YNPN Tax Exemption Discussion

Thursday, September 7th

5pm PDT / 6pm MDT / 7pm CDT / 8pm EDT

Call-in number 563-843-7000

Passcode 622243#

September 2006* None of this presentation is intended as legal advice, but

rather as a compiled list of other resources for your information. 2

1. Distinction between a 501(c)(3) and a 501(c)(6) organization and why that matters to YNPN chapters

2. What roles National can and cannot play for your chapters in this regard (i.e. what is legal, what isn't and what is just a plain bad idea)

3. Tips and pitfalls in applying for 501(c)(3) tax exempt status with the IRS

4. Tips on reaching out to get a fiscal sponsor to support your chapters

Many thanks to Gene Takagi for joining this call to give us tips (not legal advice) about tax exemption issues!! I’m sure he’s be happy to be hired by any of our organizations… let the national board know if you’d like to get a hold of him.

Agenda

September 2006* None of this presentation is intended as legal advice, but

rather as a compiled list of other resources for your information. 3

Trade Association versus Public Charity What is the “charitable intent”? Emphasis on social networking activities

versus educational activities Complications of job posting boards,

membership, and other activities outside of “charitable intent”

Difference between a 501c3 & 501c6

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Role of National YNPN in helping Chapters with Tax Exemption Issues

- Options that we considered:

-Playing a “pass-through” role for donations (“step transactions”)

- Fiscal Sponsorship: playing a grantee-grantor role for chapters (donors cannot specify chapter that should receive funds, but can specify a programmatic area)

- Administrative work on both ends makes the legal options unviable for the network, as it is.

- Remaining recommendations for chapters:

- Incorporate

- File for tax exemption or Find a fiscal sponsor

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Filing for 501c3 status

To qualify for 501(c)(3) tax-exempt recognition, an organization must meet the following requirements set by Congress:

The organization must be organized and operated exclusively for religious, educational, scientific, or other charitable purposes,

Net earnings may not inure to the benefit of any private individual or shareholder, No substantial part of its activity may be attempting to influence legislation, The organization may not intervene in political campaigns, and The organization’s purposes and activities may not be illegal or violate fundamental public

policy.

The first step in forming a nonprofit is to incorporate in some state as a “nonprofit corporation” under that state’s laws. Once incorporated, the nonprofit files a Form 1023 with the IRS, applying for tax-exempt status. If approved, the organization receives a letter recognizing 501(c)(3) tax exemption as a public charity. Your organization must operate in furtherance of its exempt purposes described in its Form 1023, and the Form 1023 must be available for public inspection. If you are being asked to write grants that seem to be far afield from the organization’s mission, check the original 1023 to see if they are within the scope of the original application. If they aren’t, the organization should consider whether if would be appropriate to apply for that grant or, with much deliberation, should seek to modify its purpose.

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Responsibilities of Nonprofit BoardsAdministration of the Corporation

▪ The board is responsible for oversight of the legal entity (to ensure that the organization’s resources are effectively and efficiently utilized to advance the organization’s exempt purposes)▪ The board defines the organizations purpose (vision, mission and vales)▪ The board determines policy for the organization

Program Planning and Budgeting▪ Translates the mission into a specific program plan▪ Defines specific needs to be addressed▪ Establishes goals and objectives in order of priority▪ Develops a realistic budget, which supports the above▪ Adopts the program plan and budget annually

Evaluation of Organizational Effectiveness▪ Measures progress towards specific goals and objectives in the program plan▪ Evaluates the big picture, are you achieving your mission▪ Evaluates responsiveness to new situations▪ Evaluates the effectiveness of volunteer leadership (the board)

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Responsibilities of Nonprofit Boards (cont.)Financial Stewardship

▪ Development of financial resources (Board members make contributions and assist in fundraising).

▪ Review, approve and set conditions for all funds being solicited in the organization’s name

▪ Exercise fiduciary care of all funds entrusted to the organization (regular financial reports, audits, policies and controls)

▪ Engage in long range planning

Constituting the Community Connection

▪ Represent the public interest

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Incorporate as a Nonprofit

Articles of Incorporation serve two necessary functions: Reserve the name of your organization, by registering with the Secretary of

State. The State recognizes your organization as an incorporated nonprofit

organization. Incorporation provides the organization’s leaders and members with

limited liability from the claims of creditors of the corporation. Incorporation provides a set of default rules that may apply to the

organization and operation of the corporation.

