1. © 2011 Leaffer Law Forming a Nonprofit: The Process Essentials Becky Seidel, bseidel@leafferlaw.com Colorado Bar Association, Young Lawyers Division April 23, 2012

2. © 2011 Leaffer Law Agenda 1.Is a Nonprofit the Right Fit? 2.What Are the Formation Requirements? 3.What Are the Exemption Requirements? 4.What Are the Ongoing Requirements? 2

3. © 2011 Leaffer Law Is A Nonprofit the Right Fit? 3

4. © 2011 Leaffer Law Is a Nonprofit the Right Fit?  Some Background on 501(c)(3) Organizations:  What most people mean when they talk about charities and nonprofits  Exempt from federal income tax  Organized and operated exclusively for charitable purposes  Eligible for tax-deductible contributions  Highly regulated in terms of lobbying, political activity, transactions with “insiders”  No ownership allowed! 4

5. © 2011 Leaffer Law Is a Nonprofit the Right Fit?  Other Potential Alternatives:  501(c)(4) social welfare organization  Exempt from tax  Less regulation in terms of lobbying and political activity  Still regulated in terms of transactions with insiders and ownership  Can’t accept tax-deductible contributions  For-profit organization (LLC or newer hybrid entity)  May not owe tax if no profits  Can have private ownership/share in upside  Less regulated  Can’t accept tax-deductible contributions 5

6. © 2011 Leaffer Law Is a Nonprofit the Right Fit?  Startup Scenario Client (or friend) approaches you with an idea for an organization. He wants to operate a restaurant that will provide job training skills for individuals who have been chronically homeless or suffered addiction to drugs or alcohol. The restaurant will operate in a busy location near the Pearl Street Mall during regular lunch/dinner hours, and will serve a menu of classic diner fare. The restaurant has the potential to make a good deal of money while also helping out the community in an important way. He asks you to help form a nonprofit, 501(c)(3) organization. 6

7. © 2011 Leaffer Law Is a Nonprofit the Right Fit?  Threshold questions:  Will you (or anyone) want an ownership interest in organization?  Can’t have ownership/stake in nonprofit (501(c)(3) or (c)(4))  Can’t change your mind and change status later  Certain organizations that won’t make much profit won’t owe tax anyway  Will you rely on donations or grants?  Only 501(c)(3) organizations can accept tax-deductible contributions  Many organizations only grant to 501(c)(3)  Will you want to pursue lobbying/political activity?  501(c)(3) organizations can only conduct insubstantial lobbying  501(c)(3) organizations cannot participate in any political campaign activity 7

8. © 2011 Leaffer Law Is a Nonprofit the Right Fit?  Startup Scenario  No one wants ownership stake  Private donations and grants are a big part of the budget plan for operating the restaurant  Lobbying and political activity are not a concern  Regulation of transactions with insiders are not a problem The Plan: Move ahead as a nonprofit, 501(c)(3) organization! 8

9. © 2011 Leaffer Law What Are the Formation Requirements? 9

10. © 2011 Leaffer Law What Are the Formation Requirements?  Form as a Colorado Nonprofit Corporation  Prepare and file articles of incorporation with secretary of state  Prepare and adopt bylaws  Prepare organizational action  Set up corporate minute book 10

11. © 2011 Leaffer Law What Are the Formation Requirements?  Articles of incorporation  File online with Colorado Secretary of State ($50 filing fee)  Articles establish framework for operation and should address key issues like  Exempt purpose  Distributions of assets upon dissolution  Whether organization will have members  Limited liability for directors  Current process has filer fill out online form for certain information (agent, principal address, etc.) and file attachment with other required elements 11

12. © 2011 Leaffer Law What Are the Formation Requirements?  Bylaws  No filing requirement with Secretary of State  Bylaws establish management rules for the organization on issues like  Director selection, terms and removal/resignation  Notice and time of meetings  Officer duties  Committee structure  Indemnification of officers, directors and members  Availability of records 12

13. © 2011 Leaffer Law What Are the Formation Requirements?  Bylaws (continued)  Remember that articles will trump bylaws  Avoid duplication of issues in the articles and bylaws, where only bylaws typically end up getting updated  Keep just the essentials in the articles  Bylaws can be updated without Secretary of State filing 13

