www.probonopartnership.org copyright 2011 pro bono partnership. all rights reserved. no further use,...

www.probonopartnership.orgCopyright 2011 Pro Bono Partnership. All rights reserved. No further use, copying, dissemination, distribution

or publication is permitted without express written permission of Pro Bono Partnership.

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Starting a Nonprofit: Myths and Realities

Original June 2011 presentation adapted by Philadelphia VIP/LawWorks January 2012



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What is Philadelphia VIP/LawWorks? Free business legal services for nonprofit organizations through

the services of our corporate and private attorney volunteers

To be eligible, the organization must be:• Nonprofit, tax exempt (or seeking 501(c)(3) status);• Primarily serving the poor and disadvantaged and/or providing other

important services to the Greater Philadelphia community;• Focusing on health and human services, community development,

affordable housing, neighborhood revitalization, environmental protection, or the arts;

• Providing programs that have a demonstrable impact; and• Unable to pay for legal services without significant impairment of

program resources.

Apply at http://www.phillyvip.org/content/apply-assistance

EDIT NEXT PARAGRAPH!* Exception: If you seek services with incorporation and/or applying for tax exemption and

the Partnership determines that we can help your group, there will be a non-refundable $500.00 fee for that service, in addition to all required state and federal filing fees.



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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

By 2010, the number had increased to over 1,280,000

• In 2010 alone, almost 60,000 nonprofits applied to the IRS for 501(c)(3) status; only 82% were approved

• In 2010, there were over 540,000 tax-exempt nonprofits registered under other provisions of §501(c)

[IRS Data Book 2010]

– In 2007, the IRS Commissioner for Tax Exempt & Government Entities said that there is one tax-exempt organization for every 228 Americans

Most rapidly growing sector of American economy



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Introduction (cont’d) But revenue sources are decreasing, especially in this

economy!

More targeted individual giving and redirected/focused corporate giving

• In 2009, direct charitable contributions by individuals to public charities amounted to approximately $227 billion/year (75% of all charitable giving in 2009) [Giving USA data]

• In 2009, total giving was down 3.6% [Giving USA data]

• In 2009, the 400 largest charities experienced an 11% drop in donations [The Chronicle of Philanthropy data]

• Individual giving decreased 4.9% in 2009, on top of a 6% decrease in 2008 [Center on Wealth and Philanthropy at Boston College data]



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Introduction (cont’d)

Resulting in an environment where it is essential to make a disciplined assessment of whether it makes sense for you to incorporate and apply for tax exemption

Philadelphia VIP’s experience screening and referring new applicants



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Myth or Reality? 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

Nonprofits cannot engage in lobbying



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Myth or Reality? (cont’d)

Nonprofits cannot pay salaries (or nonprofits can pay any salaries they want to)

Nonprofits are exempt from workers’ compensation and unemployment laws

I can get a tax deduction for the time/services I give to my nonprofit

I can get a tax deduction for use of my space

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



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Incorporation and Tax Exemption

Becoming a tax-exempt organization is a two-step process

• First step: Incorporation is a product of state law; obtained by filing a certificate of incorporation or articles of incorporation with the state

• Second step: Tax exemption is a federal designation for which the corporation applies to the Internal Revenue Service on Form 1023 and asks to be recognized as tax exempt



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Pros and Cons of IncorporatingPROS Limited liability

Facilitates tax exemption

More attractive to funders

Perpetual existence

CONS State filings

Federal filings

Maintaining corporate records

Observing corporate formalities

Must recruit and retain people to carry out responsibilities

Perpetual existence



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Organizational Requirements

Not-for-profit vs. for profit

Bylaws

Membership vs. nonmembership

Board of Directors/Board of Trustees

Officers

Staff



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Organization Chart for Nonprofits

R em ain ingS taff

(P a id a n d U np a id )

Executive D irector

D irectors/T rustees

M em bers(if a p p lica b le )

Elect

Hire & Supervise

Hires & Supervises

www.probonopartnership.org

Incorporating in Pennsylvania Incorporating in Pennsylvania

1. Choose a business name and check for availability– Your nonprofit corporation's name may not be the same as or

very similar to other corporate names on file with the Secretary of State

See the Name Availabilities resource at the Corporations Bureau for more information.

2. Recruit and/or appoint directors – You must have at least one director under the law, but a

minimum of three is recommended. – Directors need not be residents of Pennsylvania unless the

Articles of Incorporation or bylaws require otherwise.


