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Nonprofit Must-Have: Bring on the Bylaws

nonprofit leader at table

When forming a new nonprofit there are really two must-have documents you need to get the dream off the ground. Those two documents are articles of incorporation and bylaws. Of course, there are other important documents you will need, but it’s good to tackle first things first!

Articles of Incorporation: Like a Nonprofit’s “Constitution”

Recently on the blog we explored the state and federal requirements and best practices for articles of incorporation. Now, let’s learn about bylaws!

What Exactly Are Bylaws?

Undoubtedly you’ve at least heard of or read through a set bylaws. But, what does this document do? Effective bylaws should do the following:

  • serve as the internal operating rules of a nonprofit.
  • specify processes like the election process of directors and operation of meetings.
  • resolve any uncertainty between board members on issues of correct process.

Do Bylaws Need to be Filed or Adopted?

Unlike articles of incorporation, bylaws are not filed with any government entity like the Iowa Secretary of State. However, Iowa law does require that the initial bylaws of a nonprofit be adopted by its board of directors.

A nonprofit’s bylaws should address the high level governing decisions that founding board members deem non-negotiable for the organization’s success. Here are a few provisions that great bylaws often include:

  • Purpose for organization
  • Board structure
  • Official meeting requirements
  • Terms of board service for officers
  • Officer position descriptions
  • Procedure for officer/board member succession and removal
  • Provisions for membership (if any)
  • Voting rights

Another essential element that can be mistakenly forgotten is a paragraph for amending the bylaws in the future. Times change and the circumstances of how your organization can do the most good can shift. In such a case your board will want to rely on the procedure for amendments outlined in the bylaws to reflect the transition.

How to Form a 501(c)(3) Organization

Regularly Review and Reference

Again, an organization’s bylaws are like an internal roadmap if there’s any question of structure or procedure. As fiduciaries of the organization, board members should re-read the bylaws at least annually for sustainable good governance. Of course, brand new board members should be provided with a copy as a part of their board orientation.

What About All the Other Documents I Need?

At this point you may be skeptical that you just need two documents–articles of incorporation and bylaws. What about all the other documents you’re certain you need to have? It’s a valid question and to obtain and maintain qualified tax-exempt status there’s certainly more “paperwork” to be done:

Form 990 Variations: Which Annual Return Should Your Nonprofit File?

So, How Do I Go About Drafting Bylaws

There is much more to be said on bylaws as they can and should be tailored to your individual organization. It’s a wise investment to enlist a professional (like an attorney well-versed in nonprofit law!) to draft quality, comprehensive bylaws personalized for your nonprofit’s needs, mission, and goals.

Questions? Want to learn more about turning your dream of an organization that makes a significant impact or positive change? Grab my complimentary Nonprofit Formation Guide and then contact GFLF for a free consult!

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How to Form a 501(c)(3) Organization

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discussion over table with laptop

Imagine I’m working with a great new client named Daphne. She wants to found a nonprofit organization to assist at-risk youth in her local community and across Iowa. This is a hypothetical memo I would send to Daphne outlining the steps of what it takes to form a nonprofit in the state of Iowa. (Note, if you’re looking to form a 501(c)(3) it’s best work with a qualified attorney for advice and counsel specific to your situation and goals.)

To:                  Daphne Downright – SENT VIA EMAIL
From:             Gordon Fischer (gordon@gordonfischerlawfirm.com)
Subject:         How to Form a 501(c)(3) Nonprofit
Date:              April 13, 2019

Dear Daphne:

Good afternoon! I very much enjoyed our phone conversation of this morning, where we discussed your intent to begin a nonprofit to assist at-risk youth. Certainly this is an noble mission and I have no doubt that you could make a big impact. I also acknowledge you are very busy and don’t have the time to allocate to dealing with all of the documentation. So, I’m here to take this stress off of your plate!

Let’s recap some details regarding the process for founding a nonprofit organization. These steps will set your public charity up for the best possible success.

Main Steps to a 501(c)(3)

To recap what we talked over, forming a 501(c)(3) involves four steps:

  1. drafting, editing, and filing articles of incorporation;
  2. drafting and editing bylaws, with new board members then voting in favor of the bylaws in a duly authorized meeting;
  3. applying for an Employer Identification Number (EIN); and
  4. drafting, reviewing, and editing the IRS non-exempt status application, known as IRS Form 1023, as well as all the supporting materials IRS Form 1023 requires.

By far, the most difficult and time-consuming of the four steps is the IRS Form 1023. You should definitely review the form immediately, so you can gain a sense of the level of detail and involvement it requires.

How much does it cost?

While my regular hourly rate can go up to $300 per hour, I often have agreed with clients to perform all the legal work required to successfully begin a nonprofit for a flat fee of $4,800. I typically bill this over the span of five months, i.e., five easy payments of $980, due on, say, the first of each of the months.

Additionally, as you would expect, this matter will necessitate payment of filing fees to governmental agencies, such as the Iowa Secretary of State’s Office and the IRS. (The Iowa Secretary of State has a $20 filing fee, and the IRS 1023 Form has a $850 or $400 filing fee depending on the amount of gross revenue expectations). Of course, clients are solely responsible for payment of all such governmental fees.

How long does this take?

It usually takes a few months to pull all the paperwork together, including and especially Form 1023. I’ve had, however, ambitious clients who wanted to do it much faster, and I was able to accommodate. The flat fee includes as many conferences with me as you reasonably need for us to complete steps 1-4, above.

Benefits of Nonprofit Formation

Daphne, the benefits of a 501(c)(3) are many and include:

Tax exemption/deduction

Organizations that qualify as public charities under Internal Revenue Code 501(c)(3) are eligible to be completely exempt from payment of corporate income tax. Once exempt from this tax, the nonprofit will usually be exempt from similar state and local taxes.

Even better: if an organization has obtained 501(c)(3) tax exempt status, an individual’s or company’s charitable contributions to this entity are tax-deductible.

Eligibility for public and private grants

Nonprofit organizations can solicit charitable donations from the public. Many foundations and government agencies limit their grants to public charities.

Being able to offer donors income tax charitable deductions for donations, as well as eligibility for public and private grants, are probably the two major reasons folks want to obtain 501(c)(3) status.

