starting a nonprofit - pro bono partnership · starting a nonprofit: upsides, downsides and...

9/21/2016

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www.probonopartner.org

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Starting a Nonprofit:

Upsides, Downsides and

Alternatives

September 21, 2016

Maurice Segall, Esq., Program Director, NY and Fairfield County, CT

Courtney Darts, Esq., Director of Education

Pro Bono Partnership, Inc.



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Please Note

This presentation is not and should not be construed as legal advice nor does this presentation create an attorney client relationship between you, your organization and Pro Bono Partnership. The content of this presentation is for informational purposes only. If you have specific questions about the practices of your organization, you should contact an attorney for advice.

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What is Pro Bono Partnership?• Free business legal services for nonprofit organizations through the

services of our staff and corporate and private attorney volunteers

– Exception: If you seek assistance with incorporating and/or applying for tax-exempt status, and the Partnership determines we can help your group, there will be a non-refundable $500 processing fee in addition to all required state and federal filing fees.

• To apply, visit www.probonopartnership.org and click on “Request Legal Assistance”



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Who Do We Serve?

• Nonprofit organizations, or those seeking 501(c)(3) status, that are serving the disadvantaged or enhancing the quality of life through important social, civic, arts, educational, or environmental programs or services;

• Unable to pay for legal services without significantly impacting resources for programs; and

• Located in New York (excluding New York City), New Jersey, Connecticut, and other areas on a case-by-case basis.

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What Assistance is Available?

Non-litigation, business law matters, in areas such as:

• Corporate structure and governance

• Contracts

• Employment law

• Intellectual property law

• Real estate (including lease reviews)

• Regulatory compliance (e.g., registration, annual reporting, charitable solicitation rules, lobbying)

• Tax law and tax-exempt status



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Introduction

• In 1998, there were 650,000 §501(c)(3) tax-exempt organizations registered with the IRS

• In 2015, the number had increased to over 1.1 million

• At the same time, funders are looking critically at who and how they support

– Reductions in government grants / contracts

– More targeted individual giving

– Redirected/focused corporate giving

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Introduction (cont’d)

• In this environment, it is essential that new groups do significant business planning and self-assessment before deciding to incorporate and apply for tax-exempt status

• The Partnership’s experience screening new organizations



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Some Common Misconceptionsabout Nonprofits

• Nonprofit and tax-exempt mean the same thing (or nonprofit corporations are automatically tax-exempt)

• An organization cannot raise money unless it is tax-exempt

• Every good idea deserves a nonprofit

• If I am the founder, I can pretty much run the nonprofit the way I want

• Nonprofits can’t make a profit

• Being on the board of a nonprofit is not “serious,” the way being on the board of a for-profit company is

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Common Misconceptions (cont’d)

• Nonprofits cannot pay staff

• Nonprofits are not subject to workers’ compensation, unemployment compensation and other employment laws

• I can get a tax deduction for the time/services I give to my nonprofit or a nonprofit’s use of my space

• State tax and local property tax exemptions are automatic for a 501(c)(3) organization

• Nonprofits cannot engage in lobbying



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The Legal Framework

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Incorporation and Tax Exemption

Becoming a tax-exempt nonprofit corporation is a two-step process

• Step One: Incorporation

• Product of state law

• Achieved by filing a certificate of incorporation or articles of incorporation with the state

• Step Two: Tax Exemption

• Federal designation

• Corporation applies to the Internal Revenue Service and asks to be recognized as tax-exempt



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Pros and Cons of Incorporating

PROS

• Limited liability

• Easier to open a bank account

• May be necessary in order to enter into contractual agreements

• More attractive to funders

• Perpetual existence

CONS

• State filing requirements

• Observing corporate formalities (board meetings, resolutions, etc.) and maintaining corporate records

• Must recruit and retain people to carry out work

• Perpetual existence

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Incorporating

• Accomplished by filing a certificate of incorporation (a/k/a articles of incorporation or charter) in the state where you wish to incorporate

• Groups are strongly encouraged to work with an attorney to draft the incorporation papers and the accompanying corporate governance documents (bylaws, conflict of interest policy, other corporate policies)



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Considerations for Incorporating

• Not-for-profit vs. for-profit

• Membership vs. nonmembership

• Board of Directors / Board of Trustees

• Officers

• Staff

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Organization Chart for Nonprofits

RemainingStaff

(Paid and Unpaid)

Executive Director

Directors/Trustees

Members(if applicable)

Elect

Hire & Supervise

Hires & Supervises



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501(c)(3) Tax Exemption• 501(c)(3) is one type of tax-exempt organization

