Starting a Nonprofit Organization
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Transcript of Starting a Nonprofit Organization
Sponsored by: A Service
Of:
Starting a Nonprofit Organization
Daniel A. Hershey
August 15, 2012
Sponsored by: A Service
Of:
Advising nonprofits in:
• Strategy
• Planning
• Organizational Development
www.synthesispartnership.com
(617) 969-1881
INTEGRATED PLANNING
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Today’s Speaker
Daniel A. Hershey Executive Director
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Starting a Nonprofit Organization
Dan Hershey
(617) 630-6900
Starting a Nonprofit Organization
Outline of Topics
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1. Nonprofit Organization a. State Level: Nonprofit Corporation b. Federal Level: Tax-Exempt Entity under IRC § 501(c)
2. Governance a. Structure b. Composition
3. Bylaws a. Structure and Composition b. Legal Purpose Statement c. Board of Directors vs. Voting Membership d. IRS Language, Other Provisions e. Liability & Indemnification
4. Articles of Incorporation a. Creates Legal Entity b. Liability Protection / Corporate Shield
Starting a Nonprofit Organization
Outline of Topics (continued)
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5. Application for Recognition of Exemption (IRS Form 1023, 1024) a. Two Critical Pieces: Statement of Activities & Budgets b. Charitable Purposes c. Completing the Form
6. Additional Filings & Exemptions a. State Income & Sales Taxes b. Charitable Registration c. Foreign Registrations d. Annual Compliance
7. Commencing Operations a. Board Meeting Minutes b. Resolutions c. Corporate Book
8. Insurance a. General Liability, Directors & Officers Liability b. Other Types c. Resources
Starting a Nonprofit Organization
Outline of Topics (continued)
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9. Fiscal Sponsorship a. What is it? b. Pros and Cons c. Resources
10. Additional Policies a. Off Bylaw vs. On Bylaws b. Revised IRS Form 990 c. Conflict of Interest, Executive Compensation, Whistleblower,
Document Retention & Destruction 11. Internet Resources
Starting a Nonprofit Organization
Nonprofit Organization
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• No legal definition of the term “nonprofit organization”
• State Level: Nonprofit Corporation – Defined by statute in each state – To create a nonprofit corporation, file Articles of
Incorporation with Secretary of State – Many states require that Bylaws be ratified at
time of incorporation – Articles of Incorporation basically mirror the
bylaws
Starting a Nonprofit Organization
Nonprofit Organization (continued)
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• Federal Level: Tax-Exempt Organization – Exempt from Federal Income Taxes – Plus possible deductibility for donor
contributions – Defined under IRC § 501(c) – What type of 501(c) entity are you?
Starting a Nonprofit Organization
Tax-Exempt Organization Reference Chart
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501(c)(3) Organizations: Charitable, Educational, Religious, Scientific
509(a)(1) Public
Charities – Gifts,
Grants and
Contributions
509(a)(2) Public
Charities – Gross
Receipts,
Earned Revenues
509(a)(3) Public
Charities –
Supporting
Organizations
Public
Charities
Private
Operating
Foundations
Private
Foundations
Type I Supporting Organizations:
“Subsidiary” of supported
organization (majority of board
appointed by supported organization)
Type III Supporting Organizations:
Operates independently of supported
organization
Type II Supporting Organizations:
Legally connected to supported
organization (by board overlap, other
formal organizational ties)
Functionally Integrated: Supporting
organization is an integral part of,
carries out important functions of, is
responsive to supported organization
Non-Functionally Integrated:
Supporting organization provides,
funds, grants to supported
organization
501(c)(2) Title
Holding
Corporations
501(c)(4) Civic
Organizations
501(c)(5) Labor
Agricultural
Organizations
501(c)(6) Prof.
Business
Organizations
501(c)(7) Social Clubs
501(c)(8) Fraternal Assoc.
501(c)(9) VEBA’s
..…501(c)(25) Title Corps.
Internal Revenue Code Section:
Starting a Nonprofit Organization
Governance
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• Liken it to the “genetic structure” of the organization • Each nonprofit will be different • How will board be organized?
