Creating a Section
501(c)(3)
Organization
Elaine Waterhouse Wilson
Quarles & Brady, LLP
500 West Madison Street
Suite 3700
Chicago, Illinois 60661
(312) 715 5141
ewilson@quarles.com
Before You Start….
• Should you create a new
organization?
– Is there an existing organization that
does this?
– Would a donor advised fund work
better?
– Can you partner with another
organization?
• Do a (not a) business plan
–
–
–
–
Not just your charitable activities
Where are you going to operate from?
Who is paying the utilities?
Who is doing the work? Are you paying
them?
– Where is the money coming from?
State Law Versus
Federal Tax Law
• First, create an entity under
state law
– Usually a not-for-profit
corporation
• Certainty
• Limited Liability
– Can be a charitable trust
• Harder to change
• Fewer Trustees
– Might also be an unincorporated
association
Not-For-Profit
Corporations
• Articles of Incorporation
– Start with Secretary of State's form here
in Illinois
– Not all states require this
• IRS requirements in addendum
– Authorize charitable purposes
– Prohibit activities not allowed under
Section 501(c)(3)
– Dissolution clause
– Prohibition of inurement, excess
lobbying and political activity
– Private Foundation Excise tax rules
Other Articles
Issues
• Members versus non-members
– A not-for-profit corporation can have
members or can have a selfperpetuating board
– Different then "fundraising"
memberships – corporate members
have powers like a shareholder without
financial interests
• Name your Directors – How Many?
– Functional issues – too large, too small
– Statute regarding range
– Executive and other committees
Initial Meeting
• Pass Bylaws
– Generally, all the tax requirements are
in the Articles
– These are functional
• Name Officers
– How many do you have?
• Pass a conflict of interest policy
• Pass a whistleblower and document
retention policy (SOX and new 990)
• Pass banking resolutions
• By unanimous consent or at an
actual meeting
• Sign Form SS-4 to get an EIN
Register with the
AG
• Illinois requires all charities to
register with the Office of the
Attorney General
• www.illinoisattorneygeneral.
gov/charities/index.html
• Form CO-1 and $15.00 filing
fee
• All forms available at the
website
• Form AG-990-IL required
annually
ALL ORGANIZATIONS
• Taxable and Tax-exempt
ALL ORGANIZATIONS
• Taxable and Tax-exempt
ALL TAX-EXEMPT ORGANIZATIONS
• Pensions/Retirement Plans
(Section 401(a))
• All Section 501 (c)(1) through (c)(27)
organizations (including such things as
unions, clubs, black lung trusts, etc.)
ALL ORGANIZATIONS
• Taxable and Tax-exempt
ALL TAX-EXEMPT ORGANIZATIONS
• Pensions/Retirement Plans
(Section 401(a))
• All Section 501 (c)(1) through (c)(27)
organizations (including such things as
unions, clubs, black lung trusts, etc.)
ALL SECTION 501(C)(3) ORGANIZATIONS
•
•
•
Operated exclusively for charitable, educational,
scientific, religious, etc. purposes
Can be a nonprofit corporation OR a charitable
trust
Contributions are generally tax deductible under
Section 170
• Private Foundations
• All non-public
charities and nonsupporting
organizations
• Excise Taxes
• Lower Deductability
Limitations
Private
Operating
Foundations
Section 4942(j)
• Private Foundations
• Publicly Supported
Organizations under
Sections 509(a)(1)
and 509(a)(2)
• Supporting
Organizations under
Section 509(a)(3)
• Higher Deductability
Limitations
• No Excise Taxes
Section 501(c)(3)
Organizations
(3) Corporations . . . organized and
operated exclusively for religious,
charitable, scientific, testing for public
safety, literary, or educational purposes, or
to foster national or international amateur
sports competition (but only if no part of
its activities involve the provision of
athletic facilities or equipment), or for the
prevention of cruelty to children or
animals, no part of the net earnings of
which inures to the benefit of any private
shareholder or individual, no substantial
part of the activities of which is carrying on
propaganda, or otherwise attempting, to
influence legislation (except as otherwise
provided in subsection (b)), and which
does not participate in, or intervene in
(including the publishing or distributing of
statements), any political campaign on
behalf of (or in opposition to) any
candidate for public office.
