The Non-Profit Formation Checklist Linkedin.com May 2016 So you are thinking of starting a non-profit? That’s great! Now what??? Tax-exempt organizations, such as public charities and private foundations, are legal creations formed and registered at the state and federal level. Starting a tax-exempt charity involves 4 main categories of steps: (1) performing initial tasks, (2) obtaining exempt status from the Internal Revenue Service (“IRS”), (3) conducting post-determination tasks, and (4) undergoing continuing reporting requirements. This checklist is meant to help you navigate each of these steps. As you go through each step in the checklist, you may find that there is a better solution to accomplish your charitable goal other than obtaining tax-exempt status. STEP 1: INITIAL TASKS Picking Your Mission Developing your charitable mission statement is a critical first step. It communicates your nonprofit’s purpose, what group it serves, and how your organization will best serve such group. You will want to assess whether your charity’s purpose is too narrow or whether it leaves room for future growth. o   Do research. Is there a need? Is my idea feasible? What sector am I serving? o   Identify funding. Not only will your charity have initial start-up costs, like state and federal filing fees, website costs, etc., in order to be successful, your charity will need continuous funding. Your business plan should set forth the various funding streams available for supporting your mission. o   Alternatives. You may want to consider utilizing a fiscal sponsor to achieve your charitable goals as opposed to undergoing the lengthy and costly process of obtaining tax-exempt status with the IRS. A fiscal sponsorship is a formal arrangement in which an existing public charity sponsors a project that lacks exempt status. This alternative to starting your own non-profit allows you to seek grants and solicit tax-deductible donations under your sponsor’s exempt status (for a fee) but without having to obtain tax-exempt status from the IRS outright. Fiscal sponsorship is useful for newly formed organizations to test ideas to determine whether there is a market or a desire among the public to fund the charity. Some organizations utilize fiscal sponsors because they have determined that their mission can be achieved without having to create a new entity.

Picking A Name

o   Choose a good name. You will want a name that is relevant to your charity’s purpose and mission but is also distinctive from other charities in the same field. You will want a name that is easy to pronounce. o   Check domain name availability for a website. Although domain names are not copyrightable, you will want to select a domain name that is unique and that clearly identifies your organization. o   Check the availability of the name at the state incorporation level. You will need to check the jurisdiction of where you intend to form your charity to determine whether your proposed name has been taken by another business entity registered in that state. If the name is available, you may want to reserve it in advance before you file for formation at the state level so that another prospective entity cannot claim it. o   Check the name at the federal level. You should run a search on the IRS website to determine whether the name you have selected is already being used by an existing charity with tax-exempt status to avoid confusion in your charitable field. You should also check whether the name is trademarked with the United States Patent and Trademark Office (“USPTO”) by conducting a search on the USPTO website. If your proposed name already has trademark registration for charitable services, then you will want to select an alternate name to avoid a claim of trademark infringement. Choosing an Entity In order to insulate individual members of the organization from liability, your non-profit will need to be organized as a business entity. A non-profit organization is generally organized either as a limited liability company (“LLC”) or a corporation (but without shares issued as in the case of a for-profit corporation). The main difference between LLCs and corporations is in how they handle taxation. Filing Once the corporate structure has been selected, you will need to file corporate formation documents at the state level. This means filing Articles of Incorporation in the case of a corporation or a Certificate of Formation in the case of an LLC. You will also need to adopt a set of Bylaws to address governance issues. In most cases, the corporate formation document will need to address the following: o   Registered Agent. You will need to name a registered agent within the state where the organization is formed. Each state has different eligibility requirements for the registered agent so you will need to check the specific state rules. For example, in Virginia, the registered agent must be over the age of 18, resident in the state, and either an attorney in good standing in Virginia or a corporate officer. o   Foreign Registration. If your organization is going to be formed in one state but have its business offices in another, then you will need to register as a foreign entity

