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3/30/2017 CMBA Volunteer Lawyers for the Arts/Reach Out March 30, 2017 WHAT TO THINK ABOUT WHEN YOURE THINKING OF FORMING A NONPROFIT: BUSINESS AND OPERATIONAL CONSIDERATIONS Steven W. Day -- Calfee, Halter & Griswold, LLP A Plug
CMBA Volunteer Lawyers for the Arts/Reach Out March 30, 2017
Volunteer Lawyers for the Arts Providing services to artists and arts organizations Informative seminars on arts-related legal issues Pro bono referral service for low income artists and
What is a non-profit or tax-exempt organization? Several types of organizations/entities Private foundations Trusts Trade organizations Social clubs Political organizations Cemeteries Generally applies to a “501(c)(3) organization” or
Good reasons to start a non-profit organization Passion for a mission Need in the community Support from the community
Bad reasons to start a non-profit organization Capitalization for your business or business idea Need a job The “tax write-off”
Key considerations when starting Is the purpose of your organization charitable? Commerciality doctrine
Is there a broad support for your mission in your
Attract board members/donors Public support test Are you ready for the costs/burdens of being a NPO? Start up/application costs Annual filings with IRS and state Taking on “second job” with little to no pay
“Charitable Organization” (501(c)(3)):
The exempt purposes set forth in section 501(c)(3) are charitable,
Establishing a non-profit organization Create non-profit domestic corporation under state law
Apply for tax-exempt status as a charitable
Domestic Non-Profit Corporation (Ohio) File Initial Articles of Incorporation Purpose section must include “magic” IRS language
Purpose section must include the organization’s charitable
Be specific, but as broad as possible
Must have incorporator(s) Must have statutory agent
Domestic Non-Profit Corporation (Ohio) Create Code of Regulations (bylaws) Rules for running the organization Number of directors/officers, meeting requirements,
Voting members? Single-member structure?
Domestic Non-Profit Corporation (Ohio) Find directors and officers Three directors required in Ohio Three officers – president, secretary and treasurer (can be
Establish director guidelines
Domestic Non-Profit Corporation (Ohio) A quick word on directors: The NPO is a public charity/institution The Board of Directors serves as the representative of the
The Board oversees the organization, its mission and can
The Board is personally liable for fiduciary duties of care
Domestic Non-Profit Corporation (Ohio) Other house-keeping items: Obtain federal tax ID number Obtain licenses from state Set up bank account Insurance – general liability, director & officer insurance Create budget Appoint executives Set up payroll/employment taxes for any employees Hire bookkeeper/CPA Trademark name/logo, set up website Internal systems/document management Lease rental space?
Applying for tax-exempt status with the IRS, will
Articles of Incorporation (with “magic language” in
Code of Regulations (bylaws) Requisite number of Directors Federal tax ID number Conflicts of Interest Policy Financial information and a projected budget
IRS Form 1023 – Application for Recognition of Exemption under
Section 501(c)(3) of the Internal Revenue Code
Recently re-done to provide for online “interactive”
1023-EZ for NPO with less than $50,000 in projected
Key items for preparing: Narrative description of organization’s operations and
Budget for past 5 years and projected budge for
Credentials for Directors/Officers/Executives Compensation for executives Fund-raising activities Related party transactions (try to avoid them)
It’s not your money. Nobody should profit from your organization’s
Money raised by your organization must be used
Tax-exempt entities must operate exclusively for one or more exempt
An organization’s failure to operate exclusively for its charitable
501(c)(3):
A “facts and circumstances” analysis.
“non-incidental benefits conferred on disinterested
Generally applies to outsiders. A private benefit can be conferred to a third-party
“providing unjust enrichment from an organization’s
Applies to insiders (employees, officers, directors
Requires a careful examination of relationships with third-parties
Do you have an exclusive arrangement? For how long? Is the arrangement unreasonable or unfavorable to the organization? Did you consider alternative sources or competitive prices? Requires a careful examination of the organization’s
Is the class of beneficiaries too small? Do your activities indirectly benefit a private for-profit business? Are you engaging in substantial activities that are not in furtherance of
your charitable purpose?
Exclusive Arrangements -- Does the organization funnel
Organization established to help disadvantaged youths find jobs
Unreasonable/Unfavorable Agreements -- Is the
Organization signs long-term lease with unreasonably high rent
Organization enters into agreement with ticket selling vendor that
Indirect Benefits to For-Profit Business -- Is the organization indirectly
Organization’s purpose is to promote fair-trade practices and its efforts
drive people to the one business in area that sells fair-trade goods.
Organization’s purpose is to help relocate homeless people to another
city, but motivation is to rid business district of homeless people and help local businesses.
Substantial Non-Charitable Activities -- Does the organization spend
Organization’s purpose is to promote theatrical arts, but spends majority
Class of Beneficiaries Is Too Small -- Does the
Organization’s purpose is to raise funds for patients
Also requires careful examination of organization’s
Arrangements with insiders or family members of
Compensation Practices
Any transaction with an insider (or family member of an
Organizations must have a Conflicts of Interest Policy, which
Compensation to employees must be “reasonable.” IRS provides a “safe harbor” procedure, which involves
Insider Arrangements -- sales of property, leases, business services,
Organization leases office from real estate company owned by director. Organization hires daughter of director to develop the organization’s
website.
Organization buys car from director to be used for the organization. Compensation -- unreasonable compensation Excessive compensation (above market rate for size of the organization) Excessive perqs (entertainment expenses, non-business travel expenses,
scholarships to family members, etc.)
Loans to insiders Unlimited bonuses
A new non-profit should have: Passion for a mission Need in the community Support from the community It’s a real business that requires time, effort and
It’s not your money.