Formal structure

A nonprofit organization exists as a legal entity and separate from its founder(s). Incorporation puts the nonprofit’s mission and structure above the personal interests of individuals associated with it.

Limited liability

Under the law, creditors and courts are limited to the assets of the nonprofit organization. The founders, directors, members, and employees are not personally liable for the nonprofit’s debts. There are exceptions. A person cannot use the corporation to shield illegal or irresponsible acts on his/her part. Also, directors have a fiduciary responsibility; if they do not perform their jobs in the nonprofit’s best interests, and the nonprofit is harmed, they can be held liable.

Focus your giving

With charitable giving flowing through a central nonprofit organization, and not through, say, a for-profit business, it’s easier to focus the giving on a singular mission. A for-profit business may be easily pulled away from a charitable mission by the pet causes of lots of different customers, clients, vendors, and employees. A nonprofit should be much less susceptible to such pressure.

Responsibilities of Forming & Managing a  Nonprofit

Of course, there are serious responsibilities that come along with creating and running a nonprofit. These can’t be overstated, and include:

Cost

Creating a nonprofit organization takes time, effort, and money. Plus, keeping a nonprofit on track, compliant, and successful also requires great care.

Paperwork

A nonprofit is required to keep detailed records and submit annual filings to the state and IRS by stated deadlines to keep its active and exempt status. 

Shared control

Although one who creates a nonprofit may want to shape his/her creation, personal control is limited. A nonprofit organization is subject to laws and regulations, including its own articles of incorporation and bylaws. A nonprofit is required to have a Board of Directors, who in turn determine policies. 

Scrutiny by the public

A nonprofit is dedicated to the public interest, therefore its finances are open to public inspection. The public may obtain copies of a nonprofit organization’s state and federal filings to learn about salaries and other expenditures. Nonprofits must be transparent in nearly all their actions and dealings.

Continue the discussion

I hope this information is helpful to you as you begin this journey. It won’t always be easy (although I will attempt to make it as simple as possible for you!), but it will be worthwhile.

I would enjoy the opportunity to be of service to you. Thank you for your time and attention. If you have any questions or concerns, please contact me. As I told you this morning, I offer anyone/everyone a free one-hour consultation. Simply reach out to me anytime via my cell, 515-371-6077, or my email, gordon@gordonfischerlawfirm.com.

Warmest regards,

Gordon Fischer

Gordon Fischer Law Firm, P.C.

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Nonprofit Policy Special: 10 for Form 990

paper and phone on desk

Tax-exempt organizations need to have specific guidelines in place to be compliant and in order to meet the IRS’ expectations. It’s never too late (or early!) to invest in comprehensive internal and external policies and procedures. That’s why I’m offering the Nonprofit Policy: 10 for 990 special. You don’t have to feel overwhelmed or burdened at the thought of trying to draft legally correct and comprehensive policies. I’m offering a special deal for 10 important policies (read on for an overview of each) at the rate of $990. This also includes a comprehensive consultation and one full review round.

If you’re a nonprofit founder, executive, board member, or even an active volunteer, this is an excellent way to ensure the organization you’re deeply invested in is meeting (and exceeding!) the gold standard for tax-exempt organizations.

team members holding speech bubbles

I don’t know anyone who loves paperwork more than the Internal Revenue Service (IRS). But, if you’re operating a nonprofit, you’re going to have to learn how to embrace paperwork as well. Why? The IRS requires certain information from your organization be submitted annually via Form 990 “Return of Organization Exempt From Income Tax.” This 12-page document (not including schedules) serves as a check to make certain nonprofit organizations are still qualified for that coveted tax-exempt status. To that point, the 990 asks nonprofits about policies and procedures that help ensure the nonprofit is conducting business in a transparent way that’s consistent with their exempt purposes. Specific governance policies encouraged by the IRS limit potential abuse, protect against vulnerabilities, and prevent activities that would go beyond permitted nonprofit activities.

Major Benefits & Reasons for Policies for Compliance

If governance policies are not technically required, why do them?

write ideas

The existence of a policy doesn’t mean compliance is assured, of course, but having policies in place provides a framework and the expectations for an organization’s executives, employees, volunteers, and board members. Such policies can also be referenced if/when issues arise.

One of the major reasons to invest in strongly written, organization-specific policies is because the IRS audits tax-exempt organizations, just as it audits companies and individuals. (Having certain policies in place will only serve to benefit the organization should it happen to be audited.)

Another major reason to have proper policies and procedures in place is because they provide a foundation for soliciting, accepting, and facilitating charitable donations. Last, but not least, the 990 is made accessible to the public, meaning it can be used as a public relations tool if filled out diligently. Major donors can and often do review a charity’s 990 to ensure the charity is compliant, putting charitable donations to good use, and continues to operate in alignment with the overall mission.

Form 990 also serves the greater nonprofit sector as the data collected allows for the monitoring of growth and trends, tracking the types of needs/issues being addressed by nonprofits, and identifying specific adopted practices.

What Policies are We Talking About?

25 Days of Giving: Nonprofit Policies Your Organization Needs to Consider

One thing’s for certain, articles of incorporation and bylaws are just the beginning when it comes to foundational documents.

The IRS made a major revision to Form 990 in 2008. The old version focused largely on financial data. Now, Form 990 reports extensive information on operations such as board governance, fundraising, international programs, non-cash receipts, joint ventures, use of subsidiaries, and more. Let’s cover all the policies the IRS asks tax-exempt nonprofits to report on:

Conflict of Interest

Found on Form 990: Part VI, Line 12 a-c

A conflict of interest policy should do two important things:

  1. require board members with a conflict (or a potential conflict) to disclose it, and
  2. exclude individual board members from voting on matters in which there is a conflict.

The Form 990 glossary defines a “conflict of interest policy” as follows:

A policy that defines conflict of interest, identifies the classes of individuals within the organization covered by the policy, facilitates disclosure of information that may help identify conflicts of interest, and specifies procedures to be followed in managing conflicts of interest. A conflict of interest arises when a person in a position of authority over an organization, such as an officer, director, or manager, may benefit financially from a decision he or she could make in such capacity, including indirect benefits such as to family members or businesses with which the person is closely associated. For this purpose, a conflict of interest does not include questions involving a person’s competing or respective duties to the organization and to another organization, such as by serving on the boards of both organizations, that do not involve a material financial interest of, or benefit to, such person.

