Starting a Nonprofit Organization

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This hour long webcast will discuss the legal and practical considerations when forming a nonprofit 501(c)(3) organization. Topics will include: state and federal requirements, governance, bylaws, articles of incorporation, IRS Form 1023, charitable registration and annual compliance, board minutes and resolutions, and insurance. The webcast will also touch on the concept of fiscal sponsorship. Participants will gain an understanding of the mechanics of starting a nonprofit organization and the key elements needed to obtain Federal tax-exempt 501(c)(3) status.

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Starting a Nonprofit Organization

  1. 1. Starting a Nonprofit Organization Daniel A. Hershey August 15, 2012A Service Of: Sponsored by:
  2. 2. INTEGRATED PLANNING Advising nonprofits in: www.synthesispartnership.com • Strategy • Planning (617) 969-1881 • Organizational Development info@synthesispartnership.comA Service Of: Sponsored by:
  3. 3. www.mission.doA Service Of: Sponsored by:
  4. 4. Today’s Speaker Daniel A. Hershey Executive Director Hurwit & Associates Hosting:Assisting with chat questions:Jamie Maloney, Nonprofit Webinars Sam Frank, Synthesis PartnershipA Service Of: Sponsored by:
  5. 5. Starting a Nonprofit Organization Dan Hershey dhershey@hurwitassociates.com (617) 630-6900Copyright © 2012 Hurwit & Associates. All Rights Reserved. 5
  6. 6. Starting a Nonprofit Organization Outline of Topics 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 ShieldCopyright © 2012 Hurwit & Associates. All Rights Reserved. 6
  7. 7. Starting a Nonprofit Organization 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. ResourcesCopyright © 2012 Hurwit & Associates. All Rights Reserved. 7
  8. 8. Starting a Nonprofit Organization 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 ResourcesCopyright © 2012 Hurwit & Associates. All Rights Reserved. 8
  9. 9. Starting a Nonprofit Organization 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 bylawsCopyright © 2012 Hurwit & Associates. All Rights Reserved. 9
  10. 10. Starting a Nonprofit Organization 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?Copyright © 2012 Hurwit & Associates. All Rights Reserved. 10
  11. 11. Starting a Nonprofit Organization Tax-Exempt Organization Reference Chart Internal Revenue Code Section: 501(c)(2) Title 501(c)(3) Organizations: Charitable, Educational, 501(c)(4) Civic 501(c)(5) Labor 501(c)(6) Prof. Holding Religious, Scientific Organizations Agricultural Business Corporations Organizations Organizations 501(c)(7) Social Clubs 501(c)(8) Fraternal Assoc. Public Private Private 501(c)(9) VEBA’s Charities Operating Foundations ..…501(c)(25) Title Corps. Foundations 509(a)(1) Public 509(a)(2) Public 509(a)(3) Public Charities – Gifts, Charities – Gross Charities – Grants and Receipts, Supporting Contributions Earned Revenues Organizations Type I Supporting Organizations: Type II Supporting Organizations: Type III Supporting Organizations: “Subsidiary” of supported Legally connected to supported Operates independently of supported organization (majority of board organization (by board overlap, other organization appointed by supported organization) formal organizational ties) Functionally Integrated: Supporting Non-Functionally Integrated: organization is an integral part of, Supporting organization provides,Copyright © 2012 Hurwit & Associates. All Rights Reserved. carries out important functions of, is funds, grants to supported 11 responsive to supported organization organization
  12. 12. Starting a Nonprofit Organization 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 rightsCopyright © 2012 Hurwit & Associates. All Rights Reserved. 12
  13. 13. Starting a Nonprofit Organization 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 strategizingCopyright © 2012 Hurwit & Associates. All Rights Reserved. 13
  14. 14. Starting a Nonprofit Organization Traditional Nonprofit Organizational Structure Board of Directors Fundraising Budget and Nominating Other: Ad Hoc or Committee Finance Committee Program Committee Committees -CEO- Executive Director (or President) -COO- Asst. Director -COO- Asst. Director Asst. Director -CFO- Asst. Director Planning/ Asst. Director Human Development Asst. Director Operations Marketing PR/Community Resources (or Vice Finance (or Vice (or Vice Affairs (or Vice President) (or Vice President) President) (or Vice President) President) President)Copyright © 2012 Hurwit & Associates. All Rights Reserved. 14
  15. 15. Starting a Nonprofit Organization 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 organizationCopyright © 2012 Hurwit & Associates. All Rights Reserved. 15
  16. 16. Starting a Nonprofit 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 corporations qualification as an organization described in Section 501(c)(3) of the Internal Revenue Code.Copyright © 2012 Hurwit & Associates. All Rights Reserved. 16
