of,

carries out important functions of, is

responsive to supported organization

Non-Functionally Integrated:

Supporting organization provides,

funds, grants to supported

organization

501(c)(2) Title

Holding

Corporations

501(c)(4) Civic

Organizations

501(c)(5) Labor

Agricultural

Organizations

501(c)(6) Prof.

Business

Organizations

501(c)(7) Social Clubs

501(c)(8) Fraternal Assoc.

501(c)(9) VEBA’s

..…501(c)(25) Title Corps.

Internal Revenue Code Section:


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 Committee

Budget and

Finance

Committee

Nominating Committee

Other: Ad Hoc or

Program Committees

-CEO-

Executive Director

(or President)

Asst. Director

Development

(or Vice

President)

-CFO-

Asst. Director

Finance

(or Vice

President)

-COO-

Asst. Director

Operations

(or Vice

President)

Asst. Director

Planning/

Marketing

(or Vice

President)

-COO-

Asst. Director

PR/Community

Affairs

(or Vice

President)

Asst. Director

Human

Resources

(or Vice

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


Ex Officio Appointment:

Public officials and

others who serve by

virtue of their position

Board of Directors

or Trustees

Election:

By voting membership,

constituents, or community base

Election:

By Board of Directors

through nominating

committee (self-perp.)

Appointment:

By Trust or Will


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

http://www.hurwitassociates.com/


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

requirements in your state





• 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

requirements in your state – If in doubt, contact appropriate state office (DOR,

Attorney General, Secretary of State)

http://www.irs.gov/charities



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

http://www.nonprofitrisk.org/

http://www.insuranceformynonprofit.org/


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)

http://foundationcenter.org/getstarted/faqs/html/fiscal_agent.html

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

http://www.irs.gov/charities

http://www.stayexempt.org/


http://www.boardsource.org/

http://www.foundationcenter.org/

http://www.nonprofitrisk.org/

http://www.compasspoint.org/

http://www.tides.org/

http://www.councilofnonprofits.org/

http://www.afpnet.org/

http://www.independentsector.org/


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