• Can accept tax-deductible charitable donations

• Doesn’t pay income taxes; may be exempt from sales, property and other state and local taxes

• No private benefit or inurement

• Registration and reporting requirements

• Restrictions on lobbying activities

• Absolute bar on political campaign activities

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501(c)(3) Tax Exemption (cont’d)

• Transparency and accountability

• Organizations that don’t have to apply to have tax exemption

• Religious organizations that are houses of worship (not just faith-based charities)

• Organizations under a “group exemption”

• Organizations with annual gross receipts of not more than $5,000



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Applying for 501(c)(3) Tax Exemption

• Obtain an EIN from the IRS (similar to a SSN)

• Complete and file IRS Form 1023 or IRS Form 1023-EZ

• File within 27 months of incorporating to get tax-exempt status retroactive to the date of incorporation; if more than 27 months, retroactive to date that Form 1023 is filed

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Applying for 501(c)(3) Tax Exemption (cont’d)

Form 1023

– Multipage paper form that requires detailed information about the organization, including its mission, programs, structure, anticipated sources of financial support and a three-year budget

– $850 filing fee; $400 if annual gross receipts are projected at $10,000 or less

Form 1023-EZ

– Some organizations can use the shorter Form 1023-EZ – first complete an eligibility worksheet to see if your group qualifies

– Form is filed entirely online and requires relatively little information, but there are traps for the unwary

– Filing fee is $275



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External Oversight of Tax-Exempt Organizations

• IRS

• State Attorney General

– Jurisdiction over charitable gifts and charities generally

• Other state agencies

• Public & media

• Grantmakers

• Sarbanes-Oxley legislation

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Is Incorporation / Tax Exemption Right for You?

Some Questions to Consider



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1. Do your purposes fit within 501(c)(3)?

IRC Section 501(c)(3)

• The organization must be “organized and operated exclusively for religious, charitable, scientific, testing for public safety, literary, or educational purposes, or to foster national or international amateur sports competitionN, or for the prevention of cruelty to children or animals”

“Charitable” covers a wide variety of objectives, including:

• Relief of the poor and distressed or of the underprivileged• Lessening the burdens of government• Lessening neighborhood tensions• Combating community deterioration

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1. Do your purposes fit within 501(c)(3)? (cont’d)

Other purposes may not qualify under 501(c)(3), but the organization may still qualify as tax exempt under another subsection of Section 501. However, donations to these groups are likely not deductible as charitable contributions. For example:

• 501(c)(4) – civic leagues and social welfare organizations (e.g., a block association)

• 501(c)(6) – business leagues (e.g., Chamber of Commerce)

• 501(c)(7) – social clubs



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2. Is your mission clearly articulated?

Important as a basis for incorporation, exemption, continuing focus, organizational documents, funding and public relations

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3. Is there a profit motive?

• Section 501(c)(3) requires that “no part of the net earningsNinures to the benefit of any private shareholder or individual”

• a/k/a the “nondistribution constraint”

• Compensation must be reasonable – sanctions if violated

• Upon dissolution, all assets must be distributed to other 501(c)(3) organizations or to the government for public purposes



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4. Is there a need for your services?

• Have you done a needs assessment?

• Could you operate as a program of an existing organization?

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5. Are other organizations doing something similar to what you want to do? Locally? If so, how will your activities differ?

• Will you be duplicating already available services?

• Is there limited funding for such services?



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6. Who do you plan to benefit?

• A charitable class is a group of individuals that may legally receive assistance from a charitable organization.

• Cannot form a charity to benefit one person or specifically designated individuals – that will not qualify as a charitable class

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7. Who is involved with the organization?

• How many board members do you have?

• Are they all family and/or friends?

• Do they represent the public?

• What skill(s) does each person bring to the organization?

• Are there others who will help in non-board member roles?



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8. Where will you get your $$? Do you have identified sources of funding?

• Fees? Donations? Government? Corporations?

• Some funders are reluctant to fund start-ups

• Do your volunteers have the skills to fundraise?

• Is the organization sustainable?

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9. Do you have a only short-term project?

If so, might be better to use a fiscal sponsor or work as a program of an existing agency – the time and costsinvolved in setting up and then dismantling a separateorganization may not be worth it



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10. Do you have a need for privacy?

• 501(c)(3) “public charities” are accountable to the public and full disclosure is mandated

• Form 990 annual informational tax returns – must disclose information such as compensation of key employees and corporate governance policies; must make copies of Form 990 available on demand; also likely posted online

• The list of donors filed with the annual Form 990 does not have to be publicly disclosed by a 501(c)(3) public charity

• Annual reports filed with state authorities

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11. Do you plan to do more than an insubstantial amount of lobbying, or engage in any political campaign activities?