– Number of directors – Control over corporation – Who nominates and elects successors – Voting rights
Starting a Nonprofit Organization
Governance (continued)
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• Board composition may be an irrevocable decision – Can amend/restate articles of incorporation – Can expand, change purposes – Can re-file IRS Form 1023 – But once board members are chosen and given
authority, it is very difficult to rescind that power • Type of board and who sits on the board are very
important decisions to be made • Not the focus of this presentation, but definitely
worth careful consideration and careful strategizing
Starting a Nonprofit Organization
Traditional Nonprofit Organizational Structure
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Board of
Directors
Fundraising Committee
Budget and
Finance
Committee
Nominating Committee
Other: Ad Hoc or
Program Committees
-CEO-
Executive Director
(or President)
Asst. Director
Development
(or Vice
President)
-CFO-
Asst. Director
Finance
(or Vice
President)
-COO-
Asst. Director
Operations
(or Vice
President)
Asst. Director
Planning/
Marketing
(or Vice
President)
-COO-
Asst. Director
PR/Community
Affairs
(or Vice
President)
Asst. Director
Human
Resources
(or Vice
President)
Starting a Nonprofit Organization
Bylaws
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• Written to address number of different audiences – Internal use (e.g. What constitutes quorum?) – General public (e.g. Are directors indemnified?) – Government regulators (e.g. What happens to
assets upon dissolution?) – Should be written with this in mind
• Governance – Establishes board of directors – Mechanisms of how that body works – In plain English, show how board of directors can
take an action and oversee the organization
Starting a Nonprofit Organization
Bylaws (continued)
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• Legal Purpose Statement – Broadest statement possible (don’t exclude
anything that is legally permissible) – Not a mission statement, nor statement of goals
and objectives – Example:
The corporation is organized exclusively for charitable, religious, educational and scientific purposes, including, for such purposes, fostering improvement in public education, preparing disadvantaged children for success in school, and in general supporting and promoting the benefits of early intervention and parental participation in childhood education. The corporation may, as permitted by law, engage in any and all activities in furtherance of these purposes which may lawfully be carried on by a corporation formed under the laws of [state] and which are not inconsistent with the corporation's qualification as an organization described in Section 501(c)(3) of the Internal Revenue Code.
Starting a Nonprofit Organization
Bylaws (continued)
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• Board of Directors vs. Voting Membership – Self perpetuating board – existing board
nominates, elects new members and holds all powers of the corporation
– Voting membership – nominates and elects the board; board conducts business of corporation (most common example: church)
Starting a Nonprofit Organization
Bylaws (continued)
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• Models of board composition (continued) – Self perpetuating board of directors is most
common model (60-75% of nonprofits) – Voting membership may have specific rights
protected by state statute – Important clarification: corporate voting
membership vs. supporting “membership” for fundraising purposes (e.g. public radio)
– Specify in bylaws if you don’t intend to have a voting membership
Starting a Nonprofit Organization
Methods of Appointment to Nonprofit Boards
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Ex Officio Appointment:
Public officials and
others who serve by
virtue of their position
Board of Directors
or Trustees
Election:
By voting membership,
constituents, or community base
Election:
By Board of Directors
through nominating
committee (self-perp.)
Appointment:
By Trust or Will
Starting a Nonprofit Organization
Bylaws (continued)
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• IRS Language, Other Provisions – Restrictions on Activities, Dissolution, Conflict of
Interest: standard “boiler plate” language to satisfy IRS requirements
– Corporate Transactions, Books and Records: also standard language; satisfy state authorities; establish how organization will operate at state level
• Personal Liability – establish right of individual not to be sued by
corporation (gives people confidence when joining BOD)
Starting a Nonprofit Organization
Bylaws (continued)
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• Indemnification – Corporation indemnifies or “holds harmless”
selected classes of people – Supplements corporate shield of protection,
extends to selected classes of people – “Shall” vs. “May” indemnify – Typically recommend “shall” (to reassure
directors) – Which classes of people indemnified (e.g.
directors, officers, employees) – Must weigh risks inherent in activities of
organization vs. insurance costs to extend indemnification to more classes (e.g. volunteers)
Starting a Nonprofit Organization
Articles of Incorporation
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• Incorporation – Establishes legal entity at the state level – Creates corporate shield of protection against
liability (protect personal assets) • Once bylaws are set, incorporating is the easy part!