Form 990 asks whether the nonprofit has a conflict of interest policy, as well as how the organization determines and manages board members who have an actual or perceived conflict of interest. This policy is all too important, as conflicts of interest that are not successfully and ethically managed can result in “intermediate sanctions” against both the organization and the individual with the conflicts.

If consistently adhered to, this policy can inspire internal and external stakeholder confidence in the organization as well as prevent potential violations of federal and state laws.

Nonprofit Policy Spotlight: Conflict of Interest

Document Retention and Destruction

Found on Form 990: Part VI, Line 14

This policy should clarify what types of documents should be retained, how they should be filed, and for what duration. It should also outline proper deletion and or destruction techniques.

The document retention and destruction policy (DRD policy) is useful for a number of reasons. The principle rational as to why any organization would want to adopt such a policy is that it ensures important documents—financial information, employment records, contracts, information relating to asset ownership, etc.—are stored for a period of time for tax, business, and other regulatory purposes. No doubt document retention could be important for proof in litigation or a governmental investigation.

You may have heard of the federal law, the Sarbanes-Oxley Act of 2002. It reaffirms the importance of a DRD policy. Sarbanes-Oxley reads:

Whoever knowingly alters, destroys, mutilates, conceals, covers up, falsifies, or makes a false entry in any record, document, or tangible object with the intent to impede, obstruct, or influence the investigation or proper administration of any matter within the jurisdiction of any department or agency of the United States or any case filed under title 11, or in relation to or contemplation of any such matter or case, shall be fined under this title, imprisoned not more than 20 years, or both.

While the Sarbanes-Oxley legislation generally does not pertain to tax-exempt organizations, it does impose criminal liability on tax-exempt organizations for the destruction of records with the intent to obstruct a federal investigation.

Nonprofits & Sarbanes-Oxley Compliance

Another reason a DRD policy is an excellent idea, is it forces an organization to save space and money associated with both hard copy and digital file storage, by determining what is no longer needed and when…it’s like sanctioned spring cleaning!

Whistleblower

Found on Form 990: Part VI, Question 13 

Nonprofits, along with all corporations, are prohibited from retaliating against employees who call out, draw attention to, or “blow the whistle” against employer practices. A whistleblower policy should set a process for complaints to be addressed and include protection for whistleblowers.

Ultimately this policy can help insulate your organization from the risk of state and federal law violation and encourage sound, swift responses of investigation and solutions to complaints. Don’t just take it from me, the IRS also considers this an incredibly helpful policy:

A whistleblower policy encourages staff and volunteers to come forward with credible information on illegal practices or violations of adopted policies of the organization, specifies that the organization will protect the individual from retaliation, and identifies those staff or board members or outside parties to whom such information can be reported. (Instructions to Form 990)

The Sarbanes-Oxley Act (referenced under the document retention and destruction policy above) also applies here. If found in violation of Sarbanes-Oxley, both an organization and any individuals responsible for the retaliatory action could face civil and criminal sanctions and repercussions including prison time.

Compensation

Competitive compensation is just as important for employees of nonprofits as it is for for-profit employees. Data related to compensation is reported in three different sections on Form 990: “Officers, Directors, Trustees, Key Employees, and Highest Compensated Employees;” “Statement of Functional Expenses,” lines 5, 7, 8, and 9; and Schedule J;” and “Compensation Information for Certain Officers, Directors, Trustees, Key Employees, and Highest Compensated Employees.”

Having a set policy in place that objectively establishes salary ranges for positions, updated job descriptions, relevant salary administration, and performance management, is used to establish equality and equity in compensation practices. A statement of compensation philosophy and strategy, which explains to current and potential employees and board members how compensation supports the organization’s mission, can be included in the compensation policy.

Generally, this policy provides the benefits of:

  • Enhanced confidence of donors and supporters
  • Consistent framework for decision making on compensation
  • Increased compliance with federal and state employment laws
  • Reduced risk to the organization and its management and governing board

Fundraising

The topic of fundraising gets substantial attention on Form 990; fundraising income and expenses are asked about in Part I, three places in Part IV, Part VIII, Part IX, and Schedules G and M. Almost every nonprofit needs a fundraising policy, as almost all engage in some sort of charitable fundraising. This policy should include provisions for compliance with local, state, and federal laws, as well as the ethical norms the organization chooses to abide by in fundraising efforts. Remember that fundraising doesn’t just include solicitation of donations, but also receipt of donations.

4 Tips for Effectively Managing a Monthly Giving Program

Gift Acceptance

Found on Form 990: Schedule M, Part I, line 31

While related to the fundraising policy, the gift acceptance policy relates to charitable contributions. There are no legal requirements for a gift acceptance policy, however this policy provides written protocols for nonprofit board members and staff to evaluate proposed non-cash donations. The policy can also grant some much-needed guidance in how to kindly reject donations that can carry extraneous liabilities and obligations the organization is not readily able to manage.

rubix cube on desk

Investment

One way a board of directors can fulfill their fiduciary responsibility to the organization is through investing assets to further the nonprofit’s goals. But, before investment vehicles are invested in, the organization should have an investment policy in place to define who is accountable for the investment decisions. The policy should also offer guidance on activities of growing/protecting the investments, earning interest, and maintaining access to cash if necessary.

Beyond the specifics of investments, this policy can also govern financial management decisions regarding situations like accepting charitable gifts of securities.

The policy should be written to give the nonprofit’s management personnel the authority to make investment decisions, as well as preserve the board’s oversight ability.

Many organizations hire a professional financial advisor or investment manager to implement investments and offer advice. This person’s role can be accounted for in the investment policy.

Form 990 does not ask if an organization has a specific investment policy, but it does refer to investments in multiple places throughout the form, hence the obvious need. 

Financial Policies and Procedures

Different than the aforementioned investment policy, the financial policies and procedures policy specifically addresses guidelines for making financial decisions, reporting financial status of the organization, managing funds, and developing financial goals. The financial management policies and procedures should also outline the budgeting process, investments reporting, what accounts may be maintained by the nonprofit, and when scheduled auditing will take place. Similar to the investment policy, Form 990 does not make a specific ask about an organization’s financial policies, but this type of policy will serve as an indispensable guide to organizing, collecting, and reporting financial data.

