Red Lodge Clearinghouse - Handbook Appendix B: Organizing as a Non-Profit

Handbook Appendix B: Organizing as a Non-Profit

Most collaborative groups are volunteer-driven and can function quite well during their first months or years without having to take on a formal legal existence, raise a great deal of money, or hire or contract for staff services. Moving into action plan implementation, however, almost always requires more financial and administrative support than was needed earlier. If your group plans to seek grants, loans, or other assistance, you will want to revisit the issue of structure.

Incorporation

Every state has its own laws, regulations, fees. forms and procedures for incorporating non-profit entities. Copies of any required forms and the instructions for completing them are usually available on line. Links to state sites in the Red Lodge Clearinghouse's service area are:

Arizona: www.cc.state.az.us/corp/filings/forms/
California: www.ss.ca.gov/business/corp/corp_formsfees.htm
Colorado: www.sos.state.co.us/biz/FileDocExt.do
Idaho: www.idsos.state.id.us/corp/corpform.htm
Montana: sos.mt.gov/BSB/Business_Forms.asp
Nevada: secretaryofstate.biz/comm_rec/crforms/npentities_index.htm
New Mexico: www.nmprc.state.nm.us/corporations/corpsforms.htm
Oregon: www.filinginoregon.com/brc/nonprofit.htm
Utah: www.commerce.utah.gov/cor/pdfforms/howtoincorpnonprofit.pdf
Washington: www.secstate.wa.gov/corps/
Wyoming: soswy.state.wy.us/corporat/np.htm

Signed Articles of Incorporation is the primary document that will need to be submitted when incorporating a group as a non-profit. Some states also request copies of the new corporation's by-laws. In its Publication 557, Tax-Exempt Status for Your Organization, the IRS provides a template for a drawing up Articles. It includes suggested language for groups planning to request 501(c)(3) tax-exempt status. Some states also provide draft Articles and/or specific language that must be included the Articles.

Suggested Language for Corporations and Associations (from IRS Publication 557)
ARTICLES OF INCORPORATION of the undersigned, a majority of whom are citizens of the United States, desiring to form a Non-Profit Corporation under the Non-Profit Corporation Law of                      ,
do hereby certify:
First: The name of the Corporation shall be
Second: The place in this state where the principal office of the Corporation is to be located is the City of                    ,                     County.
Third: Said corporation is organized exclusively for charitable, religious, educational, and scientific purposes, including, for such purposes, the making of distributions to organizations that qualify as exempt organizations under section 501(c)(3) of the Internal Revenue Code, or the corresponding section of any future federal tax code.
Fourth: The names and addresses of the persons who are the initial trustees of the corporation are as follows:
Name
Address
Fifth: No part of the net earnings of the corporation shall inure to the benefit of, or be distributable to its members, trustees, officers, or other private persons, except that the corporation shall be authorized and empowered to pay reasonable compensation for services rendered and to make payments and distributions in furtherance of the purposes set forth in Article Third hereof. No substantial part of the activities of the corporation shall be the carrying on of propaganda, or otherwise attempting to influence legislation, and the corporation shall not participate in, or intervene in (including the publishing or distribution of statements) any political campaign on behalf of or in opposition to any candidate for public office. Notwithstanding any other provision of these articles, the corporation shall not carry on any other activities not permitted to be carried on (a) by a corporation exempt from federal income tax under section 501(c)(3) of the Internal Revenue Code, or the corresponding section of any future federal tax code, or (b) by a corporation, contributions to which are deductible under section 170(c)(2) of the Internal Revenue Code, or the corresponding section of any future federal tax code.

[Note: If reference to federal law in articles of incorporation imposes a limitation that is invalid in your state, you may wish to substitute the following for the last sentence of the preceding paragraph: Notwithstanding any other provision of these articles, this corporation shall not, except to an insubstantial degree, engage in any activities or exercise any powers that are not in furtherance of the purposes of this corporation.]

Sixth: Upon the dissolution of the corporation, assets shall be distributed for one or more exempt purposes within the meaning of section 501(c)(3) of the Internal Revenue Code, or the corresponding section of any future federal tax code, or shall be distributed to the federal government, or to a state or local government, for a public purpose. Any such assets not so disposed of shall be disposed of by a Court of Competent Jurisdiction of the county in which the principal office of the corporation is then located, exclusively for such purposes or to such organization or organizations, as said Court shall determine, which are organized and operated exclusively for such purposes.