14. © 2011 Leaffer Law What Are the Formation Requirements?  Organizational Action  Adopt bylaws  Adopt policies  Elect initial directors and officers  Authorize bank accounts  Authorize filing for recognition of tax exemption with IRS  Establish fiscal year 14

15. © 2011 Leaffer Law What Are the Formation Requirements?  Corporate minute book  Minutes of director and member meetings  Copies of all versions of corporate documents  Articles of incorporation  Bylaws  Corporate policies  Copies of annual reports with Secretary of State 15

16. © 2011 Leaffer Law What Are the Exemption Requirements? 16

17. © 2011 Leaffer Law What Are the Exemption Requirements?  Obtain Entity Identification Number (EIN)  Complete Form SS-4  Don’t file with IRS, but retain in your records  Information about the organization and a responsible party (e.g., president, CEO)  Apply on IRS online system (free)  Number generated right away, and official letter follows 17

18. © 2011 Leaffer Law What Are the Exemption Requirements?  File Form 1023 Package with IRS for Exempt Status  Form 1023 application and attachment  Fully developed description and disclosure of planned activities  Budgets  Leadership (directors, officers, key employees)  Compensation  Relationships  Fundraising plans  Plans to lobby, engage in gaming activities, foreign grants  Form 1023 Checklist  Form 2848 (power of attorney) 18

19. © 2011 Leaffer Law What Are the Exemption Requirements?  File Form 1023 Package with IRS for Exempt Status (cont)  Certified copy of articles of incorporation (showing evidence of filing with Secretary of State)  Copy of bylaws (can have secretary certify)  Copy of conflict of interest policy  Biographies of officers, directors and highly compensated employees and independent contractors 19

20. © 2011 Leaffer Law What Are the Exemption Requirements?  File Form 1023 Package with IRS for Exempt Status (cont)  Other miscellaneous items as needed  Copies of contracts for outside services (fundraising, management)  Copies of grant agreements and applications  Brochures, program literature, website print-outs  Filing fee!  $850 for organizations with annual gross receipts expected to be over $10,000  $400 for organizations with annual gross receipts expected to be $10,000 or less Note: Some organizations need not file Form 1023 20

21. © 2011 Leaffer Law What Are the Exemption Requirements?  State Exemption Requirements  No filing with State Department of Revenue for income tax exemption  File for property tax exemption with Department of Local Affairs  File for state sales tax exemption  Application with Department of Revenue to avoid paying sales tax on items organizations purchase for use in their charitable activities  Many organizations will have to pay sales tax on items they sell in the course of their charitable activities, unless they meet small organization exception  File for local sales tax exemption  Application with city office to avoid paying sales tax on items organizations purchase for use in their charitable activities 21

22. © 2011 Leaffer Law What Are the Ongoing Requirements? 22

23. © 2011 Leaffer Law What Are the Ongoing Requirements?  Register and renew annually for fundraising  Charitable organization filing with Secretary of State under Colorado Charitable Solicitations Act  $10 filing fee  Registration requires information on  Organization’s purpose  Officers and directors  Revenue and expenses  Use of paid solicitors and professional fundraisers  Paid solicitors and professional fundraisers must register too 23

24. © 2011 Leaffer Law What Are the Ongoing Requirements?  Annual corporate and tax compliance  Periodic report with Secretary of State  Information return with IRS  990: file if either gross receipts of at least $200,000 or total assets of at least $500,000 at year’s end  990-EZ: can file shorter form if both gross receipts of less than $200,000 and total assets of less than $500,000 at year’s end  990-N: gross receipts of $50,000 or less  990-PF: all private foundations 24

25. © 2011 Leaffer Law What Are the Ongoing Requirements?  Annual corporate and tax compliance  Tax return  990-T: federal return for unrelated trade or business income  State return for unrelated trade or business income  State and/or local sales tax returns (may need to file quarterly)  Donation substantiation and disclosure  Written substantiation for gifts of $250 or more  Quid pro quo disclosure for payments over $75 25

26. © 2011 Leaffer Law Conclusion 26

27. Becky Seidel, Esq. 303.781.6899 becky.seidel@leafferlaw.com 1899 Wynkoop Street | Suite 275 | Denver, CO 80202 LeafferLaw.com 27