Creating Non-Profit/Tax-Exempt Organizations Pt. 5 — Formation Steps

Today we conclude by reviewing the usual steps for creating a non-profit/tax-exempt organization. ——————————————– The first hurdle in establishing a non-profit/tax-exempt organization is to officially organize its business structure. For starters, it is necessary to make sure that the intended name of the organization is not being used in the state where the organization is to be formed, nor in the states where it intends to operate (and must likely therefore register itself). If the name is clear, you can move forward with forming the entity. Assuming for the purposes of this article that you intend to organize the entity as a corporation or LLC, articles of organization must be filed with the state Secretary of State’s office. Unlike with many for-profit businesses, great care and detail must be paid to the purpose language on the articles, as the IRS will review the stated purpose of the entity when determining its status. Too narrow a purpose can close you off from undertaking activities in the future, but too broad a purpose may cause the IRS to rule that you do not fall “exclusively” (again, read: predominantly) into one of the tax-exempt categories. You will also need to include the identities of the organization’s initial directors/trustees and officers, as well as their residential addresses (business addresses are not permitted). Once the articles of organization are accepted and filed by the state Secretary of State, you must then draft and adopt the governing documents of the entity — bylaws in the case of a corporation, or an operating agreement in the case of a LLC. In Massachusetts and many other states, the laws governing non-profit organizations include terms that must be incorporated into governing documents, so it is important to review to ensure you are in compliance. You will likely also want to adopt organizational policies on certain matters, such as conflict of interest, record-keeping, and executive compensation — if you intend to become a 501©(3), you are all but required to have policies on issues such as these. The initial resolutions of the organization should also be adopted alongside the governing documents, enabling the entity to do things such as opening a bank account (for which you will also need to apply for an EIN from the IRS). In most, if not all, states, if you intend to become a public charity (with the exception of religious organizations), before commencing fundraising or any charitable work you must register with the state Attorney General (or other state official that oversees public charities). The application will typically require you to also submit: your articles of organization, trust instrument, or other founding document; a list of your current directors/trustees and officers; your governing documents (e.g. bylaws or operating agreement); the IRS determination letter of status (if you have one yet); and (in Massachusetts at least) a Form PC for charities past their first fiscal year (or Short Form PC for new and small charities). Finally, you may need to apply for IRS determination of your status. In most cases, only organizations seeking 501(c)(3) status must apply to the IRS for status determination; however, if you are seeking 501(c)(4) or other tax-exempt status you may still obtain a determination letter from the IRS by filing Form 1024 (and it is usually good practice to do so). 501(c)(3)s (with the exception of religious organizations and organizations with annual gross receipts less than $5000.00) apply to the IRS for status by filing Form 1023, along with their articles of organization (or other founding document) and bylaws (or other governing documents). The IRS will also use Form 1023 to determine whether or not your organization is a public charity. Depending on your state and your tax-exempt status, your organization may also be exempt from state sales and property taxes. In Massachusetts, charitable organizations are exempt from sales and use taxes for items purchased for the organization’s charitable purposes; the organization can obtain an exemption certificate to present to retailers by requesting one through the state’s WebFile for Business online portal. Charitable organizations in Massachusetts are also exempt from property tax on real estate owned or held by a charitable organization that is occupied by any charity for their respective charitable purposes; charities can obtain the exemption by filing Form 1B-3 and 3ABC with their local property assessors. ——————————————– The First Venture Legal Blog will be on break this Friday for the Thanksgiving holiday, so check back for our next article on Tuesday, December 3rd!

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