YNPN Tax Exemption
Discussion
Thursday, September 7th
5pm PDT / 6pm MDT / 7pm CDT / 8pm EDT
Call-in number 563-843-7000
Passcode 622243#
Agenda
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Distinction between a 501(c)(3) and a 501(c)(6) organization and why that
matters to YNPN chapters
What roles National can and cannot play for your chapters in this regard
(i.e. what is legal, what isn't and what is just a plain bad idea)
Tips and pitfalls in applying for 501(c)(3) tax exempt status with the IRS
Tips on reaching out to get a fiscal sponsor to support your chapters
Many thanks to Gene Takagi for joining this call to give us tips (not legal
advice) about tax exemption issues!! I’m sure he’s be happy to be hired
by any of our organizations… let the national board know if you’d like to
get a hold of him.
September 2006
* None of this presentation is intended as legal advice, but rather as
a compiled list of other resources for your information.
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Difference between a 501c3 & 501c6
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Trade Association versus Public Charity
What is the “charitable intent”?
Emphasis on social networking activities
versus educational activities
Complications of job posting boards,
membership, and other activities outside of
“charitable intent”
September 2006
* None of this presentation is intended as legal advice, but rather as
a compiled list of other resources for your information.
3
Role of National YNPN in helping
Chapters with Tax Exemption Issues
- Options that we considered:
-Playing a “pass-through” role for donations (“step transactions”)
- Fiscal Sponsorship: playing a grantee-grantor role for chapters (donors cannot
specify chapter that should receive funds, but can specify a programmatic area)
- Administrative work on both ends makes the legal options unviable for the
network, as it is.
- Remaining recommendations for chapters:
- Incorporate
- File for tax exemption or Find a fiscal sponsor
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Filing for 501c3 status
To qualify for 501(c)(3) tax-exempt recognition, an organization must meet the following
requirements set by Congress:
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The organization must be organized and operated exclusively for religious, educational,
scientific, or other charitable purposes,
Net earnings may not inure to the benefit of any private individual or shareholder,
No substantial part of its activity may be attempting to influence legislation,
The organization may not intervene in political campaigns, and
The organization’s purposes and activities may not be illegal or violate fundamental public
policy.
The first step in forming a nonprofit is to incorporate in some state as a “nonprofit
corporation” under that state’s laws. Once incorporated, the nonprofit files a Form 1023
with the IRS, applying for tax-exempt status. If approved, the organization receives a letter
recognizing 501(c)(3) tax exemption as a public charity. Your organization must operate in
furtherance of its exempt purposes described in its Form 1023, and the Form 1023 must be
available for public inspection. If you are being asked to write grants that seem to be far
afield from the organization’s mission, check the original 1023 to see if they are within the
scope of the original application. If they aren’t, the organization should consider whether if
would be appropriate to apply for that grant or, with much deliberation, should seek to
modify its purpose.
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Responsibilities of Nonprofit Boards
Administration of the Corporation
▪ The board is responsible for oversight of the legal entity (to ensure that the
organization’s resources are effectively and efficiently utilized to advance the
organization’s exempt purposes)
▪ The board defines the organizations purpose (vision, mission and vales)
▪ The board determines policy for the organization
Program Planning and Budgeting
▪ Translates the mission into a specific program plan
▪ Defines specific needs to be addressed
▪ Establishes goals and objectives in order of priority
▪ Develops a realistic budget, which supports the above
▪ Adopts the program plan and budget annually
Evaluation of Organizational Effectiveness
▪ Measures progress towards specific goals and objectives in the program plan
▪ Evaluates the big picture, are you achieving your mission
▪ Evaluates responsiveness to new situations
▪ Evaluates the effectiveness of volunteer leadership (the board)
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Responsibilities of Nonprofit Boards (cont.)
Financial Stewardship
▪ Development of financial resources (Board members make contributions and
assist in fundraising).
▪ Review, approve and set conditions for all funds being solicited in the
organization’s name
▪ Exercise fiduciary care of all funds entrusted to the organization (regular financial
reports, audits, policies and controls)
▪ Engage in long range planning
Constituting the Community Connection
▪ Represent the public interest
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Incorporate as a Nonprofit
Articles of Incorporation serve two necessary functions:
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Reserve the name of your organization, by registering with the Secretary of
State.
The State recognizes your organization as an incorporated nonprofit
organization.
Incorporation provides the organization’s leaders and members with
limited liability from the claims of creditors of the corporation.
Incorporation provides a set of default rules that may apply to the
organization and operation of the corporation.