5 Resolution Ideas for Nonprofit Pros

Form 990 Review

Found on Form 990: Part VI, Section B, Line 11

Form 990 asks the following questions:

  • Has the organization provided a copy of this Form 990 to all members of its governing body before filing the form?
  • Describe in Schedule O the process, if any, used by the organization to review this Form 990.

In asking these questions, the IRS is indicating that distribution of the form prior to filing is optimal. (This is also one of those gold standard governing practices that is beneficial when using the form as a public relations material.) There are no federal tax laws requiring Form 990 review, and Form 990 does not mandate a written policy. However, a written policy is incredibly useful in clarifying a specific process for distribution and procedure review by the governing body (such as the board of directors). It also formalizes a review process and acts as a reminder to nonprofit leaders to distribute accordingly.

paper and pen on desk

Public Disclosure

Found on Form 990: Part VI, Section C, Lines 18 – 20

Public charities exist to serve the public in some way or another, and some organizational documents must be made available to the public upon request. Other documents can be kept entirely internal. This policy should overview (1) what documents must the organization disclose, and (2) to what extent does it want to make other non-required documents and information available to the public.

Form 990 specifically asks the filing organization to report if certain documents are made available to the public, such as governing documents (like the bylaws), conflict of interest policy, and financial statements. Additionally, the form asks for the name, address, and phone number of the individual(s) who possesses the financial “books” and records of the organization.

Where Do I Start?

man writing on paper

The mission of Gordon Fischer Law Firm is to promote and maximize charitable giving in Iowa, and to that point I want to help every Iowa nonprofit be legally compliant.

The 10 policies part of this promotion will save you time, resources, and you can feel good about having a set of high quality policies to guide internal operations, present to the public (if appropriate), and fulfill form 990 requirements.

If you already have some (or all) of the above listed policies in place, seriously consider the last time they were updated. How has the organization changed since they were written? Have changes to state and federal laws impacted these policies at all? It may be high time for a new set of policies that fits your organization.

Interested? It’s always a good day to contact Gordon Fischer Law Firm via email Gordon@gordonfischerlawfirm.com or by phone (515-371-6077).

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Tax Talk: Private Foundations and Excise Taxes

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private foundation board meeting

When you first read the headline to this blog post you might have been (rightfully) confused. A private foundation is a type of 501(c)(3), so isn’t this type of nonprofit tax-exempt from federal income tax? This is just one of the nuances of private foundations that can make forming and managing them complicated. Previously I’ve covered other aspects about the private foundation that are important for foundation leaders to understand including avoiding jeopardizing investments, prohibited grants, self-dealing, and payout requirements. Today let’s shine the learning spotlight on excise taxes.

Tax Exempt, But…

Even though private foundations are exempt from income tax, they are subject to an annual 2% excise tax on the income they earn on their net investment income. (This is often referred to as the private foundation excise tax.) The purpose of collecting this revenue is to fund IRS oversight of the nonprofit sector.

Can you Reduce the Tax?

In certain circumstances, the excise tax can be reduced to 1%. The tax is reduced in situations where a foundation’s distributions (measured as a percentage of assets) in a given tax year exceed the average payout rate of the foundation over the preceding five years, by an amount at least as much as the 1% tax savings the foundation will obtain. This is called the “maintenance of effort test” and was implemented to make certain that tax savings are being used for added charitable expenditures as opposed to being “pocketed” by the foundation.

What’s the Difference Between Public Charity & Private Foundation

Managing & Administering

Managing and administering the private foundation excise tax can be difficult and complicated, particularly because of the two-tier tax structure. This can also be challenging in decision-making because it somewhat discourages foundations to consider increasing gift for unanticipated grants, such as in the case of a natural disaster or other relief efforts. To comply with the private foundation excise tax requires staff to constantly monitor and adjust spending and savings in order to calculate the correct tax rate.

Payout Requirements for Private Foundations

How to Prepare Your Private Foundation

I highly recommend enlisting an attorney well-versed in private foundation operations in order to stay on top all requirement and avoid detrimental missteps. You may also want to consider implementing training for foundation board members. It’s also a good idea to implement sound policies and procedures and update them when necessary as the foundation evolves and circumstances change.

Nonprofit Policy Special: 10 for Form 990

Questions? Want to learn more about how to make certain your private foundation is set up for success from the start? Don’t hesitate to contact me for a free consultation. You can also download my free, no-obligation nonprofit formation guide!

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New Nonprofits: Form 990 While Waiting for Tax-Exempt Status

spiral notebook

Submitting Form 1023 for “Application for Recognition of Exemption Under Section 501(c)(3) of the Internal Revenue Code” to the IRS is cause for celebration for any organization seeking that coveted tax-exempt status. While waiting for the determination letter from the IRS regarding the application, there can be many uncertainties regarding what to tell donors about donations, and what to do about other submissions, like Form 990.

What to do with Donors While Waiting for Tax-Exempt Status

For oversight and evaluation purposes, most nonprofits need to annually file Form 990 (Return of Organization Exempt From Income Tax) instead. Beyond aspects of the organization’s finances, Form 990 collects information related to practical and operational aspects like conflicts of interest, Sarbanes-Oxley compliance, and charitable gift acceptance. Submitting an annual filing is also essential to retaining the tax-exempt status.

When is Form 990 Due?

So, when is Form 990 due exactly? It depends on the end of your organization’s taxable year; the form is due the 15th day of the fifth month after the organization’s taxable year.  For most tax-exempt organizations that follow the typical calendar year (January 1 through December 31), this means Form 990 is due on May 15th every year.

notebooks on table

What Do New Nonprofits Need to Do?

What does this mean for new nonprofits and organizations waiting on the tax-exemption determination letter? Expect to submit a variation of Form 990 in the year following the close of the first tax year. This is the case even if the organization is still waiting on the determination letter from the IRS in regard to tax-exempt status.

So, for example, let’s say a nonprofit filed articles of incorporation with the Secretary of State and adopted bylaws in March 2019. The organization subsequently submitted Form 1023 to apply for tax-exempt 501(c)(3) status. In the governing documents, the organization’s tax year is established as the typical January to December. For this organization, they should expect to file Form 990 by May 15, 2020, with information related to the receipts for the 2019 operating year.

Form 990 Variations: Which Annual Return Should Your Nonprofit File?