Section 501(c)(3)
Organizations
(3) Corporations . . . organized and
operated exclusively for religious,
charitable, scientific, testing for public
safety, literary, or educational purposes, or
to foster national or international amateur
sports competition (but only if no part of
its activities involve the provision of
athletic facilities or equipment), or for the
prevention of cruelty to children or
animals, no part of the net earnings of
which inures to the benefit of any private
shareholder or individual, no substantial
part of the activities of which is carrying on
propaganda, or otherwise attempting, to
influence legislation (except as otherwise
provided in subsection (b)), and which
does not participate in, or intervene in
(including the publishing or distributing of
statements), any political campaign on
behalf of (or in opposition to) any
candidate for public office.
Section 501(c)(3)
Organizations
(3) Corporations . . . organized and
operated exclusively for religious,
charitable, scientific, testing for public
safety, literary, or educational purposes, or
to foster national or international amateur
sports competition (but only if no part of
its activities involve the provision of
athletic facilities or equipment), or for the
prevention of cruelty to children or
animals, no part of the net earnings of
which inures to the benefit of any private
shareholder or individual, no substantial
part of the activities of which is carrying on
propaganda, or otherwise attempting, to
influence legislation (except as otherwise
provided in subsection (b)), and which
does not participate in, or intervene in
(including the publishing or distributing of
statements), any political campaign on
behalf of (or in opposition to) any
candidate for public office.
Section 501(c)(3)
Organizations
(3) Corporations . . . organized and
operated exclusively for religious,
charitable, scientific, testing for public
safety, literary, or educational purposes, or
to foster national or international amateur
sports competition (but only if no part of
its activities involve the provision of
athletic facilities or equipment), or for the
prevention of cruelty to children or
animals, no part of the net earnings of
which inures to the benefit of any private
shareholder or individual, no substantial
part of the activities of which is carrying on
propaganda, or otherwise attempting, to
influence legislation (except as otherwise
provided in subsection (b)), and which
does not participate in, or intervene in
(including the publishing or distributing of
statements), any political campaign on
behalf of (or in opposition to) any
candidate for public office.
Section 501(c)(3)
Organizations
(3) Corporations . . . organized and
operated exclusively for religious,
charitable, scientific, testing for public
safety, literary, or educational purposes, or
to foster national or international amateur
sports competition (but only if no part of
its activities involve the provision of
athletic facilities or equipment), or for the
prevention of cruelty to children or
animals, no part of the net earnings of
which inures to the benefit of any private
shareholder or individual, no substantial
part of the activities of which is carrying on
propaganda, or otherwise attempting, to
influence legislation (except as otherwise
provided in subsection (b)), and which
does not participate in, or intervene in
(including the publishing or distributing of
statements), any political campaign on
behalf of (or in opposition to) any
candidate for public office.
Section 501(c)(3)
Requirements
1. Organized and operated
exclusively
2. An exempt purpose
3 No private inurement
4. No substantial amount of
lobbying
5. No political activities
Organized and
Operated Exclusively
• Organized-Documents must
contain all requirements
• Operated-Charity must actually
function in accordance with those
requirements
• Authorize charitable activities
• Prohibit more than an
insubstantial amount of noncharitable activities
– Investments, unrelated trade or
business activities
– Lobbying
• Prohibit all political activities and
private inurement
• Payment of assets to charity
upon dissolution
Exempt Purposes under
Section 501(c)(3)
• Religious
– Churches
– Related religious organizations
• Charitable (including prevention of
cruelty to animals and children)
– Relief of the poor and distressed or
underprivileged
– Advancement of religion, education or
science
– Erection or maintenance of public works
– Lessening the burdens of government
– Promotion of social welfare through
lessening of neighborhood tensions,
fighting prejudice and discrimination,
defending human and civil rights or
combating community deterioration and
juvenile delinquency.
Exempt Purposes under
Section 501(c)(3)
• Scientific and Testing for Public
Safety
– “Conduct research in the public
interest”
– Make research results public
– Research performed for the
government
– Research directed toward benefiting
the public
•
•
•
•
Curing disease
Educating students
Publications
Aiding a geographic area by attracting
and retaining industry
Exempt Purposes under
Section 501(c)(3)
• Literary and Educational
– Schools–organizations devoted to
the instruction or training of the
individual for the purpose of
improving or developing his
capabilities
– Other Educational Organizations–
organizations devoted to educating
the public on subjects useful to the
individual and beneficial to the
community.