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Common Elements of Articles/Certificate of
Incorporation
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Title (e.g. Articles or Certificate of Incorporation)
Name and number of the statute under which corporation is sought
Name of the corporation or organization
Purpose(s) clause
Statement of nonprofit nature of the corporation
Statement barring ‘prohibited’ transactions (e.g., private inurement, substantial lobbying, political
campaign activities). (Necessary, in order to obtain tax exemption)
Locality where corporate activities are to be conducted
City, town or village, and county where the principal corporation office is to be located
Number of directors or trustees, or a stated maximum and minimum number (usually at least three)
Names and residence addresses of the person who are to be the directors until the first annual
meeting (same number as that stated in item I)
Statement (in some states) that all the subscribers to the certificate are of legal age (over 21 in most
states), that two-thirds of them are citizens of the United Sates and that at least one of the directors
named is a citizen of the United States and a resident of the state.
Statement that the corporation shall (or, shall not) have numbers; shall be public benefit (or mutual
benefit) in nature; and how its assets shall be distributed on dissolution; also, for religious
corporations a statement of religious nature.
Name and address of the designated Agent for Service of Process.
Signatures, addresses and (in some states) acknowledgements (notary’s statement). Usually at
least five to seven signatures.
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DRAFT BYLAWS
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Bylaws are the rule book for a nonprofit organization, and it is helpful to draft them
during the early stages of developing your nonprofit organization. They will also be
required by the IRS when filing your application for federal tax-exempt status.
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Primarily, bylaws outline how your board of directors will operate, specify the size of
the board, selection and term commitment of board members, number of board
meetings, number and duties of officers and committees, financial and legal
procedures, indemnification policies, and the purpose of the organization.
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Applying to the IRS for Tax Exempt
Status, or 501c3
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After you have incorporated locally, you want to obtain Form 1023 and
instructions from your local IRS office. For locations you may go to the IRS
website at www.irs.gov/localcontacts/. Form 1023 is your application to the IRS.
You may also call the IRS and order ‘Kit 1023’ by calling 1-800-829-FORM.
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If questions arise, you may want to consult an attorney or accountant who is
familiar with nonprofit organizations.
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The completed application is sent along with your Articles of Incorporation and
the bylaws of your corporation to the IRS with your check for up to $750 (subject
to change; see Part XI of Form 1023). Application for tax-exempt status should
be made within twenty-seven (27) months of your incorporation date.
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The IRS will acknowledge your application and outline their process. If the IRS
requests additional information, respond as soon as possible.
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Federal Employer Identification
Number
Every exempt organization is required to have a Federal Employer
Identification Number (EIN), whether or not you have employees. An
Employer Identification Number is the official identification code for an
organization (similar to a social security number for an individual). This
number will help the IRS track all your reports and tax-exempt
application.
You should file for the Employer Identification Number (EIN)
simultaneously with your tax exemption forms, to ensure quickest
validation. There is no filing fee for the Employer Identification Number
application. The IRS created a Tele-TIN phone number for this purpose.
The instructions for form SS-4 list the phone numbers for each region.
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Reporting to the IRS
An annual report to the IRS will be required for most organizations with
budgets over $25,000. This provides the IRS with income and disbursement
information on your organization. The report is submitted on IRS Form 990.
IRS forms may be obtained from your local IRS office, by phone at 1-800-829FORM or online at http://efile.form990.org.
Instructions for Form 990
IRS Form 990
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Fiscal Sponsorship
Individuals or groups in a hurry to begin operations and
accepting tax-deductible donations can become sponsored by
an organization that already has 501(c)(3) status. By doing so,
the group can apply for and accept grants, accept tax-deductible
donations, and carry on other activities under the tax-exempt
status of their sponsor. However, the activities of the sponsored
group must be consistent with the exempt purposes of the
sponsor. For example, a group that intends to provide services
to homeless people cannot be sponsored by a 501(c)(3) that is
tax-exempt for the purposes of providing classical music
concerts.
Borrowed from Nonprofit Genie
What are the benefits of using a fiscal sponsor?
Groups may decide that using a fiscal sponsor makes sense for a variety of reasons;
Speed - It normally takes four to six months from the time an application for tax
exemption is filed with the IRS to receive notice that tax-exempt status has been
granted, and that is IF the IRS has no questions about information contained in the
application. Theoretically one could make arrangements to be fiscally sponsored in a
day or less, although a couple of weeks is more typical.
Efficiency - Especially for small groups, having someone else provide most of your
administrative, or infrastructure functions may be cheaper than doing it yourself. This is
especially true if you are a group that is only expecting to be in existence for a short
period of time.
Convenience - Most groups, start-up or otherwise, want to focus their energy on their
charitable activities. Having to create and maintain an infrastructure can be distracting
from the mission of the group.
Necessity - There are some funding sources that will not fund brand-new groups. One
way around this restriction is to become part of a group that has some history.
Borrowed from Nonprofit Genie
15
What are the disadvantages?
As a sponsored project of an already existing 501(c)(3), your
"parent organization" may be legally responsible for everything you
do (this will depend on the nature of the fiscal sponsorship
agreement). This includes the responsibility to comply with the
terms of the grants you have been awarded and how you operate.