Plan Ahead to be Prepared to Submit

The full Form 990 is over 10 pages (not including additional schedules and written attachments), so no doubt your organization should have a jump start on the process. The best way to be prepared, year after year to avoid a failure to file, is to have updated and applicable policies asked about on the form readily available to be referenced. I’m offering a great deal that features 10 policies related to Form 990 for $990. The rate includes a comprehensive consultation to discuss your organization’s need and a round of reviews so we can make certain the documents fit your organization’s needs.

Nonprofit Formation: Responsibilities to Consider

No matter what stage of the nonprofit process you’re at—from just getting started to hiring employees to board management—don’t hesitate to contact me with questions or challenges. I’m available via email (gordon@gordonfischerlawfirm.com) and by phone (515-371-6077).

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What to do with Donors While Waiting for Tax-Exempt Status

man questioning computer
Applying for tax-exempt status from the IRS is both exciting and an anticipatory waiting game. Even if you answer every question on Form 1023 and pay the correct filing fee it can take about 180 days to get a determination letter—the official notification that the organization meets the federal tax exemption as a 501(c)(3) nonprofit.
One of the key reasons entities choose to apply for that coveted tax-exempt 501(c)(3) status in the first place is so that they can offer donors the option to claim a tax deduction on donations. So, what are you supposed to say to donors in that bureaucratic purgatory between incorporation and submitting Form 1023 and waiting for the actual green light go-ahead to say you’re a tax-exempt organization?
The good news is that while your application is pending, the entity can treat itself as exempt from federal income tax back to the date of organization. This would be when the articles of incorporation were filed with the Secretary of State’s office.
That said, there is a big however when it comes to donors. Contributions do not have assured deductibility during this in-between period.
If the applicant entity is eventually granted tax-exempt status, then any donations made during this time period would be tax-deductible for the respective donors. But, if the entity is ultimately not granted federal tax-exemption, then any contributions made during the in-between period will not be tax deductible for the donor.
In the spirit of transparency, the uncertain status of donations (whether they are tax-exempt or not) should be something leaders of organizations should share with donors during this period. If appropriate, organization leaders can indicate that they have every reason to believe the donations in the interim period will be tax-deductible after 501(c)(3) status is achieved, but cannot be guaranteed in the present. Nonprofit pros will also want to indicate they will notify current donors about any status change following the determination letter. It’s also a good idea to implement a gift acceptance policy from the start.
I’m happy to help guide interested nonprofit leaders through the application process and then assist with all of those legal uncertainties and compliance requirements on the way to successful change-making. Don’t hesitate to contact me via email (gordon@gordonfischerlawfirm.com) or phone (515-371-6077), no matter what step along the way you are.
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What is a 501(c)(4) organization?

working on paper on desk

It can be difficult upon first glance to understand the differences between the various sets of letters and numbers used to identify nonprofit organizations. You hear a lot about 501(c)(3) organizations, but what if you come across a 501(c)(4) entity when making donations? What if you want to form a 501(c)4)? What does this type of IRS identification mean?

What is a 501(c)4?

Both 501(c)(3) and 501(c)(4) organizations are tax-exempt from federal income taxes on income earned and raised related to their exempt purposes.

501(c)4s are best categorized as civic organizations and local associations of employees. The Code of Federal Regulations, §1.501(c)(4), says: “A civic league or organization may be exempt as an organization described in section 501(c)(4) if:

  • It is not organized or operated for profit; and
  • It is operated exclusively for the promotion of social welfare.”

The most common organizations with a 501(c)(4) designations are those active in politics, lobbying, and advocacy work. Some classic examples include volunteer fire departments, Miss America Organization, and community service clubs like Kiwanis, Rotary, and Lions Clubs.

By comparison, 501(c)3 organizations are recognized by the IRS as tax-exempt because they are organized and operated for: “religious, charitable, scientific, testing for public safety, literary, or educational purposes, or for the prevention of cruelty to children or animals.”

These organizations tend toward advocacy work, political actions, lobbying, environmental purposes, homeowners’ associations, and various community associations.  Interestingly, it is not uncommon to find some organizations occupying the ranks of 501(c)(4) that would normally be considered 501(c)(3) if it were not for particular activities such as substantial lobbying or political candidate endorsements…things prohibited under 501(c)(3).

What’s the Difference Between Public Charity & Private Foundation

Exempt Purpose: Social Welfare

To be granted 501(c)4 status, the exempt purpose of the organization is the promotion of social welfare. What does social welfare mean exactly? The Code reads (with italics added for emphasis):

An organization is operated exclusively for the promotion of social welfare if it is primarily engaged in promoting in some way the common good and general welfare of the people of the community. An organization embraced within this section is one which is operated primarily for the purpose of bringing about civic betterments and social improvements.

To achieve and retain 501(c)4 status, the organization’s must primarily engage in activities that further its exempt purpose (promotion of social welfare). However, the organization could engage in activities (like lobbying and political campaign intervention mentioned below), so long as they don’t exceed the primary actions related to social welfare. So, technically, “other activities” should not exceed 49% of the organization’s operations.

In comparison, a 501(c)(3) organization is expressly prohibited from engaging in more than an insubstantial amount of activities that do not further its exempt purpose.

Lobbying

501(c)(4) organizations may engage in unlimited lobbying so long as it is in furtherance of their social welfare purposes.

man reading paper

Political Activities

So long as political campaign activities are not the primary actions (meaning more than 49%) of the organization, the 501(c)(4) may engage in political campaign intervention.

By distinction, 501(c)(3) organizations are prohibited from engaging in any political campaign intervention activities.

Contribution Deductibility

Generally, donor contributions to 501(c)(4) organizations are not deductible. There are limited exceptions for certain contributions to war veterans organizations and volunteer fire companies. In fundraising solicitations, 501(c)(4) organizations must disclose to prospective donors–in an obvious and easily recognizable format–that donations to the organization are not deductible as charitable contributions for federal income tax purposes. Note well that some payments to 501(c)(4)s will be deductible as business expenses in certain situations.

How do you form a 501(c)(4)

If an organization is looking for 501(c)(4) status they may go about it one of two ways. The organization may:

  1. Apply for formal IRS recognition of exemption by filing Form 1024; or
  2. Declare itself as exempt under 501(c)(4).

In both cases, the entity must notify the IRS by electronically filing Form 8976 within 60 days of establishing intent to operate as a 501(c)(4) organization. (Organizations operating under any other 501(c) section should not file this notice!)

