PowerPoint Version - Scholz Nonprofit Law

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Social Ventures 101
Presentation for
“Communiversity”
February 8, 2012
Prepared by Melissa Auchard Scholz,
Scholz Nonprofit Law LLC,  2012
Nonprofit or Not?
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Non-profit versus for-profit
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Social ventures
Social enterprise
Mission driven
Either or both
It Depends!
Nonprofit or Not?
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Why, What, Who, When, Where, How
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Key issue = how will your idea be funded?
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Do you need to be able to accept tax-deductible
contributions?
Will you be selling something?
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What Is a Nonprofit?
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Entity organized under state law
e.g., WI = “nonstock corporation” under Ch. 181
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Tax-exemption obtained through IRS
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501(c)(3) = charitable, educational, religious,
scientific, etc.
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Private foundation or public charity
501(c)(4) = social welfare organization
501(c)(6) = trade association
What is a Nonprofit?
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Does not mean “no profit” for organization
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Does not mean no selling
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DOES mean that “profit” cannot go to
individuals
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Reinvest profits in organization
Pay reasonable compensation
What does it mean to be
“Tax-Exempt under Section 501c3”?
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Exempt from federal & WI income tax for
organization’s “related activity”
Eligible for exemption from state sales taxes
Eligible for real and personal property tax exemption
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NOT exempt from employment taxes
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But not all 501c3s qualify under WI law
Exempt from WI unemployment tax if have 4 or fewer
employees
File Form 990 “information return” as tax return
What does it mean to be
“Tax-Exempt under Section 501c3”?
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Eligible for tax-deductible contributions
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Operated for “public” not private purposes
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E.g., no organization to help 1 individual with medical expenses
No enrichment of “insiders”
No “owners”
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Public subsidy = more regulation and more responsibility
Led by a Board of Directors or Members + Board
WI requirement = at least 3 persons on the Board
What does it mean to be
“Tax-Exempt under Section 501c3”?
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Assets permanently restricted as charitable assets
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OK to lobby “insubstantial” amount, for public
charities
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“501h election” gives 501c3 parameters based on the c3’s
annual budget
No political activity: can’t support or oppose political
candidates
Earned Income by Nonprofits:
Related or Not?
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Key issue = how income is earned, not spent
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If earned through activity that is related to exempt
purpose, not taxable and no threat to tax-exempt
status
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If earned through “unrelated” business activity
(unrelated business income or “UBI”), subject to
unrelated business income tax (“UBIT”) and too
much threatens tax-exempt status
Earned Income by Nonprofits:
Related or Not?
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Related v. unrelated business income:
Is the income earned from a “trade or
business, regularly carried on, that is not
substantially related” to organization’s
exempt purpose?
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Earned Income by Nonprofits:
Related or Not?
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Trade or business is any activity carried on for the
production of income from the sales of goods or the
performance of service.
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Business activities are regularly carried on if they
occur with a frequency and continuity, and are
pursued in a manner generally similar to comparable
commercial activities of nonexempt organizations.
Earned Income by Nonprofits:
Related or Not?
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Not substantially related: A trade or business is
“related” only where the conduct of the business
activities has a causal relationship to the
achievement of exempt purposes (other than
through the production of income) and that causal
relationship is a substantial one.
i.e., production of income, distribution of goods, or
performance of service must contribute importantly
to accomplishment of the exempt purposes
Earned Income by Nonprofits:
Related or Not?
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Competition with commercial enterprise = strong
indicator of UBI
Comparison to commercial operation, including:
– Marketing
– Advertising
– Distribution
– Scale
– Suppliers
– Price
Earned Income by Nonprofits:
Related or Not?
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Exceptions include:
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Volunteer labor
 E.g., volunteers selling at snack bar
Convenience of clients/members
 E.g, coffee shop at hospital
Donated merchandise
 E.g., thrift shop
Qualified trade show or convention
Corporate Sponsorship Payment
 Caution: sponsorship can’t be an advertisement
Earned Income by Nonprofits:
Related or Not?
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Passive income is, generally, not UBI:
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Interest
Dividends
Royalty payments
Rents from real property
UNLESS, except for dividends, from
“controlled subsidiary” or debt-financed
property
Earned Income: Implication of UBI?
