Transcript Headline

Nonprofit vs. Tax Exempt
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Nonprofit status is determined by STATE law,
which governs organizing documents.
Tax exempt status is governed by FEDERAL law.
Thus, all tax-exempt organizations are nonprofit,
but not all nonprofits are necessarily tax-exempt.
© MAP for Nonprofits - 2004
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Common Types of Tax-Exempt Organizations
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501(c)(3) Charitable, religious, and educational
organizations
501(c)(4) Civic leagues and social welfare organizations
501(c)(5) Labor/agricultural/horticultural organizations
501(c)(6) Business and professional leagues
501(c)(7) Social and recreational clubs
501(c)(8) Fraternal beneficiary societies
501(c)(19) Veterans organizations
© MAP for Nonprofits - 2004
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Alternatives
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Become a new non-profit (without 501c3
status)
Become a new nonprofit with 501c3 status
Become a project of a professional fiscal
sponsor
Become a project of an existing non-profit
Register as a for-profit company
Stay informal
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Why Become a 501 C3?
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Exemption from Federal income tax
Tax-deductible contributions
Possible exemption from state income, sales, and
employment taxes
Reduced postal rates
Charitable gambling
Exemption from Federal unemployment tax
Autonomy
© MAP for Nonprofits - 2004
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Types of Charitable Organizations
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Educational
Charitable
Religious
Scientific
Literary
Amateur Athletics
© MAP for Nonprofits - 2004
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Process
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Incorporate
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Name
Address
Incorporator
Name first Board?
Required IRS language
Board Action in Writing
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Organizational Test
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Articles of Incorporation must:
Limit its purposes to one or more of the exempt
purposes listed in Code section 501(c)(3) and
Not permit the organization to engage in a
nonexempt activity.
Further, assets of the organization must be
permanently dedicated to an exempt purpose.
© MAP for Nonprofits - 2004
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Bylaws
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Purpose
Membership?
Size and composition of board
Meetings
Quorum
Officers
Committies
Conflict of Interest
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Policies
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Conflict of Interest
Whistleblower
Document Retention/Destruction
Financial (Audit?)
Employment
© MAP for Nonprofits - 2004
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Application to IRS for Charitable Status
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Narrative Description
Board
Three year Projected Budget
Fundraising Plan
User Fee
Can be 4-5 months before IRS begin review
© MAP for Nonprofits - 2004
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Public Charity vs. Private Foundation
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The primary difference is the 501(c)(3)’s source of
financial support.
Generally, a public charity has a broad base of support
while;
A private foundation has very limited sources of support.
In addition, there are different tax rules that apply to each.
For example, private foundations are subject to excise
taxes that are not imposed on public charities.
© MAP for Nonprofits - 2004
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What can jeopardize charitable status?
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activities that can jeopardize that status are:
Private benefit/inurement,
Lobbying,
Political campaign activity, and
Activities generating excessive unrelated business
income (UBI).
© MAP for Nonprofits - 2004
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What is Private Inurement?
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The concept of inurement takes the notion of
private benefit further.
Code section 501(c)(3) states that no part of an
organization’s net earnings may inure to the
benefit of a private shareholder or individual. That
is, prohibited from allowing its income or assets to
accrue to insiders.
© MAP for Nonprofits - 2004
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Private Inurement (cont.)
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Prohibited inurement or private benefit does not
include
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reasonable payments for services,
other payments that further tax-exempt purposes, or
payments for the fair market value of real or personal
property.
An “insider” is a person who has a personal and
private interest in the activities of the organization.
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Examples of typical insiders are officers, directors, and
key employees
© MAP for Nonprofits - 2004
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Lobbying
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activity designed to influence legislation
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if it contacts, or urges the public to contact, a member or employee
of a legislative body to propose, support, or oppose legislation, or
if the 501(c)(3) advocates or opposes legislation.
If its lobbying activities are substantial, a 501(c)(3) may
fail the operational test (discussed earlier) and risk losing
its tax-exempt status.
The IRS uses two tests to determine whether lobbying is
substantial:
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The substantial part (facts and circumstances) test and
The expenditure test.
© MAP for Nonprofits - 2004
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Political Activity
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directly or indirectly participating or intervening
in any political campaign on behalf of or in
opposition to any candidate for public office.
This includes making contributions to political
campaign funds or making public statements for
or against the candidate.
© MAP for Nonprofits - 2004
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Reporting
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State
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Secretary of State
Attorney General
IRS
990
 990EZ
 990N
 990PF
 990 plus Form 1023 open to public inspection
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© MAP for Nonprofits - 2004
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Eight Board Responsibilities
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Strategic planning
Monitoring and evaluating
Managing finances
Fundraising
Ambassadorship
Hiring and overseeing the CEO
Board leadership and development
Creating positive organizational climate
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Duty of Care
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Maintain an active role in the organization’s
affairs
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Attend board meetings
Read minutes, review officer performance,
review salaries
Be familiar with books and records
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Duty of Care
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Protect and manage charitable property properly
 Use consistently with donor restrictions
 Invest in accordance with legal requirements
Protect organization’s exempt status
Investigate allegations of officer or employee theft
or mismanagement, in some circumstances report
misconduct
Assist organization in obtaining resources
© MAP for Nonprofits - 2004
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Duty of Care
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Directors are entitled to rely on:
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Information, opinions, reports, statements,
including financial statements
Prepared by the organization’s:
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Officers & employees
Counsel, accountants, investment advisors, other
professionals
Committees formed by board of directors
Cannot delegate ultimate responsibility
© MAP for Nonprofits - 2004
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Duty of Loyalty
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Nonprofit directors have an absolute
duty of complete, undivided loyalty to
the organization they serve (not to be
mistaken with a duty of loyalty to the
founder or executive director of the
organization)
© MAP for Nonprofits - 2004
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Duty of Loyalty
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Act at all times in best interests of
organization
Avoid conflicts of interest
Organization typically should not lend
money to director
Director should not divert corporate
opportunity for personal gain
© MAP for Nonprofits - 2004
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Duty of Care
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Discharge duties in good faith
In a manner the director reasonably
believes to be in the best interests of
the organization
Must use care of ordinarily prudent
person in like circumstances
Establish committees
© MAP for Nonprofits - 2004
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Fiscal Sponsor
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What is a Fiscal Sponsor?
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an organization that has already established its
corporate and tax-exempt status and who is willing
to be a "parent organization" to a group that wants
to apply for a grant or solicit funds for a specific
nonprofit purpose.
© MAP for Nonprofits - 2004
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Why have a Fiscal Sponsor
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Cost to Funder of administration
Expenditure Responsibility
Support that recipient doesn’t have
Continuum of role
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Considerations
 Ability of Fiscal Sponsor to handle funds
 Affect on tax exempt status of Fiscal
Sponsor
 Ability of Fiscal Sponsor to administer
 Fees to be charged
 How funders will view role of Fiscal
Sponsor
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Fundraising/Funding
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Individuals
Government
Foundations
Events
Membership
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