in the state of your principal place of business. For example, many entities incorporate under the laws of the State of Delaware because of the state’s favorable corporate treatment and ease of filing, but have a principal place of business in another state. o   Board Members. You will need to identify initial incorporators/board members in your state filing. If a board is too small, its members may be overworked and unproductive. If a board is too large, every member may not have the opportunity to participate actively. Your board may be a cross section of people in the charity’s field or people who have fundraising connections. o   Members. You will need to make a decision on whether your non-profit will be a member organization. Members may have significant rights with respect to internal governance, such as the right to elect and remove directors, vote upon changes in the structure of the organization, and amend Bylaws. Becoming a membership organization can be beneficial. For example, prominent individuals from existing community groups affiliated with your organization may feel a strong sense of ownership in the effectiveness of the board of directors, and in the overall success of the non-profit’s mission if they are members. However, forming your corporation as a membership corporation also imposes legal obligations in preserving the rights of members to participate in the corporation’s decisions. o   Employer Identification Number. Once you have successfully formed your business entity at the state level, you will need to obtain an employer identification number (“EIN”) from the IRS. This number is needed for opening bank accounts, hiring staff, providing verification to vendors, etc. This task can be conducted on the IRS website by submitting a completed Form SS-4. STEP 2: OBTAINING TAX EXEMPT STATUS Once the initial corporate formalities have been finalized at the state level, you will be in a position to file for exempt status with the IRS. Applying for exempt status is done by submitting a completed Form 1023 to the IRS and paying the appropriate filing fee. Obtaining tax-exempt status from the IRS enables donors to claim a charitable deduction on their returns for donations made to the organization. In order for donors to obtain tax benefits for donating to a charity, the charity must be organized and operated exclusively for exempt purposes as set forth in Section 501(c)(3) of the Internal Revenue Code (“IRC”). Type of Charity You will need to decide which category of charity you will be applying for. The most common non-profit is a charity organized under Section 501(c)(3) of the IRC, which is what this checklist addresses. 501(c)(3) charities refer non-profits that operate for religion, education, science, literature, public safety testing, amateur sports, and the prevention of cruelty to children or

animals purposes. These types of entities are generally prohibited from or limited in engaging in lobbying activities. o   Evaluate purpose against Section 501(c)(3) of the IRC. The IRC requires the organization to have one or more exempt purposes, which can be any of the following: religious, charitable, scientific, testing for public safety, literary, or educational purposes, or to foster national or international amateur sports competition (but only if no part of its activities involve the provision of athletic facilities or equipment), or for the prevention of cruelty to children or animals. If the organization’s purpose does not fall within one or more of the exempt purposes, the corporation may fail the requirements of Section 501(c)(3), which may result in a denial of exemption.

Other types of charities include Section 501(c)(4) civic leagues, social welfare organizations or local employee associations, Section 501(c)(6) trade or professional organizations, Section 501(c)(7) social or recreational clubs, Section 501(c)(8) fraternal societies, Section 501(c)(9) employee beneficiary associations, 50(c)(14) state chartered credit unions and mutual reserves, and 501(c)(19) veterans organizations. Once you have determined that you want your organization to be organized under Section 501(c)(3) of the IRC, you will need to determine whether your organization will be a public charity or a private foundation. Both are 501(c)(3) organizations, but public charities are understood to perform charitable work, while private foundations support the work of public charities, usually in the form of small groups of individuals and families (like the Bill and Melinda Gates Foundation) . Public charities must obtain at least one-third of their funding from public sources (i.e., donations from the public). This determination is calculated over a 5-year period. The benefit of meeting the public support test is the availability of higher donor tax-deductible giving limits and the ability to attract support from other public charities and private foundations. If the charity does not meet the one-third public support test, it will be automatically categorized as a private foundation. Private foundations are able to exercise greater control, but are required to exercise “expenditure responsibility” over grants made, which means providing additional reporting to the IRS, putting in place measures to ensure that grant money is spent appropriately, and obtaining reports from the grantee on how the funds are spent. o   Public Charity or Private Foundation. Does the organization receive at least onethird of its support from contributions from the general public? If not, can it meet the 10 percent “facts and circumstances” test?

