Many boards include directors who are serving ex officio. There is widespread misunderstanding regarding the meaning of the term. Ex officio members of a board are serving on the board “by reason of their office,” rather than by being elected or appointed to the position.
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.
The Marc Center is a thriving, creative and innovative nonprofit that is thinking strategically about how to achieve its mission through both nonprofit and for-profit ventures that provide vocational opportunities for its clients. The Marc Center is providing vocational opportunities in the areas of food service, packaging services, mailing, filing, and other low tech vocations. During my visit, I had a delicious lunch at a Banner Health facility where a Marc Center of Mesa subsidiary is in charge of food service and even provides catering. Across the country, ventures like these are commonly referred to as double bottom line “social enterprises” because they are making money and fulfilling a social mission at the same time.
Essentially, the commensurate test requires 501(c)(3) organizations to conduct charitable activities commensurate in scope with their resources. The idea is that donors fund charities to do charitable works, not to amass a fortune with no clear plan of how the funds will be spent.
The defining characteristic of a private foundation is donor control. Private foundations are usually privately created, funded, and operated by a single individual, family, or company. As a result, private foundations are generally not dependent upon the support of outside donors and are therefore not subject to the same degree of public scrutiny as public charities that depend on outside funding for their survival.
The L3C, or Low Profit Limited Liability Company, is a new legal entity that can be legally formed in six jurisdictions. The concept started in Vermont and is quickly catching on in other states across the U.S. including Illinois.
How is it different from an LLC?
The L3C’s primary purpose is to conduct activities that further a charitable or educational purpose. Earning a profit is its secondary purpose. Traditional corporate law requires that the owners’ interests are exclusively economic. This has been interpreted to mean that corporate directors have a duty to maximize profits for the company’s owners to the exclusion of virtually any other consideration. The statutory framework of the L3C turns the traditional view of the fiduciary duty to maximize the economic return for a company’s owners on its head. Instead, the L3C statutes require the managers to pursue the accomplishment of a charitable or educational purpose. They can earn a profit while pursuing their mission, but earning a profit can’t be a significant purpose of the company.
Individuals and businesses making contributions to charity should keep in mind several important tax law provisions that have taken effect in recent years. Some of these changes include the following:
Ellis Carter and Deanna Rader will be co-presenting a webinar on December 15th at 4:00 pm as part of the Arizona Charter School Association’s Charter Starter program. One of the first sessions that the program will offer is a webinar on the legal aspects of starting an Arizona charter school.
In my practice representing nonprofit and tax-exempt organizations, there are often themes that emerge. Over the last few weeks I have had a spate of calls from would be nonprofits that paid either a nonprofit start-up consultant or a document preparation company to form their nonprofit and handle their IRS filings. In each case, the work product that made it to my office required substantially more work to fix than it would have taken to do properly the first time around. You get what you pay for, and sometimes, you pay dearly for what you get. Before hiring someone to help you with the legal and tax aspects of starting a nonprofit, make sure they are licensed to provide the type of assistance they are offering, have specific experience representing nonprofits, and are in fact representing you rather than helping you to commit malpractice on yourself.
The private inurement rule and private benefit rules exist to ensure that charitable assets are preserved for the benefit of the public and not diverted to private use. This is a fundamental concept that distinguishes tax-exempt organizations from for-profits.
The rules originate in the language of Code Section 501(c)(3). Code Section 501(c)(3) contains the specific requirement that:
[N]o part of the net earnings of [the exempt organization] inures to the benefit of any private shareholder or individual . . . .
In addition, under the regulations, an organization is not treated as organized and operated for exclusively exempt purposes unless it serves a public rather than a private interest, Based on this provision, tax exempt status is not available to any organization if its net earnings inure to the benefit of private individuals in whole or in part.
In practice, the law distinguishes between different degrees of inurement depending upon who is being benefitted. The two types of inurement are referred to as private inurement and public benefit.
Most states require you to register your organization if you solicit donations from their residents. Many states also require registration if your organization collects substantial or ongoing donations from their residents, even if you aren’t specifically targeting donors in that state. Download our comprehensive list of each state’s requirements.
Download our free guide to learn about the many elements needed to run a successful nonprofit organization, as well as how to avoid common pitfalls and mistakes.