Incorporating in PennsylvaniaIncorporating in Pennsylvania3. Incorporate your Nonprofit Organization

a. Prepare and submit Articles of Incorporation to the Secretary of State

The Pennsylvania Department of State's website provides a fill-in-the-blank form for Articles of Incorporation, but a nonprofit that intends to apply for federal nonprofit tax-exempt status will need to expand its Articles of Incorporation to include required language.

Note: All incorporators must sign Articles of Incorporation. The filing fee is $125. You will have to file an Annual Report with the Department

of State by April 30th each year and the board must present this report to all members.


Incorporating in PennsylvaniaIncorporating in Pennsylvania

3. Incorporate your Nonprofit Organization

b. File a Docketing Statement

When you file Articles of Incorporation, you must also file a Docketing Statement with the Department of State.

The docketing statement contains only basic information like the name and type of business organization and a description of business activities.




c. Fulfill the “advertising requirement"

You must publish a statement of your intent to file or the actual filing of the articles of incorporation in a local newspaper of general circulation (usually The Philadelphia Daily News) and The Legal Intelligencer.Approximate cost: $300-$350

The advertisements must contain the name of the proposed corporation and a statement that the corporation is to be or has been organized under the provisions of the Pennsylvania Nonprofit Corporation Law.


Incorporating in Pennsylvania Incorporating in Pennsylvania 3. Incorporate your Nonprofit Organization

d. Create the bylaws There are no set criteria for the content of bylaws, but they typically

set forth the rules and procedures for governance of the organization:

– Number of annual meetings

– Minimum and maximum number of directors; how many must be present at a meeting in order to take a vote

– Officer positions and their responsibilities

– How votes are taken

– How internal disagreements are handled

– How the board provides financial oversight over the organization’s operations




e. Hold an organizational meeting bylaws are adopted officers are elected – must have a president, secretary

and treasurer

f. Create a corporate records book should contain the Articles of Incorporation, mission

statement, bylaws, minutes of board meetings, correspondence from the IRS and Pennsylvania state agencies, annual federal tax returns and state filings



4. Obtain your Employer Identification Number (EIN)

– Your nonprofit must have a tax identification number under which it must file annual federal tax returns and Pennsylvania state reports

– The application to obtain an EIN is available on the IRS' web site at: http://www.irs.gov/pub/irs-pdf/fss4.pdf

– The IRS also has an on-line application, which is available at: http://www.irs.gov/businesses/small/article/0,,id=102767,00.html



5. Register with state offices

a. Bureau of Charitable Organizations (BCO)

1) Organizations soliciting charitable contributions from Pennsylvania residents must register with the Bureau by filing a Charitable Organization Registration Statement (BCO-10) unless they are excluded or exempted from the Act. - Exclusions/exemptions can be found at the

Department of State website.

2) First time registrants must also submit copies of other officials documents such as the incorporation documents and by-laws.


Incorporating in PennsylvaniaIncorporating in Pennsylvania5. Register with state offices

3) Even if an organization is exempt from registering with the BCO, if it is located in Pennsylvania it is still required to file an Institutions of Purely Public Charity Registration Statement with a copy of its IRS Form 990 within 135 days of the close of its fiscal year unless it meets one of the two exemptions listed below: a) It is a bona fide duly constituted religious institution b) It is an institution of purely public charity which

receives public contributions of less than $25,000 per year, and its program service revenue does not equal or exceed $5,000,000.

NOTE: Organizations that are registered with the BCO do not have to file the Institutions of Purely Public Charity Registration Statement.




b. Pennsylvania Department of State

1) Form: Annual Statement– Due Date: On or before April 30 of each year in

which there has been a change in corporate officers during the preceding calendar year.

2) Form: DSCB:54-503 (Decennial Report of Association Continued Existence)

– Due Date: Once every ten years if the corporation has not made a new or amended filing with the Corporation Bureau in the last 10 years




c. Department of Revenue Form: REV-72 (Renewal)Due once every five years. Organizations will be notified by the Department of Revenue when they are required to submit their renewal.Required only if withholding payroll taxes or filing exemptions from PA sales taxes.

d. Pennsylvania Attorney General

Form: Copy of Form 990-PFDue 4 ½ months after end of fiscal year.Only private foundations are required to submit this filing.


