Transcript Legal Structures

Forming and Obtaining Tax
Exemption for a Not-for-Profit
Organization


The Formation Process
Tax-Exemption Process and PostFormation Issues

Incorporation
◦ Not-for-profits use a number of organizational
forms.
 The corporate form is generally recognized as the
most frequently used.
 Some organization choose to operate as
unincorporated associations
 Although the New York Not-for-Profit Corporation Law
(the “N-PCL”) imposes certain requirements upon notfor-profit corporations, there are also major
advantages to organizing as a not-for-profit
corporation in New York State.
Advantages of Incorporation
 Limited liability for directors, officers and members;
 Simplifies the process of applying for tax exemption;
 Provides a recognized structure that may be of
assistance in generating revenue; and
 The corporate form provides greater predictability of
the legal consequences of engaging in certain
organizational changes such as mergers and
reorganizations.
Disadvantages of Incorporation
 Can be somewhat time consuming;
 Can be expensive (though not unreasonably so); and
 Can be more difficult to dissolve and terminate
existence than an unincorporated association.

Fiscal Sponsorship as an Alternative
◦ Fiscal sponsorship is a formal arrangement in
which an existing U.S. tax-exempt organization
(the “Fiscal Sponsor”) enters into an agreement with
a group or organization (the “Sponsored Project”)
seeking to raise tax-deductible funds to conduct a
charitable project either prior to or without
incorporating or obtaining IRS recognition as a taxexempt organization.
 This process involves two initial steps: (i) identifying
an appropriate Fiscal Sponsor, and (ii) entering into
an agreement with the Fiscal Sponsor.
◦ Fiscal Sponsors only will accept an organization as a
Sponsored Project if the organization’s charitable
project furthers the Fiscal Sponsor’s own charitable
purposes.
◦ Fiscal Sponsors accept contributions for their
Sponsored Projects and make periodic grants to
them in response to specific funding requests.
◦ Sponsored Projects are required to report back to
their Fiscal Sponsor periodically about their use of
the granted funds.
◦ Fiscal sponsorship is advisable for:
 Groups or organizations that want to test the viability
of their charitable projects.
 In general, because there is no need to create and
administer a separate tax-exempt organization, fiscal
sponsorship can be a time-efficient and cost-effective way
for a group or organization to determine whether
sufficient funds can be raised so as to justify
incorporating and/or applying for tax-exempt status.
 Groups or organizations intending to operate
charitable projects only for a short time.
 Instead of spending time and money obtaining taxexempt status, these groups or organizations can get
their projects underway more quickly and at less cost
through fiscal sponsorship.
 Groups or organizations lacking administrative
experience or manpower.
 Individuals seeking foundation grants and taxdeductible donations for charitable projects (e.g.,
independent filmmakers).

Basic Requirements for a Not-for-Profit
Corporation
◦ In New York, not-for-profit corporations are
governed by the N-PCL.
 Not-for-profit corporations must be formed for
non-pecuniary purposes.
 Not-for-profit corporation may have members, but
do not have shareholders.
◦ Note: the incorporation process under the N-PCL
as well as completion of certain corporate
transactions during a not-for-profit corporation’s
lifespan can be time consuming and require close
attention to detail.