• Amateur Athletics
– Section 501(j)–Qualified Amateur
Sports Organizations
Private Inurement
and Private Benefit
• Private Inurement-“no part of the net
earnings of which inures to the benefit of
any private shareholder or individual”
– Statutory in nature–no de minimis exception
(but see Section 4958)
– Diversion of exempt assets away from the
activities of the organization
– Assets must inure to the benefit of an “insider”
• Private Benefit-the organization must
operate for the benefit of the general
public and not to provide private benefits
to a limited group of individuals
– Judically created from the operational test
– Allows incidental benefits
– Can be conferred on any individual, not just
“insiders”
**All private inurement is a private
benefit, but not all private benefit
constitutes private inurement**
Lobbying and
Political Activities
• Political Activities
– Generally, involvement in political
campaigns
– Absolutely prohibited
• Lobbying
– Generally, influencing the content of
legislation by contact with
legislative officials or executive
officials responsible for drafting
legislation for introduction
– Subject to the “no substantial part”
rule or a Section 501(h) election
ALL SECTION 501(C)(3)
ORGANIZATIONS
• Operated exclusively for charitable,
educational, scientific, religious, etc. purposes
• Can be a nonprofit corporation OR a charitable
trust
• Contributions are generally tax deductible
under Section 170
Private
Foundations
•All non-public
charities and nonsupporting
organizations
•Excise Taxes
•Lower
Deductability
Limitations
Public
Charities
•Publicly Supported
Organizations under
Sections 509(a)(1)
and 509(a)(2)
•Supporting
Organizations under
Section 509(a)(3)
•Higher Deductability
Limitations
•No Excise Taxes
Public Charities
• Section 509(a)(1)-Organizations
described in Section 170(b)(1)(A)
other than subsections (vii) and (viii)
– Section 170(b)(1)(A)(i)–Churches
– Section 170(b)(1)(A)(ii)–Schools
– Section 170(b)(1)(A)(iii)–Hospitals and
Medical Research Organizations
– Section 170(b)(1)(A)(iv)--State
University Endowments
– Section 170(b)(1)(A)(v)–Governmental
Units
• Section 170(b)(1)(A)(iv)–Publically
Supported Charities
• One-third of the charity’s total support is
from the general public
• No one contributor’s donation can count
toward public support more than 2% of total
support
Public Charities
• Section 509(a)(2)–Service Provider
Charities
– One-third of the charity’s total support is
from the general public and from fees for
services rendered
– No more than one-third of the charity’s
total support is from investment income
and UBTI
• Section 509(a)(3)-Supporting
Organizations
– Relationship Test–must have a specified
relationship with one or more named
public charities
– Organizational and Operational Test–the
supporting organization must be
organized and operated exclusively for the
benefit of its supported public charity only
– Disqualified Person Test–cannot be
controlled by disqualified persons
Federal Filing
Requirements
• Application for Tax Exempt
Status
– Form 1023 for Section 501(c)(3)
organizations (www.irs.gov)
– Generally, no due date, but filing within 27
months of date of creation will give you
exempt status retroactive to the date of
creation for Section 501(c)(3) organizations
– Filing exceptions for churches and small
organizations
• What happens next?
– The "we got your letter" letter
– Divides into three hoppers
• Easy
• Need more, but administrative
• Needs agent review
IRS Filings
• Annual Information Return
– Form 990 for most exempt
organizations – NEW FORM
– Form 990-PF for private foundations
– Generally due 5 months and 15
days after the close of the fiscal
year (May 15)
– Exceptions for churches and small
organizations
• Form 990-EZ
• Form 990-N – "e-postcard"
State Tax Exemptions
• State Income Taxes
– Generally, organizations exempt from
federal income tax under Section 501(a)
are also exempt from Indiana income tax
– However, check your state – some states
require an additional filing – the exemption
is not necessarily automatic!
• Sales and Use Taxes
– http://www.revenue.state.il.us/NonProfits/i
ndex.htm
• Property Taxes
– Real and personal property tax exemptions
are usually not based on the organization’s
charitable purpose, but on the actual use
of the property.
Other Issues
• Gaming
– Charitable gaming is highly
regulated
– This includes raffles and door
prizes
– http://www.revenue.state.il.us/Ch
arityGaming/index.htm
• Charitable Solicitation
– If you are using professional
fundraisers, there are additional
registration and reporting
requirements