1. Keeping it Legal: What to consider before starting a new nonprofit
October 27, 2012
Nancy Eberhardt, NJ Program Director
Pro Bono Partnership
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or publication is permitted without express written permission of Pro Bono Partnership.

2. What is the Pro Bono Partnership?
Free business and transactional legal services for nonprofit organizations through the services of our staff and corporate and private attorney volunteers
To be eligible, the organization must be:
Nonprofit, tax exempt (or seeking 501(c)(3) status);
Primarily serving the disadvantaged and enhancing the quality of life in their neighborhoods;
Focusing on health and human services, community development, affordable housing, neighborhood revitalization, environmental protection, or the arts;
Providing programs that have a demonstrable impact; and
Unable to pay for legal services without significant impairment of program resources.
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or publication is permitted without express written permission of Pro Bono Partnership.

3. Introduction The nonprofit sector is growing quickly
But revenue sources are decreasing, especially in this economy!
More targeted individual giving and redirected/focused corporate giving
Resulting in an environment where it is essential to make a disciplined assessment of whether it makes sense for you to incorporate and apply for tax exemption
The Partnership’s experience screening new organizations
Copyright 2012 Pro Bono Partnership. All rights reserved. No further use, copying, dissemination, distribution
or publication is permitted without express written permission of Pro Bono Partnership.

4. Myth or Reality?
Nonprofit and tax exempt mean the same thing (or nonprofit corporations are automatically tax exempt)
An organization cannot raise money unless it is tax exempt
Every good idea deserves a nonprofit
If I am the founder, I can pretty much run the nonprofit the way I want
Nonprofits can’t make a profit
Being on the Board of a nonprofit is not “serious”, the way being on the Board of a for-profit company is
Nonprofits cannot engage in lobbying
Copyright 2012 Pro Bono Partnership. All rights reserved. No further use, copying, dissemination, distribution
or publication is permitted without express written permission of Pro Bono Partnership.

5. Myth or Reality? (cont’d)
Nonprofits cannot pay salaries (or nonprofits can pay any salaries they want to)
Nonprofits are exempt from workers’ compensation and unemployment laws
I can get a tax deduction for the time/services I give to my nonprofit
I can get a tax deduction for use of my space
State tax and local property tax exemptions are automatic for a 501(c)(3) organization
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or publication is permitted without express written permission of Pro Bono Partnership.

6. Incorporation and Tax Exemption
Becoming a tax-exempt organization is a two-step process
First step: Incorporation is a product of state law; obtained by filing a certificate of incorporation or articles of incorporation with the state
Second step: Tax exemption is a federal designation for which the corporation applies to the Internal Revenue Service on Form 1023 and asks to be recognized as tax exempt
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7. Pros and Cons of Incorporating
Limited liability
Facilitates tax exemption
More attractive to funders
Perpetual existence
CONS
State filings
Federal filings
Maintaining corporate records
Observing corporate formalities
Must recruit and retain people to carry out responsibilities
Perpetual existence
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8. Organizational Requirements
Not-for-profit vs. for profit
Bylaws
Membership vs. nonmembership
Board of Directors/Board of Trustees
Officers
Staff
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9. Organization Chart for Nonprofits
Elect
Hire & Supervise
Hires & Supervises
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or publication is permitted without express written permission of Pro Bono Partnership.

10. Incorporating Generally
Each state has its own Nonprofit Corporations Act or Nonstock Corporation Act (or some other name)
You generally must complete and file a Certificate of Incorporation (sometimes called Articles of Incorporation) with a state agency; agency that handles incorporations and fees vary between states.
Usually, must decide:
Membership or non-membership
Agent for service of process
Carefully state your organization’s mission, keeping in mind your intention to apply for federal tax-exempt status
Incorporators sign
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11. Incorporating Generally (cont’d)
Other State filing requirements:
Usually some kind of consumer protection function within each state.
Some states have specific filing requirements depending on type of activities (example: NY nonprofits engaging in educational activities)
Copyright 2012 Pro Bono Partnership. All rights reserved. No further use, copying, dissemination, distribution
or publication is permitted without express written permission of Pro Bono Partnership.