If you and your sponsor disagree, you may be forced to "do it their
way". The fiscal sponsor may also own the products of your work
when you exit the relationship (again, this depends on the
agreement).
Some foundations have policies that do not permit them to make
grants through fiscal sponsors.
Borrowed from Nonprofit Genie
16
What are some of the services typically
provided by fiscal sponsors?
There is really no such thing as a "typical" bundle of services provided by a sponsor. The services
available from sponsors vary from nothing to those listed below that are often provided by a
professional sponsor.
Federal, state and local tax & informational returns
Receipt and acknowledgment of tax-deductible donations and grants
Monthly financial statements
Financial record-keeping
Independent Audit
Check processing and issuance for expenses, I-9s, 1099s
Directors' & Officers, Volunteer, & General Liability Insurance
Technical assistance on personnel issues
General Administration
Legal advice
Grant progress reports
Borrowed from Nonprofit Genie
17
How do I go about looking for a
fiscal sponsor?
Some of the places to inquire about fiscal sponsorship
services are: a local technical assistance provider such
as the members of the California Management
Assistance Partnership (C-MAP), a local community
foundation, legal firms that specialize in nonprofits,
prospective funders, the internet under "fiscal
sponsorship".
Borrowed from Nonprofit Genie
18
What can a fiscal sponsor provide
us that we couldn’t do on our own?
A fiscal sponsor can often provide useful advice and help
point you in the right direction. Hopefully the sponsor will
also have solid experience in the areas where they are
providing services to you. But the bottom line is, except for
groups needing to get around being new with funders, if
you wanted to put in the resources necessary to do
everything on your own, you could do it all yourself.
Borrowed from Nonprofit Genie
19
Are there organizations that are "in the
business" of fiscal sponsorship?
Yes. Some 501(c)(3)'s have received permission
from the IRS to support "a very wide variety of
charitable and educational activities". Fees and
services can vary widely so it is important to
understand each sponsor's "personality".
Borrowed from Nonprofit Genie
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Do we need an attorney to work out a fiscal
sponsorship agreement?
When a project sets up a relationship where it voluntarily gives up some
control over its activities, it is always a good idea to have a written
contract. Often a sponsor will have a standard contract that it uses with
new projects. A good contract will have a procedure outlined in it as to
how to terminate the relationship if for some reason either side becomes
uncomfortable. Read the contract carefully and don't be afraid to ask the
sponsor questions. The sponsorship agreement is a legally enforceable
document so unless the group has experience in this area, a review of
the document by an attorney paid to represent your interests is a good
idea. Make sure you know what you are getting yourself into.
Borrowed from Nonprofit Genie
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Do you have an example of a fiscal
sponsorship agreement between two
nonprofits?
http://www.compasspoint.org/askgenie/details.php?id=90
Do you have an example of a fiscal
sponsorship agreement between a
professional fiscal sponsor and its projects?
http://www.compasspoint.org/askgenie/details.php?id=91
Borrowed from Nonprofit Genie
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What happens if we want to leave a fiscal
sponsor?
It is important to both the you and the sponsor that the
terms of the relationship are in writing before the
relationship begins. If you don't and later decide you
want to leave you may find that the sponsor wants to
keep the project but not you. Any good sponsorship
agreement will have a mechanism to deal with how to
terminate the relationship. There are certain legal
restrictions on how the project's activities and assets
are severed from the sponsor but that should be
disclosed in the sponsorship agreement.
Borrowed from Nonprofit Genie
23
We’ve decided to become an independent nonprofit,
what are the steps we should take?
If you have decided to separate from your current sponsor and don't want to
affiliate with another the process to become independent begins with informing
your current sponsor of your decision.
Most often you will next create a nonprofit (public benefit) corporation that will file
applications with both the IRS and state taxing authority asking to be exempt
from income tax. From the time the applications are submitted it usually takes
four to six months [Note: this was a standard estimate, but recent lore puts this
timeline more into the 8-12 months timeline] to receive your determination
letters (notice that exemption has been granted). When you receive your notice
it may be retroactive to the date of your original application (or the date of
incorporation, depending on the time frame between formation and the
exemption application).
The final step is arranging to have your sponsor transfer the project's assets and
liabilities to the new nonprofit.
Borrowed from Nonprofit Genie
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Disclaimer
The information contained in this presentation has
been prepared by YNPN and is not intended to
constitute legal advice. YNPN has used reasonable
efforts in collecting, preparing, and providing this
information, but does not guarantee its accuracy,
completeness, adequacy, or currency. YNPN is a
California nonprofit public benefit corporation and is
affiliated with its chapters solely pursuant to the
terms of an affiliation agreement.
September 2006
* None of this presentation is intended as legal advice, but rather as
a compiled list of other resources for your information.
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