Becoming a 501(c)(3) NonProfit
Pros and Cons – Benefits and Cautions

October 24, 2012
Miriam Robeson, Attorney
www.lawlat...
Program Summary
Today’s topics

What is a nonprofit?
Should your organization be a §501(c)(3)?
How do you become a §501...
What is a NonProfit?
(In 15 words or less)

A NonProfit organization
is a corporation
organized and operated
exclusively f...
Types of NonProfits
Defined by the IRS, Nonprofits fall two categories:

Tax Exempt: The organization does not
have to pay...
Both are “NonProfits,” but...

There are 28 (Other)
501(c)
categories of
Vs.
§501(c)
Does not pay income tax nonprofits In...
Under 501(c)(3
Only §501(c)(3) organization are BOTH
Tax Exempt AND Tax Deductible:
o
o
o
o
o
o
o
o

Charitable
Religious
...
Under 501(c)(3)
What if my organization is not listed?

Generally, if your organization does not fit the tax exempt
defini...
Who should be a 501(c)(3)?
You should consider §501(c)(3) status if you...

Have a charitable purpose (see earlier defini...
Who should be a 501(c)(other)?
Tax Exempt, but NOT Tax Deductible

If you are organized for a business purpose
If your p...
Why is NonProfit Status
a “good thing” for my organization?

You can apply for/receive public grant funds
Donations are ...
Why NOT be a IRS NonProfit?
Official Tax Exempt status is not for everyone.

If you are a small organization, the process...
Rules of the Road for NonProfits
What NonProfits can and cannot do –

NonProfits CAN:
Solicit donations from individuals...
Time for a Break!
How do you become a NonProfit?
1. Philosophical Step
▪ Determine your purpose – what do
you wish to accomplish as a
NonPro...
How do you become a NonProfit?
2. The Mechanics
The Details of Incorporation and
Application for Tax Exempt Status

This i...
Corporate Formalities
What Does the Government Want to See?
Corporate Formalities
Minimum Required Documents for Tax Exempt Status:

Articles of Incorporation - Indiana
Tax ID numb...
Guided Questions
Choosing structure for your corporation

Will you have members?

How will you fund your mission?
Grant...
Corporate Formalities
It’s all in the appearances – Typical Corporate Structure
Board of Directors
Minimum = 3 / Preferr...
Yes, but,
What does it COST to become a
NonProfit?
Incorporation Fees: $30 to IN Sec. of State
IRS Tax Exempt Applicatio...
Okay, I’ve applied for Tax Exempt
Status – Now what?

Wait for 3-9 months to hear from IRS
May need to provide more info...
Congratulations –
You’re Tax Exempt!
Good news from the IRS

Act like a Corporation
Regular Meetings, minutes, Board of
...
A Word About Meetings
Minimum Requirements for Good Meetings

 Agenda
 Financial Report
 Current, accurate, understanda...
Congratulations –
You’re Tax Exempt!
Good news from the IRS
To retain Tax Exempt Status, you must
continue with governmen...
Now you have NonProfit Status –
How do you keep it?
Pitfalls for NonProfits – word to the wise

Sales/Use Tax – You are e...
Financial 990
IRS Tax Return
To Verify Nonprofit Activities

Purpose - to give the IRS more information to verify the “tr...
Sample IRS 990-N
For Nonprofits Earning < $50,000 per year
Protecting Nonprofit Status
Ethics and Conduct – What NOT to do

 Improper donor acknowledgements
 Donations of time are...
A Word About Ethics
Nonprofit Corporations have the Public Trust

Ethical conduct of Board and Staff is essential!
No co...
Charitable Donations

 Watch the Rules regarding charitable donations!
 What can be considered a donation?
 What paperw...
Is it worth it?

Weigh the costs and benefits
Talk to an attorney
Talk to your organization – what do
your members want...
A word about Charity Gaming
BINGO and Raffles in the State of Indiana
Rule #1 – Gaming is illegal in Indiana
Rule #2 – L...
Where to find information
Smart Stops on the Web

Handout – Top 10 Internet Links for Nonprofits
Any questions?

