Formation of Not-For-Profit/Tax-Exempt Organization

Formation of Not-For-Profit/Tax-Exempt Organization

LaDale K. George
Foley & Lardner
(312) 755-2524
lgeorge@foleylaw.com

1. Overview of Not-For-Profit/Tax-Exempt Organizations
    a. Not all Not-For-Profit Corporations are Tax-Exempt Organizations.
    b. Not all Tax-Exempt Organizations are Not-For Profit Corporations.
    c. Purpose and Mission are public service, civic, or charitable in nature.

2. Characteristics of Not-For Profit Corporations
    a. Corporation defined under State Law.
    b. Not-For-Profit, Non-Profit are synonymous.
    c. Non-Stock, Non-Shareholder Ownership.
    d. Governance by Members, Directors/Trustees, and Officers.
    e. Purpose is public service, civic or charitable in nature.
    f. Revenue is applied to furtherance of the Purpose.
    g. Potential oversight by the state Attorney General's Office as a "charitable organization."

3. State Not-For-Profit Incorporation:
    a. Organizational Documents
        i. Articles of Incorporation: Basic organizational document, filed with the state Secretary of State.
            (1) Articles must state the Purpose of the Organization.
            (2) Please Note: To qualify for tax-exempt status under section 501(c)(3), the Articles must contain certain language required by the IRS that indicates exclusive operation in furtherance of the exempt purpose.
            (3) Include a Dissolution Clause.
        ii. By-laws: Document setting forth the operating rules and procedures for the corporation; adopted by the Board of Directors or Members of the corporation; not filed with Secretary of State.
    b. Governance of Not-For-Profit Corporation
        i. A State Law indicates whether Not-For-Profit corporation may have both members and a Board of Directors/Trustees or only a Board of Directors/Trustees.
        ii. Members:
            (1) Distinguish between governing members and participating membership.
            (2) If the corporation has governing members, the members are usually given the right to vote on such matters as the election of directors, amendment of the Articles of Incorporation and by-laws, sale of major assets and dissolution of the corporation.
            (3) The Articles or by-laws may restrict or eliminate the members' voting rights.
        iii. Directors: All corporations have directors.
            (1) Directors have ultimate control of the corporation.
            (2) If there are no members, the directors are elected in the manner set forth in the Articles or by-laws. Typically, the current Board of Directors elects the next Board of Directors.
            (3) The Articles or by-laws may provide that one or more directors will be appointed by an outside entity (such as a related organization).
        iv. Officers: A nonprofit corporation may or may not have officers depending on state law.
            (1) The officers of a nonprofit corporation are the President, Vice President, Secretary and Treasurer.
            (2) They are elected by the Board of Directors.
            (3) They carry out the directions of the Board and conduct the day-to-day business of the corporation.
            (4) Officers and directors may overlap but are not required to.
        v. Fiduciary Rights and Responsibilities. All corporate officials are subject to certain fiduciary responsibilities.
    c. Dissolution Clause
        i. Upon ceasing to do business, Not-For-Profit must provide for the transfer of remaining assets to another Not-For-Profit.
        ii. Transfers to

missible.

4. Characteristics of Tax-Exempt Organizations
    a. Tax-Exemption is a status designating an corporation or other entities tax liability under Federal Law, Section 501(a) of the Internal Revenue Code.
    b. The entity must meet the criteria for qualifying organizations set for in Section 501(c).
    c. Only entities meeting the criteria set forth in Section 501(c)(3) may offer certain tax deductions to members.
    d. Section 501(c)(3) organizations must meet the following criteria:
        i. Be a corporation, community chest, fund or foundation.
        ii. Organized and operated exclusively for religious, charitable, scientific, testing for public safety, literary, or educational purposes.
        iii. No part of the net earnings may inure to the benefit of any private shareholder, or individual.
        iv. No substantial part of the activities may involve carrying propaganda designed to influence legislation.
    e. Public Charity Versus Private Foundation:
        i. If the organization receives most of its support from a small group of individuals or private foundations, the organization will be classified as a "private foundation" rather than a "public charity." (Examples: United Performing Arts Fund is a public charity, while the Bradley Foundation is a private foundation. The word "foundation" in the name does not determine whether a charity is public or private.)
        ii. Most organizations attempt to be classified as public charities because a number of restrictions and additional reporting requirements apply to private foundations. In addition, many private foundations will not give grants to other charities which are classified as private foundations.
        iii. Status as a public charity or private foundation must be determined by the entity and confirmed by the IRS.
        iv. No participation or intervention in any political campaign on behalf of any candidate for public office.

5. Application for Tax-Exempt Status and Charitable Designation
    a. Federal Tax-Exempt Status.
        i. An application on IRS Form 1023 must be filed with the Internal Revenue Service for a determination that the organization is exempt from federal income tax under section 501(c)(3) of the Internal Revenue Code.
        ii. The organization will, for the most part, be exempt from federal income tax;
        iii. Contributions to the organization will be deductible by individuals and businesses; and
        iv. Other tax-exempt organizations and governmental units will be able to make grants and contributions to the organization.
    b. State Tax Recognition
        i. All States recognizes the tax exemption granted by the IRS.
        ii. The organization may apply for sales tax exemption in order to avoid paying sales tax on its purchases. This exemption does not apply to sales made by the organization.
        iii. The organization may apply for real estate property tax exemption in order to avoid paying property tax on owned real property. The exemption only applies to property that is being operated or has defined plans to be operated in furtherance of the organizations purpose.
    c. State Charitable Organization Recognition
        i. Each State regulates the establishment of Charitable Organizations.
        ii. In order to solicit contributions, the organization must register with the various State agencies or the State Attorney General's Office.
            (1) Website solicitation may be subject to registration in all 50 states, and certain foreign countries. (See Charleston Principles at www.nasconet.org )
        iii. Registration as a Charitable Organization may severally restrict the use and transferability of donated assets.