HowToFormANonprofit_1st_ed-Chapter3

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Starting A Nonprofit: What You Need To Know, 1 st Ed. – Chapter 3 political advocacy and lobbying activities. Our LINC organization, on the surface, leans towards the 501(c)(3) classification rather than (c)(4), but will practice lobbying as an insubstantial part of its activities. In Section III, we will discuss how much lobbying a 501(c)(3) can undertake. Other categories are extremely specific (example: 501(c)(5), Labor, Agricultural, and Horticultural Organizations; 501(c)(6), Business Leagues, Chambers of Commerce, Real Estate Boards, Etc.; 501(c)(7), Social and Recreation Clubs, …). Most organizations that do not meet the specifics of one of those categories file for exemption under 501(c)(3). The main advantages of forming a 501(c)(3) nonprofit organization include the following: 1. The organization is qualified for tax-exempt status. The nonprofit organization will not pay taxes on the profit of its activities. However, if this profit is not directly related to the activity of the organization, it will not be exempt from taxes. Typically, the organization will not only be exempt from income taxes, but also from property taxes on real estate and other property. 2. The organization may be eligible for public or private grant money. Being a nonprofit charitable organization may ensure easier access to public and private grants, which often require 501©(3) status for eligibility. 3. The organization may solicit tax-deductible contributions. Individuals and organizations are encouraged to donate to charitable organizations, because tax law permits such donors to deduct their contributions from taxable income. 4. Personal liability of the members is limited. Usually, incorporating a nonprofit organization protects the directors, officers, and members of the nonprofit from personal liability for the organization's debts and other obligations. If the nonprofit is sued, the general rule is that only the assets of the nonstock corporation are at risk unless there is willful misconduct or self-dealing. However, directors and officers are subject to the duties of diligence, obedience, and loyalty and can be sued for negligence in the performance of those duties. Once an organization has been granted the 501(c)(3) status, it must adhere to certain duties and restrictions posed by federal and state law. The primary focus of the requirements is to ensure that substantially all its activities relate to its tax exempt purpose outlined in the articles of incorporation. An organization can participate in activities that are remote to its tax exempt purpose, but can only do so as an insubstantial part of its overall operation. Regular responsibilities of the organization maintaining 501(c)(3) status include: • Recordkeeping to meet annual IRS requirements for financial and non-financial transparency, as well as to report a summary of funding sources. • Various filing requirements for lobbying, fundraising, and tax exempt status. • Disclosure of the initial application for 501(c)(3) status upon request (Form 1023). • Annual returns through Form 990. • Allow public to access Bylaws and annual returns. Classification 4
Starting A Nonprofit: What You Need To Know, 1 st Ed. – Chapter 3 In order to avoid automatic classification as a private foundation by the IRS, a 501(c)(3) must be prepared to distinguish itself as a public charity. Private foundations are subject to a 2% income tax on net investment income and additional tax if they fail to distribute a percentage of their assets for exempt purposes. Other organizations which qualify as public charities include, but are not limited to, churches, schools, organizations formed for the benefit of colleges and universities, hospitals and cooperative hospital organizations, and governmental units. In addition, a nonprofit organization may also qualify as a public charity if the organization meets the 1/3 test. An organization will qualify if the total amount of support that the organization receives, excluding amounts received for services rendered and gross receipts from either governmental units or the general public, is at least one third of the total support received by the organization. B. The Application Procedure For Federal Exemption The IRS explains tax information for charitable organizations on its web site: http://www.irs.gov/charities/charitable/index.html. Publication 557 of the IRS gives a detailed explanation of the application process and other miscellaneous questions. You can find it online at: http://www.irs.gov/pub/irs-pdf/p557.pdf • Charitable Organizations Section 501(c)(3) includes organizations with exempt purposes that are “charitable, religious, educational, scientific, literary, testing for public safety, fostering national or international amateur sports competition, and the prevention of cruelty to children or animals. The term charitable is used in its generally accepted legal sense and includes relief of the poor, the distressed, or the underprivileged […].” 1 In order to obtain the 501(c)(3) status, an organization must be classified into one of the exempt purposes listed above. Large common groups of organizations, such as churches, educational organizations, health centers, and others have officially been recognized as fulfilling the requirements of the exempt purposes and are mentioned in statutes or case law. Organizations which do not fall into one of those categories can also qualify under a more general requirement of “charitable”. Different tests, developed through time, help to determine if an organization falls within an exempt category. 2 For the most part, charitable organizations must have been established over time to promote the general welfare of the public. 3 The activities of the organization must benefit people who 1 IRS web site, Tax Information for Charitable Organizations, Exemption requirements at http://www.irs.gov/charities/charitable/article/0,,id=96099,00.html 2 26 U.S.C.A. § 501, IRC § 501; St. David’s Health Care System v. U.S., 349 F. 3d 232, 235 (2003). 3 “Generally, a charitable organization has been defined as being devoted to charitable purposes and organized for the purpose of promoting the general welfare of the public, a community, or a class of an indefinite number of individuals.” 1A William Meade Fletcher, Fletcher Cyc Corps. § 79 (2002) 5
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