Preparation and Filing of a Certificate of
Incorporation
◦ The first formal step in the formation of a new notfor-profit corporation is the filing of a Certificate of
Incorporation with the Secretary of State.
 A sample Certificate of Incorporation is available at the
Secretary of State’s website.
 In New York, the purposes clause in a Certificate of
Incorporation must be specific in demonstrating the
organization’s charitable, educational, religious, etc.
purposes.
◦ Before filing a Certificate of Incorporation, an
organization may consider reserving a name to ensure
that it is available when the Certificate of Incorporation
is filed.
New York State versus Delaware
 Some not-for-profit corporations in the New York City area
choose to incorporate in Delaware instead of incorporating in
New York.
 Incorporating a New York not-for-profit corporation often is
more time consuming than incorporating a Delaware not-forprofit corporation, and under New York State law certain
fundamental corporate changes (e.g., revisions to purposes,
mergers and dissolutions) need to be approved by the New
York State Attorney General and New York State Supreme
Court.
 Note: organizations that incorporate in Delaware but operate
in New York must file an application for authority to conduct
business in New York.
Adoption of By-Laws
◦ The next formal step in the formation of a new
not-for-profit corporation is the adoption of ByLaws.
 By-Laws are the operative body of internal rules
adopted for the management of the corporation.
 Generally, the By-Laws contain, among others,
provisions relating to the election of directors and
officers, the conduct of the corporation’s affairs, the
powers of its members, directors or officers,
conflicts of interest, and the indemnification of
officers and directors.
Adoption of Initial Corporate Resolutions
 After the Certificate of Incorporation has been filed, the
initial members and directors of the corporation must
adopt initial corporate resolutions, either at
organizational meeting(s) or by unanimous written
consent.
 The initial members generally will adopt the corporation’s
By-Laws and elect the corporation’s directors (if not named
in the corporation’s Certificate of Incorporation).
 Role of Members: Members are analogous to shareholders
in the for-profit context and have right to elect directors
and approve fundamental corporate changes.
 The initial directors will adopt the By-Laws (if the corporation
has no members), elect officers, authorize the opening of bank
accounts, authorize the necessary state and federal filings and
registrations, and transact any other necessary business that
may come before the organizational meeting.
Obtaining Employer Identification Number
◦ The corporation should also apply for an employer
identification number, or “EIN.”
 Among other things, an EIN is generally required to
open bank accounts.
 There is no application fee to obtain an EIN.
 To apply, a representative of the corporation must
complete and file IRS Form SS-4.
 The Form SS-4 should be filed immediately after
incorporation.
 Blank Forms SS-4 and the accompanying instructions
are available from the IRS website.

IRS Form 1023
◦ To obtain exemption from federal income tax under section
501(c)(3) of the Internal Revenue Code of 1986, as
amended (the “Code”), the corporation generally must file
IRS Form 1023 with the IRS and seek classification as a
public charity or private foundation.
 Churches are not required to file.
◦ If IRS Form 1023 is filed within 27 months of incorporation,
exemption generally will be retroactive to the date of
incorporation.
◦ Required user fee is currently:
 $400 for organizations with annual gross receipts of not
more than $10,000.
 $850 for all other organizations.

Public Charity versus Private Foundation
◦ Public charities generally include:
 Churches, schools, and hospitals.
 Publicly supported organizations.
 Must meet a public support test, which generally requires
an organization to show that at least 1/3 of total support
is public support, calculated on a 5-year floating average.
 For more information on the public support test, please
see IRS Publication 557.
 Supporting organizations (i.e., organizations that
support other public charities).
◦ Private foundations are generally grantmaking
organizations funded by one family or company.

IRS Form 1023 Requirements
◦ Attach Certificate of Incorporation and By-Laws.
◦ Narrative description of programs and activities.
 Form also includes detailed questions about certain
activities (e.g., grantmaking, gaming activities,
lobbying, joint ventures)
◦ Financial budgets for 3 years (if not yet completed
1 tax year), 4 years (if completed 1 tax year) or 5
years (if in existence for 5 or more years).
 If applicable, this information is used by the IRS to
determine whether the corporation is likely to meet
the public support test.
◦ Balance Sheet for most recently completed year.

IRS Form 1023 Requirements (cont.)
◦ Names, biographies and compensation of directors,
trustees, officers, highest-compensated employees
and highest-compensated independent
contractors.
 Disclosure of family or business relationships
between these individuals.
 Disclosure of any transactions or agreements
between the corporation and these individuals.
◦ Whether the corporation has adopted a conflict of
interest policy.
◦ Information regarding fundraising practices.

Timing of Review Process
◦ IRS will first send an “Acknowledgement Notice,”
acknowledging receipt of the Form 1023.
◦ Review process will generally take 2 to 8 months
at the least.
 IRS website shows the date of receipt of
applications currently being assigned for review
and lists a phone number to call to check on the
status of an application.
 Applications of organizations conducting activities
abroad or online may take longer to process.
◦ IRS may request supplemental information by
sending a letter with additional questions.