12. 501(c)(3) Tax Exemption
501(c)(3) is one type of tax-exempt organization
Can accept tax-deductible charitable donations
Doesn’t pay income taxes; may be exempt from sales, property, and other state and local taxes
No private benefit or inurement
Registration and reporting requirements
Restrictions on lobbying activities
Absolute bar on political campaign activities
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or publication is permitted without express written permission of Pro Bono Partnership.

13. 501(c)(3) Tax Exemption (cont’d)
Transparency and accountability
Organizations that don’t have to apply to have tax exemption
Religious organizations that are houses of worship (not just faith-based charities)
Organizations under a “group exemption”
Organizations with annual gross receipts of not more than $5,000
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or publication is permitted without express written permission of Pro Bono Partnership.

14. How to Apply for 501(c)(3) Tax Exemption
Obtain a federal tax ID number, EIN, from the IRS (Form SS-4)
Complete and file IRS Form 1023
Set out, in detail, information about the organization, including its mission, programs, structure, fundraising program, sources of financial support, and three-year budget
$850 filing fee; $400 if annual gross receipts of $10,000 or less
IRS is working on “Cyber Assistant” that may result in reduced fees
File within 27 months of incorporating to get tax exemption retroactive to the date of incorporation; if more than 27 months, retroactive to date that Form 1023 is filed
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or publication is permitted without express written permission of Pro Bono Partnership.

15. External Oversight of Tax-Exempt Organizations
IRS
Compliance and reporting requirements
The IRS recently revoked tax-exempt status for over 385,000 organizations for failure to a Form 990 for three consecutive years [IRS Data Book 2011]
State Attorneys General
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16. External Oversight of Tax-Exempt Organizations
Other State agencies (e.g., Departments of State and Taxation)
Public
Media
Grantmakers
Sarbanes-Oxley legislation
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or publication is permitted without express written permission of Pro Bono Partnership.

17. Is Incorporation/Tax Exemption Right for You? Ask These Questions:
Do your purposes fit within 501(c)(3)?
Is your mission clearly articulated?
Is there a profit motive?
Is there a need for your services?
Are other organizations doing what you want to do? Locally? If so, how will your activities differ?
Whom do you plan to benefit? Many, or just a few?
Who is involved with the organization?
(continued…)
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18. Ask These Questions (cont’d):
Where will you get your $$? Do you have identified sources of funding?
Do you have only a short-term project?
Do you have a need for privacy?
Do you plan to do more than an insubstantial amount of lobbying, or engage in any political campaign activities?
Do you have the personality needed to work under the direction of a board and timely file required reports with government agencies?
Do you have any experience working with/for a nonprofit organization?
Can you afford it?
Have you considered alternatives to incorporation and tax exemption?
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or publication is permitted without express written permission of Pro Bono Partnership.

19. 1. Do your purposes fit within 501(c)(3)?
IRC Section 501(c)(3)
The organization must be “organized and operated exclusively for religious, charitable, scientific, testing for public safety, literary, or educational purposes, or to foster national or international amateur sports competition…, or for the prevention of cruelty to children or animals”
“Charitable” covers a wide variety of objectives, including:
Relief of the poor and distressed or of the underprivileged
Lessening the burdens of government
Lessening neighborhood tensions
Combating community deterioration
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or publication is permitted without express written permission of Pro Bono Partnership.

20. 1. Do your purposes fit within 501(c)(3)? (cont’d)
Other purposes may not qualify under 501(c)(3), but the organization may still qualify as tax exempt under another subsection of Section However, donations to these groups are likely not deductible as charitable contributions. For example:
501(c)(4) – civic leagues and social welfare organizations (e.g., a block association)
501(c)(6) – business leagues (e.g., Chamber of Commerce)
501(c)(7) – social clubs
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or publication is permitted without express written permission of Pro Bono Partnership.