• A 501(c)(3) cannot have a “substantial part” of its activities consisting of attempts to influence legislation

• Section 501(h) Election on IRS Form 5768

• A 501(c)(3) is prohibited from participating in campaign-related activities – supporting or opposing a candidate for public office



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12. If you are the founder, are you comfortable working under the direction and supervision of a board?

If no, starting a nonprofit may not be right for you

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13. Do you or your co-founders have any experience working with/for a nonprofit organization?

• Funders will look at your experience

• Can you fill in gaps with other more experienced board or staff members?

• Do you have the administrative skills to ensure that the nonprofit can meet all of its legal and financial obligations in a timely manner?



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14. Can you afford it?

• Filing fees?

• Insurance?

• Startup costs?

• Overhead/administrative costs (e.g., wages)?

• Annual accounting fees?

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15. Have you considered alternatives to incorporation and tax exemption?

(A) Become a program of another organization

Pros:• Able to concentrate on and build your program

• Do not need to deal with fundraising, administrative, or organizational issues

Cons:• Lack of control

• Possible lack of identity



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15. Have you considered alternatives to incorporation and tax exemption? (cont’d)

(B) Fiscal sponsorship

• An existing 501(c)(3) organization (the “Sponsor”) may financially support an unrelated organization (the “Project”) so long as doing so furthers the Sponsor’s exempt purposes

• Funders donate to the Sponsor, which reports the income, controls the administration of funds and the Project’s activities, and is responsible for record-keeping and reporting to IRS and state agencies on behalf of the Project

• Sponsor may charge a reasonable fee for its administrative services

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15. Have you considered alternatives to incorporation and tax exemption? (cont’d)

(B) Fiscal sponsorship (cont’d)

• Good idea for new groups; allows them to focus on developing their programs

• Often temporary/short-term arrangements – can be an interim step on the road to incorporation and tax exemption

• Many different ways to structure a fiscal sponsorship. A written agreement is recommended and can be tailored to the needs of each Sponsor and Project



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Start with a Business Plan

• The mission of the organization

• A detailed description of the proposed activities

• The target beneficiaries

• The communities where the activities will be conducted

• Identification of other local groups that are doing similar work and a description of how your organization differs

• Expected sources of financial support and specific plans

• A three-year budget (revenue and expenses)

• Proposed staffing

• List of prospective board members and a summary of their experiences working with a nonprofit

• Opportunities, if any, for partnering with other organizations

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Resources• IRS Online Training for 501(c)(3) Organizations:

https://www.stayexempt.irs.gov/

• Thinking of Forming a Non-Profit? What to Consider Before You

Begin (Center for Non-Profits) www.njnonprofits.org/ThinkingOfFormingDesc.html

• Right from the Start: Responsibilities of Directors of Not-For-Profit

Corporations (New York State Charities Bureau) https://charitiesnys.com/pdfs/Right%20From%20the%20Start%20Final.pdf

• Internal Controls and Financial Accountability for Not-for-Profit

Boards (New York State Charities Bureau) https://charitiesnys.com/pdfs/Charities_Internal_Controls.pdf



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Resources (cont’d)

• Starting a Nonprofit Online Tutorial (Foundation Center): http://grantspace.org/training/self-paced-elearning/establishing-a-nonprofit-organization-tutorial

• Information on other charities:

• GuideStar: www2.guidestar.org

• Charity Navigator: www.charitynavigator.org

• Pro Bono Partnership’s Learning Center – articles and on-demand webinars (including a free eight-part series for new nonprofits)

https://www.probonopartner.org/learning-center/

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Resources (cont’d)

• Resources for Developing a Business Plan:

• SCORE: https://www.score.org/resource/business-plan-template-startup-business

• U.S. Small Business Administration: https://www.sba.gov/tools/sba-learning-center/training/how-write-business-plan



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Contact Us

237 Mamaroneck AvenueSuite 300White Plains, NY 10605 Phone: 914-328-0674

280 Trumbull Street28th FloorHartford, CT 06103 Phone: 860-541-4951

300 Lanidex PlazaSuite 3203Parsippany, NJ 07054 Phone: 973-240-6955

New York & Fairfield County Connecticut (except Fairfield County)

New Jersey

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www.linkedin.com/company/pro-bono-partnership

starting a nonprofit - pro bono partnership · starting a nonprofit: upsides, downsides and...

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