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2019.10.03-Nonprofit-Basics.pptx
- 2. What is a nonprofit? • Nonstock corporation • Provides for dedication of assets to nonprofit purpose (MGL Ch. 180, Sec. 4) • Benefits cannot be to private individuals 2
- 3. Nonprofit vs. Benefit Corporation • Not the same as a nonprofit • For profit corporation that allows some of profits to go to a “benefit” purpose • Some states require benefit reports • Not tax-exempt 3
- 4. Lifecycle of a Massachusetts Nonprofit • Formation • Form an entity • Register with Massachusetts Attorney General • File with IRS for Tax Exempt Status • Governance • Adoption of appropriate policies • Maintenance of registration • Employment • Compensation • Volunteers • Dissolution 4
- 5. Articles of Organization • Name • Purpose • Address • Fiscal year end • Officers • Directors 5 File Online https://www.sec.state.ma.us/cor/corpweb/cornp/npfrm.htm
- 6. Directors • Must have at least one • What talent sets do you need? • Interrelationships an issue 6
- 7. Formation Documents • Bylaws • Sole Incorporator Consent • Directors Consent • Policies to minimize risk of abuse and nonexempt activities • Conflict of Interest and policy acknowledgement • Whistleblower • Travel/Expense • Gift Acceptance 7
- 8. Tax Exempt Status • Tax-exempt status exempts a nonprofit from paying corporate income tax on income generated from activities that are substantially related to the purposes for which the group was organized. • Nonprofits are not automatically exempt (for federal OR state tax) • Not all are 501(c)(3) • (c)(4): civic leagues • (c)(6): business leagues, chambers of commerce • (c)(7): social and recreational clubs • (c)(8): fraternal organizations 8
- 9. 501(c)(3) 501(c)(3) organizations fall into one of three primary categories: • Public charities: Designed to directly benefit the public • Activities are restricted to the charitable purpose • Have active program of fundraising and receive contributions from many sources • Cannot be closely held • Private foundations: Designed for the purpose of financially supporting other public charities • Receives donations from limited number of sources • Can be closely held • Excise tax • Private operating foundations: Hybrid (rare). Must directly benefit public • Can be closely held • Can have funding from a limited number of sources 9
- 10. How to file with the IRS • EIN • File 1023 or 1023-EZ with IRS 10
- 11. EIN • https://www.irs.gov/businesses/small-businesses-self- employed/apply-for-an-employer-identification-number-ein-online • Select “Begin Application” • Then select kind of organization applying for • Select if Individual or existing business is applying • Fill in the name, address, and other details • Will automatically log out if inactive • Must complete it in one sitting • Get an EIN immediately online upon completion of the application 11
- 12. 1023 or 1023-EZ • Recognition of 501(c)(3) tax-exempt status 12
- 13. 13 13
- 14. 1023 or 1023-EZ 1023 1023-EZ Complex Simple Up to 6 months to process Up to 3 months to process IRS checks compliance with 501(c)(3) Company must make sure compliant with 501(c)(3) No donation issues Certain foundations have policies stating they will not accept grant applications if company used 1023-EZ Important to work with nonprofit accountant for preparation of 1023 Possible to complete 1023-EZ without help from nonprofit accountant 14
- 15. Form 1023 Resources • Massachusetts Society of CPAs • Massachusetts Nonprofit Network 15
- 18. Solicitation for Donations • Each state has different requirements for soliciting donations from state residents • In Massachusetts, nonprofit must first obtain a Certificate of Solicitation from MA Attorney General (Submit Form PC to get Cert or just A-2 if before Form PC due) • Exception for < $5k annual contributions • Once nonprofit obtains 501(c)(3) status, donations become tax deductible for donors (retroactive effect back 27 months). • Be clear in Solicitation Letter 18
- 19. Maintenance of Registration • Annual report (MA) • Filed by November 1 • Publicly available • Annual Form PC (MA) • Filed 4.5 months after close of fiscal year • Publicly available • Form 990/990-EZ(IRS) • Filed 4.5 months after close of fiscal year 19
- 20. Overall Cost One Time Fees Annual Fees Articles of Organization: $35 Annual Report: $15.00 Form 1023/1023-EZ: $600/$275 Form 990: $0-$190 Massachusetts Registration: $100 Form PC: $35-$2,000 Accountants? Accountants? 20
- 21. Employment Executive director payment • Independent Review • No more than “fair and reasonable” compensation for services rendered to the organization • Conflict of Interest policy • Pay at similarly situated organizations • Experience, education, other qualities 21 • Reporting • Form PC (MA Attorney General) • IRS Form 990 (Federal) • W-2 (Federal) • I-9 (Federal)
- 22. Volunteers • Non Profit organizations may utilize volunteers, but don’t assume everyone working for non profit counts as volunteer • Non Profit Policies • Volunteer Agreement • Conduct Policies 22
- 23. Dissolution https://www.mass.gov/guides/dissolving-a-charity • Where does the money go? 1. Articles 2. Any charitable purpose • Process • Court petition required, possible Attorney General involvement • Revocation for not filing a report for two years 23
- 24. Questions? • For more information please visit the Start Up Law Clinic’s website: https://sites.bu.edu/startuplaw/ • Eligibility: BU and MIT students 24
Editor's Notes
- MGL Ch. 180, Sec. 4: A corporation may be formed for any one or more of the following purposes: (a) for any civic, educational, charitable, benevolent or religious purpose; (b) for the prosecution of any antiquarian, historical, literary, scientific, medical, chiropractic, artistic, monumental or musical purpose; (c) for establishing and maintaining libraries; (d) for supporting any missionary enterprise having for its object the dissemination of religious or educational instruction in foreign countries; … (several subsections follow with very specific reasons for non-profits)
- DE Benefit Corporation: Unlike traditional corporations, a PBC must consider its conduct in addition to stockholder value. Every two years a PBC must report to its stockholders on how it is pursuing its public benefit purpose and the best interests of those materially affected by the corporation’s conduct. MA Benefit Corporation: The directors of a benefit corporation are required to consider the effects of their corporate decision-making on the following: The shareholders of the benefit corporation; The employees and workforce of the benefit corporation; The interest of clients; Community and societal factors, including those of each community in which offices or facilities of the benefit corporation are located; The local, regional and global environment; The short-term and long-term interests of the benefit corporation; and The ability of the benefit corporation to accomplish its general and specific public benefit purposes.
