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.
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.
What is a NonProfit?
(In 15 words or less)
A NonProfit organization
is a corporation
organized and operated
exclusively for the public good

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.
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.
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.
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.
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.
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.
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.
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.
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.
Time for a Break!

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.
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.
Corporate Formalities
What Does the Government Want to See?

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.
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.
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.
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.
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.
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.
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.
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.
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.
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.
Sample IRS 990-N
For Nonprofits Earning < $50,000 per year

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.
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.
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.
Is it worth it?
Weigh the costs and benefits
Talk to an attorney
Talk to your organization – what do
your members want?

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.
Where to find information
Smart Stops on the Web
Handout – Top 10 Internet Links for Nonprofits

34.
Any questions?
Thank you for
your kind
attention