21. 2. Is your mission clearly articulated?
Important as a basis for exemption, continuing focus, organizational documents, public relations, and accessing funding
3. Is there a profit motive?
501(c)(3) status requires that “no part of the net earnings…inures to the benefit of any private shareholder or individual”
This is the “nondistribution constraint”
Compensation must be “reasonable” – sanctions if violated
Upon dissolution, all assets must be distributed to other 501(c)(3) organizations or to the government for public purposes
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or publication is permitted without express written permission of Pro Bono Partnership.

22. 4. Is there a need for your services?
Have you done a needs assessment?
Could you operate as a program of an existing organization?
5. Are other organizations doing what you want to do? Locally? If so, how will your activities differ?
Will you be duplicating already available services?
Is there limited funding for such services?
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or publication is permitted without express written permission of Pro Bono Partnership.

23. 6. Whom do you plan to benefit? Many, or just a few?
Can’t establish a 501(c)(3) to benefit just one person or a few people
7. Who is involved with the organization?
How many board members do you have?
What is their ongoing commitment to the organization?
Are they all family and/or friends?
Do they represent the public?
What skill(s) does each person bring to the organization?
Is someone good at/fond of administrative/organizational tasks?
Are there others who will help in non-board member roles?
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or publication is permitted without express written permission of Pro Bono Partnership.

24. 9. Do you have only a short-term project?
8. Where will you get your $$? Do you have identified sources of funding?
Fees? Donations? Government? Corporations?
Must be able to articulate this on Form 1023
Some funders are reluctant to fund start-ups
Do your volunteers have the skills to fundraise?
Is the organization sustainable?
9. Do you have only a short-term project?
If so, might be better to use a fiscal sponsor or work as a program of an existing agency
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or publication is permitted without express written permission of Pro Bono Partnership.

25. 10. Do you have a need for privacy?
501(c)(3) “public charities” are accountable to the public and full disclosure is mandated in some circumstances
Form 990 annual informational tax returns – must disclose information such as compensation of key employees and corporate governance policies; must make copies of Form 990 available on demand; also likely posted online
The list of donors filed with the annual Form 990 does not have to be disclosed by a 501(c)(3) public charity
Annual reports filed with state authorities
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or publication is permitted without express written permission of Pro Bono Partnership.

26. 11. Do you plan to do more than an insubstantial amount of lobbying, or engage in any political campaign activities?
A 501(c)(3) cannot have a “substantial part” of its activities consisting of attempts to influence legislation
Section 501(h) Election on IRS Form 5768
A 501(c)(3) is prohibited from participating in campaign-related activities – supporting or opposing a candidate for public office
12. Do you have the personality needed to work under the direction of a board and timely file required reports with government agencies?
If no, starting a nonprofit may not be right for you
Copyright 2012 Pro Bono Partnership. All rights reserved. No further use, copying, dissemination, distribution
or publication is permitted without express written permission of Pro Bono Partnership.

27. 13. Do you have any experience working with/for a nonprofit organization?
Funders will look at your experience
Experienced board or staff available?
14. Can you afford it?
Filing fees?
Insurance?
Startup costs?
Overhead/administrative costs (e.g., wages)?
Annual accounting fees?
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or publication is permitted without express written permission of Pro Bono Partnership.

28. 15. Have you considered alternatives to incorporation and tax exemption?
(A) Become a program of another organization
Pros:
Able to concentrate on and build your program
Do not need to deal with fundraising, administrative, or organizational issues
Cons:
Lack of control
Lack of identity
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or publication is permitted without express written permission of Pro Bono Partnership.