In witness whereof, we have hereunto subscribed our names this        day of                    , 20     .

Publication 557 is found at www.irs.gov/pub/irs-pdf/p557.pdf

Employer Identification Number

Even if a group does not plan to hire staff right away, it still needs to get a federal Employer Identification Number (EIN), also known as a Federal Tax Identification Number. This nine-digit number is assigned at no charge by the IRS and is used by that agency to identify taxpayers required to file various reports and tax returns. Form SS-4, Application for Employer Identification Number, can be completed and filed on line at the Internal Revenue Service web site https://sa2.www4.irs.gov/sa_vign/newFormSS4.do.

The form also can be downloaded (or obtained at the local Social Security Administration office) and submitted by mail. Groups can obtain an EIN via telephone by calling 1-800-829-4933. Have a copy of the Articles of Incorporation at hand when placing the call.

Registration for State Workers' Compensation and Unemployment Insurance

Usually when incorporation papers are processed by a state, the new corporation will automatically be sent the forms and instructions for enrolling in required state workers' compensation and unemployment insurance programs. A state tax identification number (SEIN) will probably be assigned to the corporation at this time. If a group does not receive the forms, it should contact its Secretary of State's office or state department of labor and inquire about the procedure.

Applying for 501(c)(3) Status

Pros and Cons

Although not essential, having tax-exempt organization status under section 501(c)(3) of the Internal Revenue Service Code gives collaborative groups several important benefits:

Most government agencies, private foundations, and other funders do not provide grants to individuals or for-profit groups, and many require that non-profit groups have 501(c)(3) status.
Individuals and corporations have an added incentive to contribute to a 501(c)(3) collaborative group because their donations will be federal tax exempt.
The group itself will be exempt from federal income tax and, in some cases, Federal Unemployment Tax (FUTA).
It may also be exempt from some state income, sales, and property taxes. (A state will generally require that additional documentation be submitted to document its qualifications for tax-exemption)
Some organizations may be able to get reduced U.S. Postal Service mailing rates.

On the down side, preparing a successful application for 501(c)(3) status is very time consuming, and it can be expensive. A new organization that anticipates gross receipts averaging not more than $10,000 during its first four years has to pay a $150 application fee to the IRS. Organizations anticipating gross receipts exceeding $10,000 annually must pay $500. If an attorney and/or accountant prepare or review the application, they may also charge the group an hourly or flat fee. (Sometimes these services can be obtained as an in-kind donation.)

Moreover, submitting the application may just be the beginning of the process, because the IRS frequently will respond with requests for more material -- copies of newsletters and other collaborative publications, explanations of corporate operating procedures; further details on proposed activities; copies of any leases or agreements the group has signed; and other matters. Six months to a year may elapse before the group receives an initial determination of exemption.

Finally, 501(c)(3) status brings restrictions as well as benefits. Books and records detailing all activities, both financial and non-financial, must be kept. Reports and financial statements must be provided annually to the IRS, and the group will be required to provide copies of that information to anyone else who requests it. There are also limitations on the amount and type of lobbying that may be conducted by the group, a definite concern if a substantial part of the collaborative's work is in advocacy.

Getting Started

IRS Publication 4220. Applying for 501(c)(3) Tax-Exempt Status, is a good starting place. It can be found on-line at www.irs.gov/pub/irs-pdf/p4220.pdf.

The brochure gives a plain-language overview of what it takes to become a 501(c)(3) organization and what is required to maintain that status. It also has useful links to other relevant publications and forms. Forms and publications you will need include:

Publication 557, Tax-Exempt Status for Your Organization
Package 1023, Application for Recognition of Exemption. It includes
- Form 872-C, Consent Fixing Period of Limitation Upon Assessment of Tax Under Section 4940 of the Internal Revenue Code; and
- Form 1023, Application for Recognition of Exemption
Form 848, Power of Attorney and Declaration of Representative. This is needed only if someone other than the group's principal officer or director will represent the group in dealing with the IRS about the application.
Form 8718, User Fee for Exempt Organization Determination Letter Request
Form 5768, Election/Revocation of Election by an Eligible Section 501(c)(3) Organization to Make Expenditures to Influence Legislation

All can be downloaded from www.irs.gov.

Enter a form/publication number in the "Search Forms and Publications for" box in the upper left-hand corner and click "GO." Forms can also be obtained through a local IRS office or by calling 1-800-829-3676 (1-800-TAX-FORM).