IRS Determination Letter
◦ If the IRS determines that the corporation is exempt
from federal income tax, the IRS will send an IRS
determination letter:
 Recognizing the corporation as exempt under Code
section 501(c)(3);
 Classifying it as a public charity or private foundation;
and
 Stating the Code section under which the corporation is
classified.
◦ The corporation’s IRS determination letter should be
kept permanently. Potential donors may request a copy
of the letter when considering making a donation to
the corporation.

Registration with the NYS Attorney General’s
Office
◦ If the corporation intends to hold assets and/or solicit
contributions in New York State, it must file NYS Form
CHAR410 with the Charities Bureau of the New York
State Attorney General’s Office.
◦ NYS Form CHAR410 must be filed by the earlier of:
 30 days prior to beginning to solicit contributions in New York
State; or
 6 months after receiving property or income held for charitable
purposes in New York State.
◦ Blank NYS Forms CHAR410 and the accompanying
instructions are available from the website of the NYS
Attorney General’s Office.

New York State Corporation Franchise Taxes
◦ New York State Tax Law requires the payment of a
corporation franchise tax for the privilege of doing
business in New York State.
◦ Not-for-profit corporations formed under New
York law or which have been granted authority to
conduct business in New York State can apply for
exemption from this tax by filing NYS Form CT-247
with the NYS Department of Taxation and Finance.
◦ Blank NYS Forms CT-247 and the accompanying
instructions are available from the NYS Department
of Taxation and Finance’s website.

New York State and Local Sales and Use Taxes
◦ To avoid paying sales tax in New York, the
corporation may apply for an Exempt Organization
Certificate by filing NYS Form ST-119.2 with the
NYS Department of Taxation and Finance.
◦ Blank NYS Forms ST-119.2 and the accompanying
instructions are available from the NYS Department
of Taxation and Finance’s website.

New York State and Local Sales and Use Taxes
(con’t)
◦ The corporation should provide to each merchant a copy of its
Exempt Organization Certificate, together with a completed NYS
Form ST-119.1 (Exempt Organization Certification), in advance of
making purchases in New York State.
◦ Once the Certificate is on file with a merchant, the corporation
may refer to the file copy for future purchases from that
merchant.

Annual Filings
◦ Generally, not-for-profit organizations are required to
file annual information returns with the IRS.
 Public charities: IRS Form 990
 Private Foundations: IRS Form 990-PF
 Certain small organizations: IRS Form 990-EZ or Form 990-N (ePostcard)
 Returns must be filed by the 15th day of the 5th month after the
close of the organization’s fiscal year, unless an extension is
granted.
◦ If the corporation is registered with the Charities Bureau
of the NYS Attorney General’s Office , it must also file
annual financial reports with the Charities Bureau on
NYS Form CHAR500.

Disclosure
◦ The corporation must make its annual information
return for its 3 most recent fiscal years, its Form
1023, and its IRS determination letter available for
public inspection without charge at its offices.
◦ The corporation must also provide copies of these
documents, upon request, without charge.
◦ The corporation’s IRS Form 1023 and IRS
determination letter should be retained in the
corporation’s permanent records.

Solicitation of Charitable Contributions
◦ Most states require not-for-profit organizations that
plan to solicit charitable contributions over a certain
minimum to register with that state’s Attorney General’s
Office.
 If the corporation plans to solicit contributions in a
particular state, it should look into the registration
requirements in that state before beginning to solicit.
◦ In New York State, not-for-profit organizations are
required to include in any written solicitation a
statement regarding how to obtain the organization’s
latest NYS annual report filed with the NYS Attorney
General’s Office.

Substantiation of Charitable Gifts
◦ Upon receipt of a charitable gift (except from a
public charity), the corporation should provide the
donor with a receipt indicating:
 the property received (if not cash);
 the date it was received; and
 whether the donor received any goods or services in
return (not including de minimis gifts, such as mugs
or tote bags).
◦ If the donor makes a gift of more than $75 and receives goods
or services in return, the corporation must provide the donor
with a substantiation letter that also includes the fair market
value (not cost) of the goods or services received.
QUESTIONS?