Incorporating in Pennsylvania Incorporating in Pennsylvania 6. Apply for sales and property tax exemptions

a. Sales Tax ExemptionRegister and file Form REV-72 with the Pennsylvania Department of Revenue, Tax Forms Service Unit if your organization seeks exemption from PA sales taxes

b. Property Tax ExemptionIf your organization owns its own building and land, contact your county’s tax bureau for an application to request exemption from local property taxes



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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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How to Apply for 501(c)(3) Tax Exemption

Obtain an EIN from the IRS (similar to a SSN) Complete and file IRS Form 1023

• Set out, in detail, information about the organization, including its mission, programs, structure, fundraising program, sources of financial support, and three-year budget

• $850 filing fee; $400 if annual gross receipts of $10,000 or less

• IRS is working on “Cyber Assistant” that may result in reduced fees; not expected until after 2011

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



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External Oversight of Tax-Exempt Organizations

IRS State Attorney General

• Jurisdiction over charitable gifts and charities generally

• In Connecticut: Public Charities Unit

• In New Jersey: Division of Consumer Affairs

• In New York: Charities Bureau

Public & Media Grantmakers Sarbanes-Oxley legislation



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Is Incorporation/Tax Exemption Right for You? Ask These Questions:

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

2. Is your mission clearly articulated?

3. Is there a profit motive?

4. Is there a need for your services?

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

6. Whom do you plan to benefit? Many, or just a few?

7. Who is involved with the organization?

(continued…)



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Ask These Questions (cont’d):

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

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

10. Do you have a need for privacy?

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

12. Do you have the personality needed to work under the direction of a board and timely file required reports with government agencies?

13. Do you have any experience working with/for a nonprofit organization?

14. Can you afford it?

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



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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 competition…, 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 exemption, continuing focus,

organizational documents, public relations, and accessing funding

3. Is there a profit motive?

• 501(c)(3) status requires that “no part of the net earnings…inures to the benefit of any private shareholder or individual”

• This is 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?

5. Are other organizations doing 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. Whom do you plan to benefit? Many, or just a few?

• Can’t establish a 501(c)(3) to benefit just one person or a few people

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?

• Must be able to articulate this on Form 1023

• Some funders are reluctant to fund start-ups

• Do your volunteers have the skills to fundraise?

• Is the organization sustainable?

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



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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 in some circumstances

• 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 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

12. Do you have the personality needed to work under the direction of a board and timely file required reports with government agencies?

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



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13. Do you have any experience working with/for a nonprofit organization?

• Funders will look at your experience

• Experienced board or staff available?

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

• 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 recordkeeping 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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Ingredients for Success Clear Mission

“Market” Niche – need for organization

Business and Budget Planning

Adequate Sources of Funding

Strong Administrative Skills

Committed Board Members

Committed Volunteers

Appropriate Staff



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Resources IRS website offers online training on a wide range of subjects

relevant to maintaining tax-exempt status: www.stayexempt.org

IRS Publication 557 explains the process of applying for tax-exempt status: www.irs.gov/pub/irs-pdf/p557.pdf

Center for Nonprofit Management booklet “Get Ready, Get Set! What You Need To Know Before Starting a Nonprofit”: www.cnmsocal.org/images/downloads/startinganonprofit_getreadygetset.pdf

Center for Non-Profits booklet “Thinking of Forming a Non-Profit? What to Consider Before You Begin”: www.njnonprofits.org/ThinkingOfFormingDesc.html

BoardSource booklet “Starting a Nonprofit Organization”: www.boardsource.org/dl.asp?document_id=17



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Resources (cont’d)

American Bar Association “Tool Kit” for laypersons and lawyers that outlines the process of completing the IRS Application for Tax Exemption: www.npaction.org/resources/tetk.pdf

Foundation Center’s tutorial on starting a nonprofit: http://foundationcenter.org/getstarted/tutorials/establish

Information on other charities:

• GuideStar: www2.guidestar.org

• Charity Navigator: www.charitynavigator.org

The Pro Bono Partnership website contains many publications:www.probonopartner.org/Pages/Publications/all-publicationsfaqs-x



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Resources (cont’d)

Resources for Developing a Business Plan:

• SCORE: www.score.org/business_toolbox.html

• U.S. Chamber of Commerce Small Business Nation: www.uschambersmallbusinessnation.com/toolkits/start-up

• U.S. Small Business Administration: www.sba.gov/category/navigation-structure/starting-managing-business/starting-business



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Questions about Philadelphia VIP’s services, this presentation, or other legal questions?

Call us at 215-523-9564!



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Please Note IRS Circular 230 Disclosure: To ensure compliance with

requirements imposed by the IRS, we inform you that any tax advice contained in this communication (including any attachments) is not intended or written to be used, and cannot be used, for the purpose of (i) avoiding penalties under the Internal Revenue Code or (ii) promoting, marketing, or recommending to another party any transaction or matter addressed herein.

This presentation is provided as a general informational service to clients and friends of the Pro Bono Partnership. It should not be construed as, and does not constitute, legal advice on any specific matter, nor does this presentation create an attorney-client relationship. You should seek advice based on your particular circumstances from an independent legal advisor.

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