- -First step is formation. Need to file the articles of organization in MA to form the company. -Can be done online on MA website.
- -No minimum requirement in MA so technically only need 1 director but consider whether more (maybe 3) would be more beneficial. - Multiple ideas and viewpoints -If there is just one director then it's likely it's the same person as the executive director. This can cause conflict of interest issues as there is no one really overseeing choices that person is making. - Those donating money might want more people around the table to make decisions - Note that when forming a public charity (most people will be forming), you need a diverse board - More than 50% of the board must be unrelated by blood, marriage or outside business co-ownership and not be compensated as employees of the organization.
- -Bylaws – rules and processes of running the company -Sole incorporators consent is a short document that adopts the bylaws and sets up the board of directors
- -Nonprofits also aren’t automatically exempt from state taxes. In MA once a nonprofit gets 501(c)(3) status, they can apply for exemption from income, property, and sales taxes in MA. -501(c)(3) status allows for donations to be deductible (the slide later on re certificate of solicitation mentions this)
- Public charities must obtain no less than 1/3 of their funding from the public (this is one of multiple formulas – also a 10% test that looks at other factors), either individuals or other public charities, as opposed to private foundations, corporations, or major donors. For donors, only up to 30% of annual income is tax-deductible when donated to a private foundation versus up to 50% of income for public charities https://www.501c3.org/nonprofit-structure-public-charity-private-foundation-private-operating-foundation/ https://www.irs.gov/charities-non-profits/charitable-organizations/public-charities
- Note that nonprofits should not overestimate their likely gross receipts because that will push them into more complicated filing. As a practical matter, if you use the 1023-EZ and end up exceeding 50K in year three, it won’t matter because you'll already have their 501(c)(3) status
- https://www.501c3.org/pros-and-cons-of-using-form-1023-ez-for-starting-a-nonprofit/ https://www.resilia.co/blog/start-a-nonprofit/the-difference-between-a-1023-and-a-1023-ez/ http://www.nonprofitlawblog.com/starting-a-nonprofit-form-1023-or-form-1023-ez/
- -MSCPA – network of certified public accountants in MA. Tab for "Find a CPA" then "CPA listings -MA nonprofit network. Apply to be part of the network. Have some resources online and some available when part of the network and pay dues.
- https://www.northwestregisteredagent.com/how-to-start-massachusetts-nonprofit-organization.html
- -Price variants are based on gross support and revenue. -Note that if you have $200-$500k in gross support you also need financial statements prepared by a CPA. If you have $500k+ you need audited financial statements by an independent CPA prepared in accordance with GAAP. https://www.northwestregisteredagent.com/how-to-start-massachusetts-nonprofit-organization.html https://www.mass.gov/files/documents/2018/10/09/PC%20Instructions%2010.2018.pdf (page 3 has the fees) Annual Gross Revenue Filing Fee Less than $100,000 $35 $100,001 to $250,000 $70 $250,001 to $500,000 $125 $500,001 to $1 million $250 $1,000,001 to $10 million $500 $10,000,001 to $100 million $1,000 $100 million + $2,000
- The nature of the entity receiving the services The receipt by the worker of any benefits, or expectation of any benefits, from their work Whether the activity is less than a full-time occupation Whether regular employees are displaced by the "volunteer" Whether the services are offered freely without pressure or coercion Whether the services are of the kind typically associated with volunteer work Not everyone can be considered a volunteer. If someone works 40 hours a week for nonprofit, likely an employee.
- -revocation not a good idea. AG involved and more appropriate to affirmatively take the action.