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Net profit from UBI taxed at corporate rate
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Insubstantial amount of UBI is OK
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Expenses that are “directly connected with
carrying on” the unrelated business deducted
against UBI
If >15-20% of annual gross receipts, unrelated
business should be done through for-profit
subsidiary
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Corp. - Stock Corporation
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Ch. 180 corp. in WI or organize in another
state & register as “foreign corporation” in WI
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Will have 1 or more shareholders
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Only requires one director
LLC - Limited Liability Company
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Organized under Chapter 183 in WI
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1 or more members
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But if single member, then a “disregarded entity”
for tax purposes
May be managed by a board or by a
member/members
L3C - Low Profit Limited Liability
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Variation on an LLC
Not available in WI but can be organized in
another state & register as a “foreign
corporation” in WI
Must have an explicit primary charitable
mission and earning a profit can only be a
secondary mission
Operate as standard LLCs for tax purposes
Benefit Corporations
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Variation on a standard business corporation
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Not available in WI but can be organized in another
state & register as a “foreign corporation” in WI
Requirements:
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Gives protection to Boards that consider social and
environmental issues when making decisions on behalf of
the corporation
Create a “material positive impact”
Impact must be assessed by a 3rd party
Report results annually
B Corp. Designation
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B Lab, a nonprofit organization, certifies B
Corporations, the same way TransFair certifies Fair
Trade coffee or USGBC certifies LEED buildings
Certified B Corporations are a new type of
corporation that “uses the power of business to solve
social and environmental problems.”
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See http://www.bcorporation.net/about
To receive B Corp. designation must complete an
application and adopt required legal language in
corporate documents
How to Form a For-Profit Entity
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File articles of incorporation or organization
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Obtain tax identification number (EIN) & WI DOR
registration
Prepare bylaws/operating agreement and
shareholder/member agreements as appropriate
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Include special language if necessary
Include special language if necessary
Get tax advice
Establish necessary employment tax accounts
How To Form a 501(c)(3)
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Form corporate entity
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File articles of incorporation
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Secure at least 3 Directors and name officers
Prepare bylaws (filed with IRS but not WI)
Obtain tax identification number (EIN)
Establish necessary employment tax accounts
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State of WI form does not work for IRS
For info on employee v. independent contractor
See:http://dwd.wisconsin.gov/wc/employers/independent_c
ontractors.htm
How To Form a 501(c)(3)
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Prepare Form 1023, application for taxexemption
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Include Narrative: Why, What, Who, When,
Where, & How
Three year budget: current year + 2 future years
$400 fee if <$10K; $850 if >$10K
Exemption will be retroactive back to date of
incorporation, if filed within 27 months
How To Form a 501(c)(3)
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Seek assistance from knowledgeable advisor
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Consider whether M-LINC can help
(Marquette Legal Initiative for Nonprofit
Corporations).
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E.g., Scholz Nonprofit Law at
http://scholznonprofitlaw.com/
Advice available by telephone
Good resources available at: http://m-linc.org/
Alternatives to Forming
New Organization
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Fiscal sponsorship = a 501(c)3 public charity (the
“Sponsor”) supports individuals or a nonexempt
organization (the “Project”) to undertake a charitable
(etc.) activity
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For Sponsor to be able to collect tax-deductible
contributions on behalf of Project, Sponsor must have
“complete discretion and control” over the finances but
Project can run the program
Contract for services - propose providing services
to existing organization and help find funding for your
services
Additional Resources
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IRS Publication 557 at
http://www.irs.gov/formspubs/index.html
IRS Publication 526, Unrelated Business Income,
http://www.irs.gov/formspubs/index.html
Life Cycle of an Exempt Organization at irs.gov
Social Enterprise Alliance,
https://www.se-alliance.org/
Scholz Nonprofit Law,
http://scholznonprofitlaw.com/
Contact Information
Melissa Auchard Scholz
Scholz Nonprofit Law LLC
608/268-0076
[email protected]
www.scholznonprofitlaw.com
This presentation is intended for informational purposes only and is not intended as legal
advice on specific matters, factual situations, or issues. Different facts, information or
developments in the law may affect the material in this presentation.
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