  17. 17. Starting a Nonprofit Organization 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)Copyright © 2012 Hurwit & Associates. All Rights Reserved. 17
  18. 18. Starting a Nonprofit Organization 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 membershipCopyright © 2012 Hurwit & Associates. All Rights Reserved. 18
  19. 19. Starting a Nonprofit Organization Methods of Appointment to Nonprofit Boards Election: Election: Board of Directors By voting membership, By Board of Directors or Trustees constituents, or through nominating community base committee (self-perp.) Ex Officio Appointment: Appointment: Public officials and By Trust or Will others who serve by virtue of their positionCopyright © 2012 Hurwit & Associates. All Rights Reserved. 19
  20. 20. Starting a Nonprofit Organization 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)Copyright © 2012 Hurwit & Associates. All Rights Reserved. 20
  21. 21. Starting a Nonprofit Organization 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)Copyright © 2012 Hurwit & Associates. All Rights Reserved. 21
  22. 22. Starting a Nonprofit Organization 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)Copyright © 2012 Hurwit & Associates. All Rights Reserved. 22
  23. 23. Starting a Nonprofit Organization 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 activitiesCopyright © 2012 Hurwit & Associates. All Rights Reserved. 23
  24. 24. Starting a Nonprofit Organization 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.Copyright © 2012 Hurwit & Associates. All Rights Reserved. 24
  25. 25. Starting a Nonprofit Organization Application for Recognition of Exemption (continued) • 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 involvedCopyright © 2012 Hurwit & Associates. All Rights Reserved. 25
  26. 26. Starting a Nonprofit Organization Application for Recognition of Exemption (continued) • 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. ReligiousCopyright © 2012 Hurwit & Associates. All Rights Reserved. 26
  27. 27. Starting a Nonprofit Organization Application for Recognition of Exemption (continued) • 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, protectionCopyright © 2012 Hurwit & Associates. All Rights Reserved. 27
  28. 28. Starting a Nonprofit Organization Application for Recognition of Exemption (continued) • 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)Copyright © 2012 Hurwit & Associates. All Rights Reserved. 28
  29. 29. Starting a Nonprofit Organization Application for Recognition of Exemption (continued) • 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)Copyright © 2012 Hurwit & Associates. All Rights Reserved. 29
  30. 30. Starting a Nonprofit Organization 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 stateCopyright © 2012 Hurwit & Associates. All Rights Reserved. 30
  31. 31. Starting a Nonprofit Organization 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 stateCopyright © 2012 Hurwit & Associates. All Rights Reserved. 31
  32. 32. Starting a Nonprofit Organization State Level Filings & Compliance (continued) • 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 attorneyCopyright © 2012 Hurwit & Associates. All Rights Reserved. 32
  33. 33. Starting a Nonprofit Organization State Level Filings & Compliance (continued) • 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)Copyright © 2012 Hurwit & Associates. All Rights Reserved. 33
  34. 34. Starting a Nonprofit Organization 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 bookCopyright © 2012 Hurwit & Associates. All Rights Reserved. 34
  35. 35. Starting a Nonprofit Organization 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)Copyright © 2012 Hurwit & Associates. All Rights Reserved. 35
  36. 36. Starting a Nonprofit Organization 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/SecretaryCopyright © 2012 Hurwit & Associates. All Rights Reserved. 36
  37. 37. Starting a Nonprofit Organization 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 attorneyCopyright © 2012 Hurwit & Associates. All Rights Reserved. 37
  38. 38. Starting a Nonprofit Organization 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)Copyright © 2012 Hurwit & Associates. All Rights Reserved. 38
  39. 39. Starting a Nonprofit Organization 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 PoliciesCopyright © 2012 Hurwit & Associates. All Rights Reserved. 39
  40. 40. Starting a Nonprofit Organization 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.orgCopyright © 2012 Hurwit & Associates. All Rights Reserved. 40
  41. 41. Thank you! Dan Hershey dhershey@hurwitassociates.com (617) 630-6900Copyright © 2012 Hurwit & Associates. All Rights Reserved. 41
  42. 42. Find listings for our current season of webinars and register at: NonprofitWebinars.comA Service Of: Sponsored by:

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