Once a non-profit founder has surveyed the non-profit landscape and found a legitimate need, recruited an initial board, created business and fundraising plans, and scraped together some start-up funding, he or she is ready to proceed. In Arizona, it usually makes the most sense to form the entity as an Arizona non-profit corporation. Very generally, the steps to creating a new non-profit corporation in Arizona are as follows:
1. Prepare and File Articles of Incorporation. The filing of the articles of incorporation begins the organization’s legal existence. To qualify for tax-exemption under Section 501(c)(3), the articles must limit the corporation’s activities to tax-exempt purposes. The purpose statement should be broad and flexible enough to give the organization room to evolve, without being so all encompassing that it would permit it to engage in non-exempt activities. The articles must permanently dedicate the corporation’s assets to tax-exempt purposes and must not permit distribution of profits to private individuals. If the Articles do not meet these basic IRS requirements, the IRS will require amendments and may only grant exemption from the date of the amendment rather than retroactive to the date of incorporation. There are other organizational requirements for organizations that plan to qualify for exemption under some other section of 501(c) such as social clubs, social welfare organizations, business leagues, and labor organizations, to name a few.
2. Prepare the Bylaws. The articles and bylaws collectively form the governance structure for the corporation. Perhaps most importantly, they prescribe how the board of directors is selected. In Arizona, directors can be selected by board vote, by designation of a third-party, by one or more members or delegates, or through a combination of these methods.
3. Prepare Governance Policies. We recommend that newly formed corporations adopt certain key governance policies. Arizona law requires certain Arizona non-profits to have a Conflict of Interest Policy. Whistle blower and Document Retention and Destruction Policies help the corporation avoid violations of Sarbanes Oxley’s criminal provisions. Other governance policies that are typically considered at this stage include Gift Acceptance Policies, Compensation Policies, Travel and Expense Reimbursement Policies, and Joint Venture Policies.
4. Hold Organizational Meeting. At the organizational meeting, the directors will approve the corporation’s articles and bylaws, elect directors and officers not identified in the Articles, adopt governance policies, pass a banking resolution authorizing the opening of a bank account, authorize the hiring of the chief executive and any conduct other initial corporate business.
5. Obtain Tax Identification Number. In order to open bank accounts, the corporation will need to obtain a tax identification number from the IRS. It is very important that the number not be obtained before the organization is formed because the identification number cannot attach to a corporate entity that does not yet exist.
In Arizona, the time required to accomplish these steps depends on how complex the governance structure is, how quickly the founders can make the necessary decisions, and how quickly the Arizona Corporation Commission can process the articles. If the articles are filed on an expedited basis, a new Arizona non-profit corporation can usually be formed in a few days. Once the entity is formed, the next step is to apply for tax-exempt status which will discussed in Part III of this post.
Whoaa . . . what do you do if they by laws and articles of incorporation are filed and accepted before a board has been established?
Very information and in terms a rookie can understand.
How do I get to Part III?
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As was asked above, “What do you do if the by laws and articles of incorporation are filed and accepted before a board has been established?
And, Is it OK for the wife of a board member and officer to form and file the initial State documents, even if the wife’s company may later do business with the non-profit, and what do I do if I have already done this?
Thanks
In this case the board member’s wife acted as incorporator of the organization. If it is a public charity and her husband will serve on the Board, then regardless of who incorporated, any financial transactions with her company have to be fair and arms length. Any such arrangement should be made pursuant to the rebuttable presumption safeharbor. For 501(c)(3) public charities the procedure, if carefully followed, shifts the burden of proof to the IRS to prove the unreasonableness of the compensation package. For other tax-exempt organizations, the procedure serves as a good roadmap for adequately documenting financial transactions with insiders. To “adequately document” the decision for purposes of the rebuttable presumption process, the records of the governing body must state the terms of the contract that was approved, the date it was approved, the members of the governing body who had a conflict, the members of the governing body who were present during the debate on the compensation arrangement that was approved and those who voted to approve or reject it. Obviously, the husband and any other conflicted board members must recuse themselves from the vote and in this case should leave the meeting room while the board deliberates. The documentation should also note the comparability data obtained and relied upon by the governing body, how it was obtained and the actions taken with respect to any member of the governing body who had a conflict of interest with respect to the compensation decision. Additionally, the governing body must record the basis for its determination whenever it decides that the reasonable compensation for the product or service is higher or lower than the range of comparable data received. The documentation must be made concurrently with the determination on whether to enter into the contract. Records must be prepared by the next meeting or within 60 days of the governing body and must be reviewed and approved by the governing body as reasonable, accurate and complete within a reasonable time thereafter. While this process provides legal cover, also be sure to consider the “new york times test”. If you wouldn’t want it made public, you probably should not move forward with the arrangement.
If the organization is a private foundation, then it is subject to the self-dealing rules which are more strict. If that is the case you should get specific legal advice before moving forward.
Read more: http://charitylawyerblog.com/2011/03/08/setting-nonprofit-executive-compensation/#ixzz1Xm3PV7VS