Thank you for
your kind
attention
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Non profit basics 2012

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Non profit basics 2012

  1. 1. Becoming a 501(c)(3) NonProfit Pros and Cons – Benefits and Cautions October 24, 2012 Miriam Robeson, Attorney www.lawlatte.com © 2012 Miriam E. Robeson
  2. 2. Program Summary Today’s topics What is a nonprofit? Should your organization be a §501(c)(3)? How do you become a §501(c)(3)? How do you keep nonprofit status? Frequently asked questions about nonprofits Tips to get you started
  3. 3. What is a NonProfit? (In 15 words or less) A NonProfit organization is a corporation organized and operated exclusively for the public good
  4. 4. Types of NonProfits Defined by the IRS, Nonprofits fall two categories: Tax Exempt: The organization does not have to pay income tax on money earned or received through donations, activities, and grants. Tax Deductible: Contributions made to the organization are deductible on the donor’s income tax return. Note: You can be Tax Exempt and NOT Tax Deductible, but you cannot be Tax Deductible without being Tax Exempt.
  5. 5. Both are “NonProfits,” but... There are 28 (Other) 501(c) categories of Vs. §501(c) Does not pay income tax nonprofits Income Tax Does not pay 501(c)(3) Contributions Deducible to Donor Contributions NOT Deductible Qualifies for Grants Usually NOT qualified for grants only 1 is 501(c)(3)
  6. 6. Under 501(c)(3 Only §501(c)(3) organization are BOTH Tax Exempt AND Tax Deductible: o o o o o o o o Charitable Religious Schools/Education Science Literature Testing for Public Safety Fostering Amateur Sports Competition Prevention of Cruelty to Animals and Children
  7. 7. Under 501(c)(3) What if my organization is not listed? Generally, if your organization does not fit the tax exempt definition, it can be a nonprofit, but not a tax exempt nonprofit: Example: Arts organizations are NOT specifically listed as eligible for tax exempt status. However, all is not lost!  An arts group (or other nonprofit group that does not fit the “definition”) can become nonprofit by electing one of the OTHER nonprofit types: Education, Charitable, etc.
  8. 8. Who should be a 501(c)(3)? You should consider §501(c)(3) status if you... Have a charitable purpose (see earlier definition) Handle money (more than simply “dues”) Receive more then $5,000 per year Apply for grant funds (local, state, national) Are part of a state/national organization (more on this, later) Give money away (scholarships, etc.) Are (or wish to be) publically supported (that is, receive money from general public) Handout: Nonprofit Basics FAQs
  9. 9. Who should be a 501(c)(other)? Tax Exempt, but NOT Tax Deductible If you are organized for a business purpose If your primary purpose is not “charitable” If you take in money, and are organized for one of the purposes above. If you have a political purpose Handout - IRS Organizational Reference Chart
  10. 10. Why is NonProfit Status a “good thing” for my organization? You can apply for/receive public grant funds Donations are tax-deductible (for §501(c)(3) only) Your income may be exempt from tax Purchases may be exempt from sales tax Representation of Goals in the Community Financial Planning and Fund Raising Affiliation with other non profits (including state or national organizations) Credibility, Continuity and Longevity
  11. 11. Why NOT be a IRS NonProfit? Official Tax Exempt status is not for everyone. If you are a small organization, the process may be more than you want to attempt ($$$, time, paperwork) If you can use another organization as a money conduit, (to apply for grants, award scholarships, etc.) If you are part of a larger organization, you may be under its tax exempt umbrella If you have a political agenda as the primary purpose of your organization (political action cannot be 501(c)(3)) If you have < $5,000 per year annual income, or are a church, you do not have to have Tax Exempt Status to be a NonProfit (but you should consider it, anyway)
  12. 12. Rules of the Road for NonProfits What NonProfits can and cannot do – NonProfits CAN: Solicit donations from individuals and corporations (which may or may not be tax-deductible) Pursue recognition of their cause and accomplishment of their purpose in the community NonProfits CANNOT: Lobby for political change or legislation Engage in a “business” for profit Give money to members (“inure to benefit of...”)
  13. 13. Time for a Break!
  14. 14. How do you become a NonProfit? 1. Philosophical Step ▪ Determine your purpose – what do you wish to accomplish as a NonProfit? Handout: 7 Tips for Starting a Nonprofit
  15. 15. How do you become a NonProfit? 2. The Mechanics The Details of Incorporation and Application for Tax Exempt Status This is how you “get -er- done”
  16. 16. Corporate Formalities What Does the Government Want to See?
