3/30/2017 CMBA Volunteer Lawyers for the Arts/Reach Out March 30, 2017 WHAT TO THINK ABOUT WHEN YOU’RE THINKING OF FORMING A NONPROFIT: BUSINESS AND OPERATIONAL CONSIDERATIONS Steven W. Day -- Calfee, Halter & Griswold, LLP A Plug 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 arts organizations 1
3/30/2017 Starting out 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 “charitable organization” Starting Out Good reasons to start a non-profit organization Passion for a mission Need in the community Support from the community 2
3/30/2017 Starting Out Bad reasons to start a non-profit organization Capitalization for your business or business idea Need a job The “tax write - off” Balancing Act Community Champion vs. Entrepreneur 3
3/30/2017 Balancing Act Community Champion vs. Entrepreneur Balancing Act Community Champion vs. Entrepreneur 4
3/30/2017 Balancing Act Community Champion vs. Entrepreneur Balancing Act Community Champion vs. Entrepreneur 5
3/30/2017 Balancing Act Community Champion vs. Entrepreneur Balancing Act Community Champion vs. Entrepreneur 6
3/30/2017 Balancing Act Community Champion vs. Entrepreneur Balancing Act Community Champion vs. Entrepreneur 7
3/30/2017 Balancing Act Community Champion vs. Entrepreneur Balancing Act Community Champion vs. Entrepreneur 8
3/30/2017 Balancing Act Community Champion vs. Entrepreneur Balancing Act Community Champion vs. Entrepreneur 9
3/30/2017 Balancing Act Community Champion vs. Entrepreneur Balancing Act Community Champion vs. Entrepreneur 10
3/30/2017 Balancing Act Community Champion vs. Entrepreneur Balancing Act Community Champion vs. Entrepreneur 11
3/30/2017 Balancing Act Community Champion vs. Entrepreneur Starting Out Key considerations when starting Is the purpose of your organization charitable? Commerciality doctrine Is there a broad support for your mission in your community? 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 12
3/30/2017 Application for Tax-Exempt Status “Charitable Organization” (501(c)(3)): The exempt purposes set forth in section 501(c)(3) are charitable, religious, educational, scientific, literary, testing for public safety, fostering national or international amateur sports competition, and preventing cruelty to children or animals. The term charitable is used in its generally accepted legal sense and includes relief of the poor, the distressed, or the underprivileged; advancement of religion; advancement of education or science; erecting or maintaining public buildings, monuments, or works; lessening the burdens of government; lessening neighborhood tensions; eliminating prejudice and discrimination; defending human and civil rights secured by law; and combating community deterioration and juvenile delinquency. Establishing the NPO Establishing a non-profit organization Create non-profit domestic corporation under state law (Ohio) Apply for tax-exempt status as a charitable organization with the IRS 13
3/30/2017 Establishing the NPO Domestic Non-Profit Corporation (Ohio) File Initial Articles of Incorporation Purpose section must include “magic” IRS language regarding prohibitions on distributions and liquidation requirements Purpose section must include the organization’s charitable purpose Be specific, but as broad as possible Must have incorporator(s) Must have statutory agent Establishing the NPO Domestic Non-Profit Corporation (Ohio) Create Code of Regulations (bylaws) Rules for running the organization Number of directors/officers, meeting requirements, membership requirements, etc. Voting members? Single-member structure? 14
3/30/2017 Establishing the NPO Domestic Non-Profit Corporation (Ohio) Find directors and officers Three directors required in Ohio Three officers – president, secretary and treasurer (can be same people as directors) Establish director guidelines Establishing the NPO 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 public The Board oversees the organization, its mission and can hire/fire executives The Board is personally liable for fiduciary duties of care and loyalty 15
3/30/2017 Establishing the NPO 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? Establishing the NPO Applying for tax-exempt status with the IRS, will need: Articles of Incorporation (with “magic language” in purpose section) Code of Regulations (bylaws) Requisite number of Directors Federal tax ID number Conflicts of Interest Policy Financial information and a projected budget 16
3/30/2017 Application for Tax-Exempt Status 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” version 1023-EZ for NPO with less than $50,000 in projected annual revenues Application for Tax-Exempt Status Key items for preparing: Narrative description of organization’s operations and charitable purpose Budget for past 5 years and projected budge for current year and next two years Credentials for Directors/Officers/Executives Compensation for executives Fund-raising activities Related party transactions (try to avoid them) 17
3/30/2017 Key Points Emphasized in Form 1023 It’s not your money. Nobody should profit from your organization’s activities. Money raised by your organization must be used for its charitable purpose. Private Benefit and Private Inurement Tax-exempt entities must operate exclusively for one or more exempt purposes. An organization’s failure to operate exclusively for its charitable purpose may result in revocation of its tax-exempt status. 501(c)(3): “no part of the net earnings of [the tax -exempt entity] inures to the benefit of any private shareholder or individual.” A “facts and circumstances” analysis. 18
3/30/2017 Private Benefit “non -incidental benefits conferred on disinterested persons who serve private interests.” Generally applies to outsiders. A private benefit can be conferred to a third-party indirectly -- it does not have to be money going directly from the non-profit organization to the third-party. Private Inurement “providing unjust enrichment from an organization’s earnings to another party.” Applies to insiders (employees, officers, directors and relatives) 19
3/30/2017 Private Benefit Requires a careful examination of relationships with third-parties (vendors, suppliers, service providers, etc.): 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 mission/business model: 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? Examples -- Private Benefit Exclusive Arrangements -- Does the organization funnel money or services to a private for-profit organization? Organization established to help disadvantaged youths find jobs signs exclusive agreement with for-profit company to provide workers. Unreasonable/Unfavorable Agreements -- Is the organization paying too much for the services provided? Organization signs long-term lease with unreasonably high rent and other expensive terms. Organization enters into agreement with ticket selling vendor that allows the vendor to holdback large percentage of money to cover future fees and expense. 20
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