You will need complete financial statements for your group for the current tax year and for each of the three years immediately preceding it. If the group has been in existence less than four years, statements must be provided for each year in existence. If the group is less than a year old, it must provide a current year statement and proposed budgets for the next two years.

Eligibility

The IRS specifies that in order to be eligible for 501(c)(3) status, a nonprofit organization "must be organized and operated exclusively for one or more exempt purposes."

Organization - The "organizational test" provides that the group's organizing instrument (ex. Articles of Incorporation) must limit the group's purposes to one or more of the exempt purposes described in the Internal Revenue Code (see below).
Operation - A 501(c)(3) organization
- Must not participate in any political campaigns;
- Must restrict its lobbying to an insubstantial part of its total activities;
- Must ensure that its earnings do not inure to the benefit of any private shareholder or individual;
- Must not operate for the benefit of private interests, such as those of the founders;
- Must not have as a primary purpose the conducting of a trade or business not related to its exempt purpose; and
- May not have purposes or activities that are illegal or violate fundamental public policy.
Exempt Purpose - Exempt purposes are limited to:
- Charitable
- Religious
- Educational
- Scientific
- Literary
- Testing for public safety
- Prevention of cruelty to children or animals
- Fostering national or international amateur sports competition

Many collaborative groups will have multiple exempt purposes. Groups are statutorily classified as public charities if they, among other things, receive a substantial part of their support in the form of contributions from publicly supported organizations, governmental units, and/or the general public. A group operating as a public charity must continue to seek "significant and diversified public support" throughout its existence.

Organizations considered to have an educational purpose include not only schools, museums, and zoos, but also organizations that conduct public discussion groups, forums, panels, lectures, or similar programs. Advocacy of a position may be considered educational "if there is a sufficiently full and fair exposition of pertinent facts to permit an individual or the public to form an independent opinion or conclusion."

A scientific purpose could be claimed if, for instance, the organization's research is carried on in the public interest (meaning that the results of that research "are made available to the public on a non-discriminatory basis"); if is done for a unit of government; or if it helps a community attract new industry to an area or retain existing industry.

Completing the Application

Read the instruction manual (Publication 1023) very carefully, and follow all instructions. Failure to do so will almost certainly result in requests for additional information and a delay in processing the application. Be sure to put the organization's name, address, and EIN at the top of each attachment to Form 1023.

Form 8718 is the application cover sheet, and must have a check for the appropriate filing fee attached.

Two copies of Form 872-C are the next pieces of the application. This form contains the group's request to be treated as a tax-exempt, publicly supported organization during the "advance ruling period" that lasts five years from the date of the initial 501(c)(3) determination a newly created organization receives from the IRS.

Next comes Form 1023 and its attachments. The first page asks for basic information about the organization, and requires that "conformed" copies of the group's organizing documents be attached. (For corporations this is the Articles of Incorporation, showing approval by the appropriate state official, and the by-laws.) A conformed copy is a photocopy of the signed and dated original.

Part II of Form 1023 is the heart of the application. It requires a "narrative description of all the activities of the organization - past, present, and planned." Activities need to be fully and completely described, and prioritized in order of importance (based on the time and resources spent on each activity). Start by describing the background of the organization, how it came into being, and for what purposes. (Remember, the purposes need to be consistent with the exempt purposes you are claiming.) It may be helpful to list the purposes, in priority order, with an estimate of the time devoted to each purpose. For instance:

Educational Activities

Taking approximately 65% of the corporation's time

Following each exempt purpose, list and describe the activities and the amount of time each is likely to require:

Workshops and Training Sessions

2-3 sessions annually, from 2-5 days long, plus planning and preparation time

Workshops and training sessions are designed to enhance the capacity of community forestry practitioners, researchers, and others to effectively accomplish their work and address the issues facing them. Some workshops/training programs are annual events. Others are developed as necessary to respond to special issues/needs of concerns. [This would be followed by a description of the various workshops completed or planned.]

Website, Newsletter, and Other Publications

12 hours weekly

The corporation has a website [address] which provides information on community forestry activities, laws and proposed legislation affecting community forestry, upcoming training sessions, books and articles, meetings, and other timely topics. [Attach printout of home page and perhaps some current postings.] The newsletter [title] is published quarterly and distributed to approximately 1,500 subscribers by mail or electronically. [Attach copies of two or three past newsletters.]

