Forming a nonprofit corporation is not the same as being tax-exempt. To obtain 501(c)(3) status, newly formed entities must apply to the IRS for a formal determination of exemption. Entities seeking 501(c)(3) status apply by filing Form 1023. (Entities seeking exemption under other sections of 501(c) file Form 1024.)
Newly formed organizations applying for exemption face a chicken and egg dilemma. Form 1023 requests considerable detail regarding the charity’s planned programs and activities. The attitude of the IRS is that requiring applicants to articulate detailed plans is a small price to pay for the significant tax benefits associated with 501(c)(3) status.
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. The steps required to form a nonprofit in Arizona are covered.
I receive several calls a week from people who want to start a new non-profit. Looking back on my legal career, I realize that many of the tax-exempt organizations I helped to create early on never got off the ground. Today, I consider it part of my responsibility to the potential new client and to the sector to educate would be founders on the realities of the marketplace. What follows is a walk through the typical discussion that I have with potential founders.
Most non-profits understand that if a fund is a permanent endowment, the principal must be preserved in perpetuity. Still, in my practice I am often surprised by how little some fundraising professionals understand about the mechanics of gift restrictions – particularly the implications of permanent restrictions and legal meaning of the term “endowment.”
The Chronicle of Philanthropy reports that Sen. Grassley is once again attempting to change the rules that impact how certain exempt organizations set executive compensation. This time, Sen. Grassley wants to do away with the “rebuttable presumption process” that exempt entities have been relying on to provide some measure of assurance that their compensation decisions will not trigger intermediate sanctions.
To ensure its decisions will stand up to the scrutiny of the media, regulators, and donors, and protect the employee as well as the board from personal liability, nonprofits that employ executive staff should consider implementing practices and procedures that ensure its executive compensation procedures are thorough, well-documented, and free of conflicts of interest.
As evidenced by the recent media coverage of the salaries paid to CEOs of four nonprofits that contract with the government to deliver U.S. foreign aid, nonprofit executive compensation continues to be an area of keen interest for the media and for key members of Congress.
The I.R.S. has made the guidelines it provides to its exempt organization determination specialists for processing tax exemption applications publicly available.
Failing to Understand Fiduciary Duties. When you volunteer to serve as a director or officer of a nonprofit, you accept the responsibility to act with the duties of good faith, due care and loyalty. You also accept the potential liability for failing to fulfill those duties. Increased scrutiny from the I.R.S., Congress, state attorneys general, the Department of Justice, donors and the media require vigilance at every step. It is no longer sufficient to rubber stamp committee or staff recommendations or to simply “abstain” from dicey decisions. Today, board service comes with real responsibilities and real consequences for those that fail to live up to them.