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CONSIDERATIONS IN
FORMING A TAX EXEMPT NON PROFIT CORPORATION
We are frequently called by
people wanting to form non profit corporations. Inevitably, we find some common misunderstandings about this
form of business entity. So we have
worked up the following considerations for your review. Be prepared to discuss when you call and
as you put together about your business plan.
Nonprofit
organizations are not automatically exempt from federal income
taxation. The organization must
first receive a determination letter from the Internal Revenue service that
is tax-exempt under Section 501(c)(3) of the Code.
Look out if you have
already formed your nonprofit using the form Articles of Incorporation
available through the Washington Secretary of State’s Office! The articles of a nonprofit must prohibit the distribution of
any net earnings to members, directors, officers or other private persons
and must contain appropriate language with respect to political action and
lobbying activities in order to comply with federal tax law requirements
under Section 501(c)(3). The form of articles of incorporation available
through the Secretary of State’s office do not contain these
provisions and, therefore, should not be used if you intend to seek
501(c)(3) status for your organization.
Oftentimes, the idea to
form a nonprofit arises from a problem or issue that is important to the
client. More details and
clarification is necessary to explain why this should be important to
others. Ask yourself the following:
§ Who
will the organization’s members, clients or patrons be? Who will carry on
the activities of the organization?
§ What
will the organization offer to these individuals or entities? What will the
organization charge? What will take place at a typical meeting or event of
the organization?
§ When
did the organization’s founders begin working on it? When will the
organization be fully operational? When will regular meetings or events be
held?
§ Where
will the organization be based? Where will the organization obtain its
funding?
§ How
will members, clients or patrons hear about the organization’s activities?
How many members, clients or patrons does the organization expect to serve?
How is the organization distinguishable from for-profit entities, if any,
with similar activities?
Ultimately, the IRS is going to need to
know the following:
§ Will
any officers, directors, members, or their relatives, receive a salary,
reimbursement for expenses, or any other form of payment from your
organization? If so, be prepared to explain fully, and include the
recipients’ names, their duties, and the number of hours each week that
they will devote to such duties, as well as the compensation each will
receive and the basis for arriving at the amounts of such payments.
§ A
chronology and complete description of all activities of your organization
since the date of incorporation, as well as activities planned for the next
12 months.
§ Copies
of literature regarding your organization (newsletters, newspaper articles,
brochures, pamphlets, solicitations for donations, etc.)
§ Will
anyone use your facility other than for the purpose of directly carrying
out your work? Will any of your directors or employees reside at your
facility? If so, explain fully. Is the owner of the facility related to you
in any way other than as landlord?
§ Will
you engage in any publishing activities (i.e., printing, publication or
distribution of your own material or material printed or published by
others and distributed by you) of any nature? If “yes,” you will have to
submit the materials.
§ Will
you engage in the sale of merchandise? If “yes” submit the following:
(followed by a detailed list). Will you engage in the sale of services? If
“yes” you will have to submit the materials.
§ Will
you engage in lectures, or seminars open to the public or to members? If
“yes,” be prepared to explain in detail.
Finally, you will need:
·
Financial Data
Actual financial data,
including income statement(s) and a recent balance sheet, if the
organization has had any financial activity should be included with the
application.
·
Budgets
A two-year projected budget,
showing both expected sources of income and anticipated expenses is needed.
(Sometimes the IRS asks for a projected budget even when the applicant can
provide a full year of actual financial data.)
As a final precaution, if you haven’t
received your tax exemption determination, you shouldn’t be in the news
soliciting donations, suggesting they are tax deductible, no matter how
worthy the cause.
Thank you for considering these recommendations. We look forward to hearing from you
soon.
© Crowley Law Offices, PS 2006
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