– Articles of Incorporation “parse” key elements of the bylaws
• Once incorporated, essentially “open for business” – Obtain EIN (employer identification number) – Open bank account – Starts requirement for annual state filings – Not yet tax-exempt (27 month clock begins)
Starting a Nonprofit Organization
Application for Recognition of Exemption (IRS Form 1023 or 1024)
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• Form contains a lot of technical jargon that can seem complex but there are essentially 2 key pieces: – Narrative Statement of Activities (Part IV) – Proposed Budgets (Part IX)
• Statement of Activities – This is where you “sell your story” to the IRS and
make your case for tax-exempt status – NOT a copy of your legal purpose statement – NOT a philosophical or mission statement – Do NOT make judgments, opinion statements – DO be specific (opposite of corp. purpose stmt.) – DO give the “who, what, when, where, why,
how” of your specific charitable activities
Starting a Nonprofit Organization
Application for Recognition of Exemption (continued)
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• Statement of Activities (continued) – Is a “good faith” statement of intent – Not legally required to fulfill all activities listed – Not strictly limited to activities listed – In future, can easily supplement activities; but
material change in direction may be more involved
• Projected Budgets – Do NOT overestimate numbers – Do NOT show large deficits or surpluses – DO reflect programmatic expenses as outlined in
statement of activities – Again, not legally obligated to meet these amts.
Starting a Nonprofit Organization
Application for Recognition of Exemption (continued)
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• KISS! – More information is not necessarily better – The less you say, the less chance you have of
tripping yourself up – Don’t inundate the IRS examiner – Can easily supplement activities, but materially
changing direction may be more involved
Starting a Nonprofit Organization
Application for Recognition of Exemption (continued)
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• Charitable Purposes – Will I qualify for tax-exempt 501(c)(3) status? – Primary purpose must fit into one of several
categories – 4 main categories
1. Charitable 2. Educational 3. Scientific 4. Religious
Starting a Nonprofit Organization
Application for Recognition of Exemption (continued)
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• Charitable Purposes (continued) – “Charitable” category is the most extensive
category of 501(c)(3) organizations – Some of the most common charitable purposes
are: 1. Relief of poor, distressed 2. Civil, human rights orgs. 3. Promote social welfare, public works 4. Promotion of health 5. Promotion of arts 6. Environmental preservation, protection
Starting a Nonprofit Organization
Application for Recognition of Exemption (continued)
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• Other types of organizations that don’t fit neatly into one of the 4 main categories but that still qualify for 501(c)(3) status are:
1. Cruelty prevention 2. Amateur sports 3. Literary 4. Others (fairly obscure e.g. public safety
testing, cooperative hospital service organizations, charitable risk pools)
Starting a Nonprofit Organization
Application for Recognition of Exemption (continued)
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• Charitable Purposes (continued) – If your primary purposes fit into one of the
aforementioned categories, still may not qualify for 501(c)(3) status
– Must also: 1. Benefit broad sector of general public 2. Not conduct excessive lobbying activities 3. NO political campaign activities 4. NO private benefit (“private inurement”),
even upon dissolution of organization 5. Primary activity must not be a commercial
activity (e.g. casino that donates all of its profit to charity)
Starting a Nonprofit Organization
State Level Filings & Compliance
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• State Income & Sales Tax Exemptions – Both are state specific – Income Tax exemption automatic in many states;
may need to file copy of IRS determination letter – Sales Tax exemptions may or may not be
available – Sales Tax exemption may be available both as
purchaser and retailer of goods – See www.hurwitassociates.com for specific
requirements in your state
Starting a Nonprofit Organization
State Level Filings & Compliance (continued)
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• Charitable Registration – Required to conduct fundraising in most states;
again very state specific – May need to register in multiple states – Key Factors:
• Amount raised • Nature of fundraising activity (active vs.