Nonprofit Document Drafting: 2 Common Problems to Avoid

Want to learn more? Have questions which organization designation may be best for your entity? Maybe your 501(c)(3) would benefit from establishing a 501(c)(4) arm? Don’t hesitate to contact me to discuss your situation!

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Purposeful Planned Giving: What it is & How to Make a Powerful Difference

planned gift pink bow

A planned gift is literally what is sounds like. Sort of. The term refers to the process of creating a charitable bequest now that will take effect later. In other words, during your lifetime you plan for a gift that will be given a future date—usually at or upon your death. A planned gift is best accomplished as part of an overall estate plan and it is usually delivered through a will or trust.

While you can make provisions to give a specific dollar amount, there are many different types of planned gifts. You can make a planned gift of real estate, life insurance, and retirement plans, or tangible property (such as artwork). You can also remember organizations with planned gifts of charitable remainder annuity trusts (CRATs), charitable remainder unitrusts (CRUTs), Net Income with Makeup Charitable Remainder Unitrusts (NIMCRUTs), FlipCRUTs.

Let’s Head Back to School! First Lesson is on Planned Giving

For now, let’s go over exactly what planned giving is; the benefits of planned giving; the kinds of charities you need to consider when making a planned gift; and the kinds of gifts that qualify for a tax deduction.

Who gives? Donors and benefactors

In July 2018, Warren Buffet donated about $3.4 billion to five charities, including the Bill & Melinda Gates Foundation—itself headed by the country’s most generous philanthropic couple who gave it $4.8 billion. Facebook founder Mark Zuckerberg and his wife, Priscilla Chan, donated $1 billion to their charitable foundation.

It’s fun to read about the super-rich and their bountiful bequests, but you don’t have to be a modern-day Rockefeller or a member of the one percent to donate to charity or create a planned gift. Indeed, ordinary people with ordinary means can bequeath gifts that make an extraordinary difference.

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In 2016, a legal secretary in Brooklyn, New York, who had worked at the same law firm for 67 years, bequeathed $8.2 million to, among others, New York City’s Henry Street Settlement and Hunter College to help disadvantaged students. Sylvia Bloom, who worked until she was 96 years old, saved her fortune through frugal living and savvy investing.

People make planned gifts for any number of reasons:

  • Streamline estate planning and closing;
  • Make a meaningful contribution to a cause or organization that reflects their beliefs and values;
  • Create a legacy that will have lasting impact into the future;
  • Gain income and tax benefits.

There are three types of planned gifts:

  • Outright gifts that use assets instead of cash;
  • Gifts that return income or other financial benefits to you in return for a contribution;
  • Gifts payable upon your death.

YOU Are a Super Hero: Charitable Giving Through Estate Planning

Who receives? Planned giving beneficiaries

Organizations love planned gifts. After what are known as “major gifts”—the six-figure endowment, the priceless Old Master painting, the stretch of valuable coastline—planned giving makes up the largest chunk of donations a nonprofit receives. Planned giving helps nonprofits weather fluctuations in other kinds of charitable giving and income, such as yearly donations and gift shop sales. It can alleviate the possibility of dipping into an endowment or cutting back on services and programs. Planned giving is also a way to develop and sustain relationships with donors — and in an increasingly competitive giving environment, nonprofits can’t afford to ignore planned giving programs. Even though organizations don’t immediately receive a planned gift, it is worth the wait.

The reality is that nonprofits can no longer simply ask donors to pony up with cash by writing a check. Donors expect and often demand an array of choices when it comes to helping their favorite nonprofits. Many if not most nonprofits have programs in place to accept planned gifts. But if you’re interested in donating an asset your favorite nonprofit isn’t accustomed to accepting, your best bet is to connect it with an experienced nonprofit attorney to make your gift a reality.

Latest Iowa Lawyer Mag Article: Charitable Giving Strategies Under the Revised Tax law

Not all nonprofits are the same when it comes to giving

When we talk about “charitable giving,” it is usually when referring to a particular kind of nonprofit organization. Specifically, organizations formed under 501(c)(3) of the Internal Revenue Service tax code.(Click to the IRS website to check if a possible beneficiary is a qualified 501(c)(3).) A 501(c)(3) can come in many different forms: foundations, charities, churches, community organizations, schools. They all have one thing in common in that they are formed to benefit the general public, not individuals, not for the mutual benefit of their members (such as homeowners associations, and not for political coalitions).

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Be aware, however, that not every nonprofit is a 501(c)(3) organization. There are actually 29 types of nonprofits in the U.S. federal tax code, but when it comes to planned giving you can only take a tax deduction if you donate to one that the IRS has conferred 501(c)(3) status. Contributions to non-501(c)(3) groups, charities, and organizations can be valuable to recipients and make you feel good as well. It’s just that the federal government is not going to give you a tax break for your donation. Knowing what you can and can’t claim helps you maximize the potential tax savings that the charitable tax deduction to a 501(c)(3) offers.

Before we discuss what kinds of giving qualify for a tax deduction, here are some that don’t qualify:

Promises and pledges

Let’s say you made a charitable pledge of $150 to a 501(c)(3), but only gave $50 that particular tax year. You can only deduct from your taxes the $50 that you actually donated that year. Once you donate rest of the pledge (the remaining $100) you can deduct that amount for the tax year in which this occurred.

Political support

While it is important to be involved in the democratic process, monetary support is not considered charitable giving. Monies given to political candidates, campaigns, parties, and political action committees (PACs), as well as money spent to host or attend fundraising events, or to purchase advertising, lawn signs, and bumper stickers are not considered charitable giving.

Fundraising and special event tickets

I’m sure you can’t count the number of times you’ve bought raffle or lottery tickets, bingo cards, and partook other kinds of games of chance. These classic and popular fundraising methods support charities and are fun to imagine winning, but you can’t claim a deduction for them.

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Personal benefit gifts

The IRS considers a charitable contribution to be one-sided. This means if you receive something in return for your 501(c)(3) donation — from a tote bag to a T-shirt, from a side of beef to a three-course meal — only the amount above the fair market value of the item/service is deductible. Let’s say your neighbor’s child is selling popcorn to raise money for a scouting troop. You buy a bag of popcorn for $10 whose retail value is $6. This amounts to a $4 charitable donation. Similarly, you purchase a $75 ticket to a fundraising dinner sponsored a favorite charity. The dinner would cost you $30 at a restaurant, so your charitable deduction would be $45.