Form 1023 requires the applicant to report its finances (or the organization’s projected finances if the organization has not been in operation for very long). However, if your organization’s gross receipts will not exceed $50,000 in any of the next 3 years, the organization may be eligible to

file utilizing Form 1023-EZ. This is a streamlined version of Form 1023 that can be used by small charities whose receipts are less than $50,000. Form 1023-EZ is processed in a shorter amount of time than the standard Form 1023. o   Receipts. Will receipts exceed $50,000 in any of the next 3 years? If not, then you should consider filing utilizing Form 1023-EZ.

Form 1023 requires the applicant to certify that it has certain policies and procedures in place for the organization. For more information, please read my article “Common Policies for NonProfits” published on linkedin.com in January 2016. The major policies that the organization needs to have in place are as follows: o Conflicts of Interest Policy. Does the organization have a written conflicts of interest policy? o Document Retention Policy. Does the organization have a written policy for documentation and destruction? o Compensation. Is compensation for officers, directors, trustees and key employees approved in an advance by an authorized body of individuals with no conflict of interest with respect to compensation arrangements?

STEP 3: POST-DETERMINATION TASKS Once the organization has filed its Form 1023 with the IRS and successfully received a determination letter from the IRS approving its exempt status, there are other post-determination tasks that need to be accomplished, as follows: o   State Registration. The organization will need to register as a charity at the state level so it can legally conduct charitable activities within the state. For example, in New York, organizations that engage in charitable activities and/or solicit charitable contributions are required to register with the state Attorney General’s Charities Bureau through the filing of a CHAR-410 form. In Virginia, for example, the charity needs to file a registration statement with the Office of Charitable and Regulatory Programs. o   Trademark Filing. If the organization has not already done so, it should file for federal trademark protection for its name and logo. Such filings can be prepared on the USPTO website. STEP 4: CONTINUING REPORTING REQUIREMENTS o Form 990. Once the charity obtains tax-exempt status with the IRS, it is required to file an annual statement with the IRS. The form utilized is Form 990. Depending on the size of the charity, the charity may utilize Form 990, Form 990-N (gross receipts

under $50,000 annually), or Form 990-EZ (gross receipts of less than $200,000 and total assets of less than $500,000 annually). Organizations that have total gross income from unrelated trades or businesses of at least $1,000 also are required to file Form 990-T. o Yearly State Filings. In addition to federal annual reporting, the charity will need to prepare an annual reporting in its home state. For example, in New York, charities must file a CHAR-500 form each year. o Business Entity Renewal. Each year, the organization will need to keep its corporate registration up to date at the state level. This requires paying the state business registration fee, filing an updated list of the Board of Directors, and confirming the current registered agent of the business. If the entity has filed to conduct business as a foreign entity in other jurisdictions, annual filings will need to be made in those jurisdictions as well. o Donation Acknowledgement. Once the organization has attained tax-exempt status and has received contributions from donors, the entity will need to comply with the IRS requirements for acknowledging donations. For donations of $250 or more, the organization must send a written acknowledgment to substantiate the charitable contribution. The acknowledgment must contain the name of the organization, the amount of the cash contribution, the description of the non-cash contribution, a statement that no goods or services were provided by the organization (if that is the case), a description and good faith estimate of the value of goods or services, if any, that organization provided in return for the contribution, and a statement that goods or services, if any, that the organization provided in return for the contribution consisted entirely of intangible religious benefits (if that was the case). Furthermore, for quid pro quo contributions, a written disclosure is also required to be provided to a donor who makes a payment exceeding $75 partly as a contribution and partly for goods and services provided by the organization. For more information on non-profit formation, please contact attorney Leslie Brown.