passive; one-time vs. recurring) • Who conducts activity (volunteer, staff, paid
fundraiser) – Discuss with an attorney or other advisor – See www.hurwitassociates.com for specific
requirements in your state
Starting a Nonprofit Organization
State Level Filings & Compliance (continued)
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• Foreign Registrations – May be required if incorporated in one state and
“conducting business” in another state – “Conducting business” defined differently in
each state; not necessarily by statute – Key Factors:
• “permanent, continuous, regular” activity • Is the activity vital to organization’s business
or merely incidental – If contemplating operations in another state or
states, consult an attorney
Starting a Nonprofit Organization
State Level Filings & Compliance (continued)
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• Annual Compliance – Federal: IRS Form 990-N, 990-EZ or 990 (990-PF
for Private Foundations) – See www.irs.gov/charities to determine which
form should be filed – State: Exemption Renewals, Charitable
Registration Renewals, Annual Reports – See www.hurwitassociates.com for annual filing
requirements in your state – If in doubt, contact appropriate state office (DOR,
Attorney General, Secretary of State)
Starting a Nonprofit Organization
Commencing Operations
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• Meeting Minutes – Document that a given action was taken in
accordance with bylaws, state/federal laws – Organizational meeting minutes – special
minutes to document organizational meeting of corporation; includes banking resolutions, director & officer elections, adoption of bylaws
– Regular meeting minutes include: • Summary of last meeting • Agenda for current meeting • Vote tallies, resolutions from current meeting • List of items for next meeting
– File meeting minutes in corporate book
Starting a Nonprofit Organization
Commencing Operations (continued)
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• Resolutions – Method by which board of directors/trustees
takes an action on behalf of corporation – Actions requiring a board resolution:
• Amending bylaws, articles of incorporation • Business transactions with board members
(conflicts of interest) • Corporate transactions (mergers, dissolution) • Sales or purchases of assets • Banking transactions (loans, endowment
transactions)
Starting a Nonprofit Organization
Commencing Operations (continued)
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• Corporate Book – Used to store critical corporate information
regarding the nonprofit including: • Articles of Incorporation and any
amendments or restatements • Bylaws and amendments • IRS Determination Letter • Initial & Annual Compliance filings (IRS Form
990, state filings) • Organizational Meeting Minutes • Regular Meeting Minutes
– Maintained by Clerk/Secretary
Starting a Nonprofit Organization
Insurance
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• Protects the assets of the Corp., Directors & Officers • Two main types of concern to nonprofit:
– General Liability – Directors and Officers Liability
• Other types: – Professional Liability – Business Automobile – Workers Compensation – Property
• Useful resources: – www.nonprofitrisk.org
– www.insuranceformynonprofit.org • Find independent agent, consult attorney
Starting a Nonprofit Organization
Fiscal Sponsorship
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• What is it? – An existing 501(c)(3) organization sponsors a new
project that does not yet have 501(c)(3) status • Pros:
– Circumnavigate IRS application for exemption – Begin accepting tax-deductible donations quickly – Benefit from name recognition of sponsor
• Cons: – Lack of control, visibility, independence; fees
• Resources: – Foundation Center
(http://foundationcenter.org/getstarted/faqs/html/fiscal_agent.html)
– Tides Center (http://www.tidescenter.org)
Starting a Nonprofit Organization
Additional Policies
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• Nonprofits make use of many additional policies to ensure efficient operation and good governance – e.g. personnel policies, investment policies, data
privacy policies • Off Bylaw vs. On Bylaw
– These policies should be maintained off of the bylaws
• IRS Form 990 – Revised form requires much more information
on governance – Conflict of Interest, Executive Compensation,
Whistleblower, Document Retention & Destruction Policies
Starting a Nonprofit Organization
Internet Resources
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• www.irs.gov/charities • www.stayexempt.org • www.hurwitassociates.com • www.boardsource.org • www.foundationcenter.org • www.nonprofitrisk.org • www.compasspoint.org • www.tides.org • www.councilofnonprofits.org • www.afpnet.org (for the Charleston Principles) • www.independentsector.org
41
Thank you!
Dan Hershey
(617) 630-6900
Copyright © 2012 Hurwit & Associates. All Rights Reserved.
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