Gifts without proof

Cash placed in your church’s collection plate, dropped into the Salvation Army’s Red Kettle, and handed to a student for a cupcake at a bake sale…these are all worthy donations, but you can’t just guesstimate how much you’ve given and deduct the amount from your taxes. Of course, I believe, you gave, but the IRS demands documentary proof of all cash donations, no matter the amount in order for you to claim the deduction. Proof might be bank records such as a canceled check, a receipt from the nonprofit organization, or a pay stub if the donation was made through a payroll deduction. For single cash donations of more than $250, the IRS requires a statement from the organization.

25 Days of Giving: Quick Rule-of-Thumb on Charitable Deduction Limits

Gifts to individuals

I’ve seen many successful crowdfunding campaigns to support any number of good causes. Let’s say a friend is raising money for her child’s expensive medical procedure through an online site and you make a donation to help her reach her goal. Or, perhaps your nephew is raising money for a mission trip over the summer and you write him a check for $25. Unfortunately, contributions earmarked for certain individuals (despite their economic, medical, educational or other needs) are not deductible according to the IRS. However, if you donate to a qualified organization that in turn helps your friend or nephew, that contribution would be deductible — although you can’t designate your donation to be directed to that person. Again, a contribution can’t be given directly or indirectly to a specific individual and still be tax-deductible.

Retirement Benefit Plans and Charitable Giving

Bountiful opportunities for charitable giving

It may seem like there are a lot of kinds of giving and plenty of nonprofits that do not qualify for the tax benefits you’re looking for, but don’t worry!  There is a multitude of ways for you to show your generosity and contribute to a charity that can minimize your estate taxes, bypass capital gains taxes, and receive current tax deductions. Of course, planned giving is not the only kind of giving. Unplanned giving is no less a means of showing your generosity and supporting those organizations whose mission and activities you believe in.

I’d love to discuss your charitable giving goals and options tailored to your individual situation. Don’t hesitate to contact me via email or by phone (515-371-60770).

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Nonprofit Formation: What the Parkland Students Should Do Now

In the days since the horrific school shooting in Parkland, Florida on February 14, many of the surviving students of Marjory Stoneman Douglas High School, along with students across the country and their supporters, have banded together to demand “never again.” Their battle cry is built on the disappointment and frustration with elected policymakers at the state and federal levels that fail to change the current status quo. They are calling out the politicians’ collective “there’s nothing we can do about it” shrug and the cumulative sag of the democratic system weighted by prescribed partisanship, undeniable deadlock, and constricting lobby money.

Parkland Students

Cameron Kasky, Emma Gonzalez, David Hogg, and Delaney Tarr (art by Kimothy Joy) via Vince Reinhart, Flickr

In the wake of yet another senseless mass shooting, these students are calling for actionable policy changes that will serve to protect other youth from having to face the same horrific scenario of murdered friends, teachers, and administrators that they did. Without a doubt, these teens have shown an impressive level of organization that has already resulted in some changes and important conversations on the issue. The Stoneman Douglas students have inspired school walkouts across America, published impassioned articles and op-eds, given interviews on national news, led televised press conferences, influenced a lie-in in front of the White House, took center stage at a CNN town hall, have advocated for gun control at their state Capitol, are creating “wining” social media content to spread their message to legislators and the general public, and so much more. The March For Our Lives is planned for March 24 in Washington D.C. (and in more than 460 sister sites/events around the world) as activists will “demand that their lives and safety become a priority and that we end this epidemic of mass school shootings.”

As time goes on, the #NeverAgain movement may take on different forms, pursue various routes, and try different tactics. Given the life cycle of major protests, it can be difficult to sustain the momentum of continued interest and activism so imperative for driving change. Because of this I want to offer up some legal strategies the Parkland activists and others could employ.

https://twitter.com/neveragainmsd

Form a 501(c)3

One legal strategy the Parkland youth (and other groups interested in pursuing progressive gun policies with a structured platform) could take is forming a 501(c)(3) organization. But, as we mentioned, the Never Again activists are making waves and changes without an official nonprofit platform to stand on, so why would they bother? It’s a good question, and the answer is a multitude of benefits including the following:

Tax exemption/deduction: Organizations that qualify as public charities under Internal Revenue Code 501(c)(3) are eligible for federal exemption from payment of corporate income tax. Once exempt from this tax, the nonprofit will usually be exempt from similar state and local taxes.

Tax-deductible contributions: Even better—if an organization has obtained 501(c)(3) tax exempt status, an individual’s or company’s charitable contributions to this entity are tax-deductible. (It’s true that charitable deductions are generally not as “valuable” since the changes made by the 2017 tax bill, but that’s a topic for another post entirely).

Eligibility for public and private grants: Nonprofit organizations can not only seek charitable donations from the public, they can also seek funding from grant making organizations, like foundations and government entities.

Formal structure: A nonprofit organization exists as a legal entity and separately from its founder(s). Incorporation puts the nonprofit’s mission and structure above the personal interests of individuals associated with it.

Limited liability: Under the law, creditors and courts are limited to the assets of the nonprofit organization. The founders, directors, members, and employees are not personally liable for the nonprofit’s debts. Also these folks have no personal liability for the actions and obligations of the nonprofit. Of course, there are exceptions. A person obviously cannot use the corporation to shield illegal or irresponsible acts on his/her part. Also, directors have a fiduciary responsibility; if they do not perform their jobs in the nonprofit’s best interests, and the nonprofit is harmed, they can be held liable.

Focus your giving: With charitable giving flowing through a central nonprofit organization, it’s easier for donors and the organizers alike to focus the giving on a singular mission (such as advocating for progressive gun control and reform at both the state and federal policy levels). An organized nonprofit can be much less susceptible to varied causes and cases of the different donors, volunteers, and employees, because a platform can be clarified.