29. 15. Have you considered alternatives to incorporation and tax exemption? (cont’d)
(B) Fiscal Sponsorship
An existing 501(c)(3) organization (the “Sponsor”) may financially support an unrelated organization (the “Project”) as long as doing so furthers the Sponsor’s exempt purposes
Funders donate to the Sponsor, which reports the income, controls the administration of funds and the Project’s activities, and is responsible for recordkeeping and reporting to IRS and state agencies on behalf of the Project
Sponsor may charge a reasonable fee for its administrative services
Copyright 2012 Pro Bono Partnership. All rights reserved. No further use, copying, dissemination, distribution
or publication is permitted without express written permission of Pro Bono Partnership.

30. 15. Have you considered alternatives to incorporation and tax exemption? (cont’d)
(B) Fiscal Sponsorship (cont’d)
Good idea for new groups; allows them to focus on developing their programs
Often temporary/short-term arrangements – can be an interim step on the road to incorporation and tax exemption
Many different ways to structure a fiscal sponsorship. A written agreement is recommended and can be tailored to the needs of each Sponsor and Project
Copyright 2012 Pro Bono Partnership. All rights reserved. No further use, copying, dissemination, distribution
or publication is permitted without express written permission of Pro Bono Partnership.

31. 15. Have you considered alternatives to incorporation and tax exemption? (cont’d)
(B) Fiscal Sponsorship (cont’d)
Choose the fiscal sponsor carefully – investigate it to make sure it is well run.
For questions to ask, see the National Network of Fiscal Sponsors’ Guidelines for Comprehensive Fiscal Sponsorship, at
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32. Ingredients for Success
Clear Mission
“Market” Niche – need for organization
Business and Budget Planning
Adequate Sources of Funding
Strong Administrative Skills
Committed Board Members
Committed Volunteers
Appropriate Staff
Copyright 2012 Pro Bono Partnership. All rights reserved. No further use, copying, dissemination, distribution
or publication is permitted without express written permission of Pro Bono Partnership.

33. Resources
IRS website offers online training on a wide range of subjects relevant to maintaining tax-exempt status:
IRS Publication 557 explains the process of applying for tax-exempt status:
Center for Nonprofit Management booklet “Get Ready, Get Set! What You Need To Know Before Starting a Nonprofit”:
Center for Non-Profits booklet “Thinking of Forming a Non-Profit? What to Consider Before You Begin”:
BoardSource booklet “Starting a Nonprofit Organization”:
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or publication is permitted without express written permission of Pro Bono Partnership.

34. Resources (cont’d)
American Bar Association “Tool Kit” that outlines the process of completing the IRS Application for Tax Exemption:
Foundation Center’s tutorial on starting a nonprofit:
Information on other charities:
GuideStar: www2.guidestar.org
Charity Navigator:
The Pro Bono Partnership website contains many publications:
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or publication is permitted without express written permission of Pro Bono Partnership.

35. Resources (cont’d) Resources for Developing a Business Plan:
SCORE: and
U.S. Chamber of Commerce Small Business Nation:
U.S. Small Business Administration:
Many states have pro bono services for start-ups – check the state and local bar associations, local law schools, and your state’s Nonprofit Association.
Copyright 2012 Pro Bono Partnership. All rights reserved. No further use, copying, dissemination, distribution
or publication is permitted without express written permission of Pro Bono Partnership.

36. Please Note
IRS Circular 230 Disclosure: To ensure compliance with requirements imposed by the IRS, we inform you that any tax advice contained in this communication (including any attachments) is not intended or written to be used, and cannot be used, for the purpose of (i) avoiding penalties under the Internal Revenue Code or (ii) promoting, marketing, or recommending to another party any transaction or matter addressed herein.
This presentation is provided as a general informational service to clients and friends of the Pro Bono Partnership. It should not be construed as, and does not constitute, legal advice on any specific matter, nor does this presentation create an attorney-client relationship.  You should seek advice based on your particular circumstances from an independent legal advisor.
Copyright 2012 Pro Bono Partnership. All rights reserved. No further use, copying, dissemination, distribution
or publication is permitted without express written permission of Pro Bono Partnership.