Strive for completeness, not brevity, in your description. Anything you leave unexplained will probably result in a letter from the IRS requesting additional information.

In Part II you will also be asked to explain the types of funding (foundation grants, government grants, other grants, contracts for service, etc.) you will be seeking, in order of their estimated proportion of your budget. Also describe your fundraising strategy, fundraising committee/council (if any), and your use of volunteer or paid fundraisers. Copies of representative support-seeking documents - brochures, letter, grant applications, etc. - need to be attached as well.

Once you finish these sections, things get easier for a while. A list of corporate officers, directors, and key staff needs to be provided, and there are a number of yes/no questions about the organization's operations, membership (if any), benefits, and ties to any other groups. If, for instance, you lease office space from a Chamber of Commerce, you need to disclose that and furnish a copy of the lease agreement.

At Line 13 you are asked if the group contemplates doing any lobbying. If so, you need to explain fully. You also need to provide an estimate of the percentage of the group's time and funds that will be spent on such activities.

This is a good time for the collaborative group to decide whether to complete Form 5768: Being A Player: A Guide to the IRS Lobbying Regulations for Advocacy Charities (available from the Advocacy Forum at www.allianceforjustice.org) explains:

The Internal Revenue Code limits the amount of lobbying activities in which 501(c)(3) public charities may engage. Charities may choose one of two standards by which their compliance will be measured. One standard, known as the "insubstantial part test," requires that "no substantial part of a charity's activities…be carrying on propaganda or otherwise attempting to influence legislation." If charities exceed this vague standard, they risk losing their exemptions altogether. Furthermore, when the IRS examines the lobbying activities of nonelecting charities, it does not limit itself to determining the amounts spent for lobbying, but instead will examine a host of "softer" factors such as the organization's goals and success in achieving them as well as the amount of time and energy devoted to legislative matters by the charity's board and volunteers, regardless of cost.

The other standard, known as the "section 501(h) expenditure test," sets specific dollar limits, calculated as a percentage of a charity's total exempt purpose expenditures (i.e., 20 percent of the first $500,000…), on the amount public charities electing to follow this method may spend to influence legislation without incurring penalty taxes or losing their exempt status. Congress enacted [these provisions] in 1976 to provide the option of an objective standard rather than the vague insubstantial part test. Unlike the insubstantial part test, the expenditure test imposes no limit on lobbying activities that do not require expenditures, such as unreimbursed lobbying activities conducted by bona fide volunteers. A charity wishing to be subject to the expenditure test must take the affirmative step of filing an election….

If the group plans to lobby, it's probably a good idea to elect coverage under the political expenditures test by filing Form 5768. It both simplifies the annual reporting involved, and provides clear guidelines as to what you may and may not do and what you may spend on lobbying activities. An election must be filed within the first taxable year to which it applies. If the group decides to revoke its election in a subsequent year, it may do so by filing a new Form 5768 before the first day of that tax year. Discussing the issue with your attorney and/or accountant prior to electing or revoking an election is advisable. Note: Form 5768 should not be submitted with your Form 1023 application for 501(c)(3) determination. It should be mailed separately to the Internal Revenue Service Center, Ogden UT 84201-0027. No fees are involved.

Part III of Form 1023 includes a number of technical questions about your organization and its funding sources and enables the IRS to identify the proper classification of public charity for your organization. If it is publicly supported (as most collaborative groups are), but you are not sure what category of public support it falls under, you can check box J on Line 9, and the IRS will make the decision for you.

Finally, Part IV includes the balance sheets and statements of revenue and expenses on which you provide your financial information.

When you have completed the application, review the checklist provided with Publication 1023. If all the required forms and attachments have been completed, the document is ready to mail to:

Internal Revenue Service
P. O. Box 192
Covington, KY 41012-0192

Disclosure and Public Inspection

The collaborative's 501(c)(3) application and subsequent annual reports (Form 990 or Form 990-EZ) are subject to public inspection. The Taxpayer Bill of Rights passed in 1996 provides that the organization must give copies of those documents (except for the names of contributors) to anyone requesting them - immediately if the request is made in person, and within 30 days if the request is made in writing. No charge may be made to the requestor except for reasonable fees for photocopying and actual mailing costs. Payment can be requested in advance. There are substantial penalties for non-compliance. Exceptions can be made if the documents have been made widely available (on the collaborative's website, for instance) or if the requests can be shown to be part of a harassment campaign.

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