With all of these benefits in mind, the present-day Women’s March is great example of a movement that has spawned dynamic nonprofits including March On, Women’s March LA Foundation, Women’s March Alliance, and Women’s March Canada. Women’s March leaders also launched a super PAC in 2017, March On’s Fight Back PAC. (Note: The 501(c)(3) organization Gathering for Justice served as the presenting partner for the Women’s March on Washington, meaning the organization lent their 501(c)(3) status to the grassroots movement, so that all donations could be tax-deductible.)

Women's March on Washington

Wait, Can Teens Even Form a Nonprofit?

Some of the criticism the Parkland students have weathered in the recent weeks has been based on their age. Without a doubt, these students have the right and have demonstrated a clear, mature ability to speak up for their cause even if some cannot legally vote in an election yet. Additionally, being a minor doesn’t prohibit them from founding a nonprofit organization. There are countless success stories of inspiring youth who haven’t let age hold them back from pursuing an amazing missions such as those behind The Ladybug Foundation, We Movement (which began as Free the Children), Kids Saving the Rainforest, Alex’s Lemonade Stand, and FUNDaFIELD (among many others).

The one things teens need to be aware of is that minors are typically not permitted to enter into legal contract unless they are emancipated. So, a teen could form a nonprofit, but then they may need to hand over control to a legal adult executive director in order for the nonprofit to pursue certain agreements and the like that would be beneficial.

person with backpack

How to Form a Nonprofit

Previously on this blog I wrote about how to form a nonprofit organization, but let’s review the basics; forming a 501(c)(3) involves four main steps:

  1. drafting, editing, and filing articles of incorporation;
  2. drafting and editing bylaws, with new board members then voting in favor of the bylaws in a duly authorized meeting;
  3. applying for an Employer Identification Number (EIN); and
  4. drafting, reviewing, and editing the IRS non-exempt status application, known as IRS Form 1023, as well as all the supporting materials IRS Form 1023 requires.

Note that each state can have different requirements for initial registration and filing, annual and employment filing, charitable fundraising compliance, and governance structure requirements. For example, in Iowa, there needs to be a minimum of one director (directors comprise the governing body of the nonprofit and serve as stakeholders in its mission and success) and an annual meeting is required.

So, if high school students in Florida form a nonprofit it would differ in process and compliance than if high school students in Iowa did the same.

What About Political Activity?

The limits on political activity is something that the Parkland students would have to adhere to if they formed a 501(c)3 organization. To maintain tax-exempt status, nonprofit organizations cannot participate with political campaigns on the behalf (or in opposition) of a candidate running for elected public office. So, this includes campaigns for U.S. president, senate, house of representatives, governor, state legislators, and even local offices like the county trustee. The IRS takes this rule super seriously and violations can result in a range of penalties from corrective actions to ensure the violation won’t reoccur, to excise taxes, to the revocation of tax-exempt status.

If the students did form a 501(c)(3), what could they do in terms of political-related activities?

peace flag

The rule of thumb here is nothing partisan. So, nonprofits can certainly engage in non-partisan activities like voter education and registration drives, as well as non-partisan political debates. (Nonprofits just need to be prepared to demonstrate that their activities don’t help or harm any particular candidate, and how the activities fit in with the organization’s exempt purposes.)

Up until now the Parkland students have been advocating largely for a specific stance (legislation that favors gun control) and not specific political campaigns. They could continue to do this issue-related advocacy work, so long as boundaries are not overstepped and the lobbying turns into political campaigning.

Remember that individuals associated with a nonprofit (say a founder or director of fundraising, for example) retain their right to participate in the democratic process by campaigning for specific candidates and vocalizing opinions; individuals just cannot do so as a representative of a nonprofit organization.

Other Options for Organization

501(c)(4)

If the Parkland students and their supporters want more of an active role in directly supporting candidates that agree and support gun control, they may want to pursue forming a 501(c)(4) instead of or in addition to the 501(c)(3).

A 501(c)(4) IRS designation indicates a “social welfare” organization, which the IRS defines as, “Civic leagues or organizations not organized for profit but operated exclusively for the promotion of social welfare.” (Note: A 501(c)(4) can also include local associations of employees.) Some commonly recognized examples of this type of organization are volunteer fire departments, homeowners associations, Disabled American Veterans chapters, and community service groups like the Rotary Club. Even Miss America Organization is a 501(c)(4)! You may also know 501(c)(4)s that are openly connected with a specific political party or ideology, like Organizing for Action and Crossroads GPS.

What differentiates the 501(c)(4) from it’s (c)(3) cousin is this type of organization is allowed to participate directly and indirectly in politics…so long as it is not the organization’s primary focus. Under this type of designation, organization representatives can conduct unlimited lobbying efforts and engage in partisan campaign activity…but only as a secondary activity. In practice, this means the organization must spend less than half of their funds on political campaigns, candidates, and the like. (Most counsel would recommend 30 to 40 percent of funds to be on the safe side).

Super PAC

Another option would be for the students to form a super political-action committee (PAC). Super PACs are not a category of nonprofit, but rather their own beast. I could (and will!) write a full post on this type of entity’s history, fundraising abilities, and limitations. What’s important for you (and the Parkland students) to know is that that super PACS have no limitations on who (be it unions, corporations, associations, or individuals) can contribute and how much they spend on elections, specific candidates, and in opposition of other candidates. This is why the 2016 presidential election saw super PACs donate massive amounts like Priorities USA Action spent more than $133 million supporting Hillary Clinton’s campaign, and Right to Rise gave $86 million to Jeb Bush’s candidacy.

When it comes to political activity, the main restriction is that a super PAC cannot spend funds “in concert or cooperation with, or at the request or suggestion of, a candidate, the candidate’s campaign or a political party,” according to the Federal Election Commission. It’s also important to note that donors can give to a nonprofit anonymously, but cannot make anonymous contributions to PACs.

Tax-exempt organizations interested in direct political work can form a PAC as a separate legal and funded entity in addition to their normal mission oriented work.

This is all to say that the Parkland students (and their supporters) have a multitude of options if they wanted to harness the benefits a nonprofit organization and/or an entity like a super PAC allows.

For anyone looking to form a nonprofit (regardless of age!) I recommend you meet with an attorney experienced in nonprofit formation and compliance to ensure you’re meeting all requirements, as well as drafting the important policies and procedures.

I would be happy to offer you a free consultation, address any questions, or help you get started on pursuing your mission-oriented organization. You can contact me via email or by phone (515-371-6077).

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