  17. 17. Corporate Formalities Minimum Required Documents for Tax Exempt Status: Articles of Incorporation - Indiana Tax ID number - from IRS Statement of purpose Bylaws/Governing Document Conflict of Interest Policy Officers/Board of Directors Budget (3 year prior or 2 years future) IRS Form 1023 - Tax Exempt Application
  18. 18. Guided Questions Choosing structure for your corporation Will you have members? How will you fund your mission? Grants, Donations, Activities, Service Fees Who will lead the organization? Board of Directors (Required) Executive Director Handout: IRS Required Language
  19. 19. Corporate Formalities It’s all in the appearances – Typical Corporate Structure Board of Directors Minimum = 3 / Preferred = 5 Officers – President Vice President Secretary Treasurer Functional Committees Handout: Nonprofit Sample Bylaws
  20. 20. Yes, but, What does it COST to become a NonProfit? Incorporation Fees: $30 to IN Sec. of State IRS Tax Exempt Application User Fee: $400 for average annual income < $10,000 $850 for average annual income > $10,000 Attorneys’ fees: Variable, depending upon time involved and complexity of your situation. Expect to pay $1,000 $3,000. Handout: IRS 1023 Application for Tax Exempt Status
  21. 21. Okay, I’ve applied for Tax Exempt Status – Now what? Wait for 3-9 months to hear from IRS May need to provide more information Receive “Determination Letter” (aka “magic letter”) Handout: IRS Top 10 reasons for delays in Exempt Applications
  22. 22. Congratulations – You’re Tax Exempt! Good news from the IRS Act like a Corporation Regular Meetings, minutes, Board of Directors Financial Reports, Government Reports Regular qualified or professional review of financial information
  23. 23. A Word About Meetings Minimum Requirements for Good Meetings  Agenda  Financial Report  Current, accurate, understandable  Minutes  Attendance, Votes taken (motion and second), note “nays” and abstentions, Document resolutions, Signed by officers, approved at meetings.
  24. 24. Congratulations – You’re Tax Exempt! Good news from the IRS To retain Tax Exempt Status, you must continue with government requirements... Annual Tax Returns Indiana NP-20 every year IRS 990EZ or 990 every year If annual income > $50,000 IRS 990N every year if annual income < $50,000 Handout: IN NP20A – Sales Tax Exempt Application
  25. 25. Now you have NonProfit Status – How do you keep it? Pitfalls for NonProfits – word to the wise Sales/Use Tax – You are exempt BUT you have to file the proper forms with State (NP-20A) Property Tax – You are (mostly) exempt BUT you have to file the proper forms with County Gaming – Yes, you can play BINGO – BUT Indiana has complicated gaming laws! Filing Requirements – keep all state and federal forms current!
  26. 26. Financial 990 IRS Tax Return To Verify Nonprofit Activities Purpose - to give the IRS more information to verify the “true” nonprofit activities of nonprofits More detail required for – Officers, Directors, Highest compensated staff Governance structure, policies, management practices Public support, fund raising, gaming activities More emphasis on determination of Public charity - public support status
  27. 27. Sample IRS 990-N For Nonprofits Earning < $50,000 per year
  28. 28. Protecting Nonprofit Status Ethics and Conduct – What NOT to do  Improper donor acknowledgements  Donations of time are not tax-deductible  Donor “influence-buying”  Improper arrangements with donors  Failing to include both spouses in joint gift paperwork  Staff/ED/Board/Volunteer accepting gifts from donors  Personal Benefit from Nonprofit Work
  29. 29. A Word About Ethics Nonprofit Corporations have the Public Trust Ethical conduct of Board and Staff is essential! No conflict of interest -- No self-dealing -- Volunteer Board (but you can have paid staff that report to the Board) Three areas Nonprofits Fail Ethics Issues Failure to watch the money Failure to watch the staff (and each other) Failure to watch conflicts of interest
  30. 30. Charitable Donations  Watch the Rules regarding charitable donations!  What can be considered a donation?  What paperwork is required?  NOTE – donations of TIME and EXPERTISE are NOT deductible! Handout: Top 10 Rules for Charitable Donations
  31. 31. Is it worth it? Weigh the costs and benefits Talk to an attorney Talk to your organization – what do your members want?
  32. 32. A word about Charity Gaming BINGO and Raffles in the State of Indiana Rule #1 – Gaming is illegal in Indiana Rule #2 – Licensed charity gaming is legal Rule #3 – Failure to follow the rules can cost you! (See Rule #1) Fines up to $5,000 per violation Must be a §501(c)(3) for three years to qualify Handout: 7 Rules of Charity Gaming
  33. 33. Where to find information Smart Stops on the Web Handout – Top 10 Internet Links for Nonprofits
  34. 34. Any questions? Thank you for your kind attention

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