Newly formed charities often encounter a chicken and egg problem. They wish to begin their operations before they receive formal approval of their tax-exempt status but they can’t attract funding until they receive their federal 501(c)(3) determination.
The group of individuals charged with the governance of nonprofits are often referred to interchangeably as “directors” or “trustees.” These terms are similar in that they both refer to the group of individuals who have a fiduciary duty to oversee the nonprofit organization. However, from a legal perspective, there are important distinctions.
Exempt organizations that wish to change their name often secure a trade name or “do business” under a fictitious name. Presumably they opt to use a fictitious name rather than formally change their name because they believe a legal name change is too much trouble or they don’t know how to accomplish it. . . . A better approach is to change the organization’s legal name with both state and federal authorities to present a unified and cohesive brand to donors and supporters.
Increasingly, nonprofits are creating affiliate organizations such as entities to hold real property, taxable subsidiaries that run unrelated businesses, lobbying organizations, foundations, chapters, and even management organizations. There are myriad reasons to create affiliates but there are a number of common scenarios that we will touch in this post.
The group exemption permits a central or parent organization to certify that each subordinate qualifies for exemption and to include it under its umbrella for tax-exemption purposes. The process is designed to reduce paperwork for both taxpayers and the IRS where affiliated entities are similar in their purpose, structure and operations.
Prior to passage of AREA, an entity seeking to change its structure likely had to undergo a multi-step transaction to accomplish its goal. AREA permits direct conversions and makes clear that it applies to all entity types (corporations, nonprofits, benefit corporations, LLCs, partnerships, etc.).
The state form does not include the tax provisions that the IRS requires tax-exempt organizations to have. Would be founders that file using the state’s form Articles of Incorporation without including an attachment with the appropriate tax provisions will end up with a taxable nonprofit – a result almost no one intends.
n the context of a nonprofit corporation, a quorum is the number of board members that must participate in a board meeting to permit official business to be transacted at the meeting.
We are used to hearing lots of folks – including yours truly – complain about the “nonprofit birth control” problem in this country. While it is true that too many nonprofits are formed for the wrong reasons – there are also many good reasons to form a new nonprofit. The trick is to learn to tell the difference.
A major advantage nonprofit corporations have over other forms of charitable entities is if a nonprofit corporation is properly managed and operated, it can provide a greater degree of personal liability protection to its directors and officers.
A legal audit is an overview of an organization’s non-financial compliance, governance and risk management issues. Organizations typically consider a legal audit when new management takes over and wants to ensure they are starting with a clean slate or the in the wake of a costly mistake.
A fiscal sponsorship is often a great idea for small charities that do not have the resources to apply for their own tax-exempt status. It allows them to receive tax deductible donations from donors to accomplish their mission without having to expend their resources on administrative duties. However, as the recent International Humanities Center scandal has shown, it can be dangerous to get into bed with a fiscal sponsor without first performing some basic due diligence.
Section 501(c)(3) of the Internal Revenue Code allows for tax exemption for organizations organized and operated to foster national or international amateur sports competition so long as no part of the net earnings inure to the benefit of any private shareholder or individual. A parent run booster club must be organized so that it benefits the entire class of athletes or participants and does not benefit certain individuals over others.
Charities should be aware that it is now illegal for anyone to receive compensation for preparing a return for someone else if they have not obtained a PTIN from the IRS first; a paid preparer who is not registered with the IRS is perpetrating fraud. If a charity chooses to work with an unregistered paid preparer, it opens itself up to IRS scrutiny and, possibly, denial of tax exemption plus additional attorneys’ fees to resolve any issues arising from the initial filing. Charities also need to keep in mind that the organization, regardless of whether or not a paid preparer was used, is ultimately responsible for the information in it’s exemption application.
Often prospective clients call us wanting to know whether we know of any dormant nonprofits that are going out of business that they could take over. The idea is that taking over an existing entity avoids the hassle and expense of incorporation, creating a governance structure and obtaining tax-exempt status for a brand new entity. Presumably, a new board of directors would be substituted in place of the old board and new officers would be elected.
When considering whether to include voting members in a nonprofit corporation, it is important to understand that voting members of a nonprofit corporation are generally analogous to shareholders of a business corporation. Voting members have statutory rights under state law; therefore, it is important to clarify the right of members to avoid inadvertently creating a voting membership class and vesting ultimate control in the members when that is not your intention. Once a membership has been established, it may be difficult to eliminate, and it may be impossible without the consent of the members.
Proxy voting is legal mechanism for a member of a voting body to delegate his or her voting right to another member of the voting body. In the context of nonprofit corporations, voting bodies include the board of directors as well as voting members. Some nonprofit corporations rely on proxy voting because it allows directors or members who have confidence in the judgment of other directors or members to vote for them and allows the voting body to convene a quorum of votes when it is difficult for all members of the voting body to attend. In proxy speak, the individual delegating his or her voting authority is referred to as the “principal” and the individual exercising the delegated voting authority is referred to as the “proxy” for the principal.
Finding support and funding in the nonprofit world is often more challenging than finding funding for a for-profit venture. In addition, contrary to the belief of many nonprofit founders, foundation grant dollars do not grow on trees and are, in fact, the most competitive and scarce source of funding available.
A social welfare organization is an nonprofit organization exempt under Code Section 501(c)(4). It is similar to a 501(c)(3) organization in that its income is generally exempt from tax and is subject to the same limits on private inurement and excessive payments to insiders. It is different, however, in that contributions to it are not deductible as charitable contributions and it is able to conduct unlimited lobbying activities. Section 501(c)(4) exempts:
* nonprofit civic organizations operated exclusively for the promotion of social welfare; and
* local associations of employees whose earnings are devoted to charitable, educational, or recreational purposes.
Too often, nonprofits include provisions in their bylaws that are old-fashioned, unnecessary, redundant, or that complicate rather than streamline governance.