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Common Elements of Articles/Certificate of Incorporation

Title (e.g. Articles or Certificate of Incorporation) Name and number of the statute under which corporation is sought Name of the corporation or organization Purpose(s) clause Statement of nonprofit nature of the corporation Statement barring ‘prohibited’ transactions (e.g., private inurement, substantial lobbying, political

campaign activities). (Necessary, in order to obtain tax exemption) Locality where corporate activities are to be conducted City, town or village, and county where the principal corporation office is to be located Number of directors or trustees, or a stated maximum and minimum number (usually at least three) Names and residence addresses of the person who are to be the directors until the first annual

meeting (same number as that stated in item I) Statement (in some states) that all the subscribers to the certificate are of legal age (over 21 in

most states), that two-thirds of them are citizens of the United Sates and that at least one of the directors named is a citizen of the United States and a resident of the state.

Statement that the corporation shall (or, shall not) have numbers; shall be public benefit (or mutual benefit) in nature; and how its assets shall be distributed on dissolution; also, for religious corporations a statement of religious nature.

Name and address of the designated Agent for Service of Process. Signatures, addresses and (in some states) acknowledgements (notary’s statement). Usually at

least five to seven signatures.

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DRAFT BYLAWS

Bylaws are the rule book for a nonprofit organization, and it is helpful to draft them during the early stages of developing your nonprofit organization. They will also be required by the IRS when filing your application for federal tax-exempt status.

Primarily, bylaws outline how your board of directors will operate, specify the size of the board, selection and term commitment of board members, number of board meetings, number and duties of officers and committees, financial and legal procedures, indemnification policies, and the purpose of the organization.

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Applying to the IRS for Tax Exempt Status, or 501c3

After you have incorporated locally, you want to obtain Form 1023 and instructions from your local IRS office. For locations you may go to the IRS website at www.irs.gov/localcontacts/. Form 1023 is your application to the IRS. You may also call the IRS and order ‘Kit 1023’ by calling 1-800-829-FORM.

If questions arise, you may want to consult an attorney or accountant who is familiar with nonprofit organizations.

The completed application is sent along with your Articles of Incorporation and the bylaws of your corporation to the IRS with your check for up to $750 (subject to change; see Part XI of Form 1023). Application for tax-exempt status should be made within twenty-seven (27) months of your incorporation date.

The IRS will acknowledge your application and outline their process. If the IRS requests additional information, respond as soon as possible.

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Federal Employer Identification Number

Every exempt organization is required to have a Federal Employer Identification Number (EIN), whether or not you have employees. An Employer Identification Number is the official identification code for an organization (similar to a social security number for an individual). This number will help the IRS track all your reports and tax-exempt application.

You should file for the Employer Identification Number (EIN) simultaneously with your tax exemption forms, to ensure quickest validation. There is no filing fee for the Employer Identification Number application. The IRS created a Tele-TIN phone number for this purpose. The instructions for form SS-4 list the phone numbers for each region.

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Reporting to the IRS

An annual report to the IRS will be required for most organizations with budgets over $25,000. This provides the IRS with income and disbursement information on your organization. The report is submitted on IRS Form 990. IRS forms may be obtained from your local IRS office, by phone at 1-800-829-FORM or online at http://efile.form990.org.Instructions for Form 990IRS Form 990

Fiscal SponsorshipIndividuals or groups in a hurry to begin operations and

accepting tax-deductible donations can become sponsored by an organization that already has 501(c)(3) status. By doing so, the group can apply for and accept grants, accept tax-deductible donations, and carry on other activities under the tax-exempt status of their sponsor. However, the activities of the sponsored group must be consistent with the exempt purposes of the sponsor. For example, a group that intends to provide services to homeless people cannot be sponsored by a 501(c)(3) that is tax-exempt for the purposes of providing classical music concerts.

Borrowed from Nonprofit Genie

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What are the benefits of using a fiscal sponsor?Groups may decide that using a fiscal sponsor makes sense for a variety of reasons;

Speed - It normally takes four to six months from the time an application for tax exemption is filed with the IRS to receive notice that tax-exempt status has been granted, and that is IF the IRS has no questions about information contained in the application. Theoretically one could make arrangements to be fiscally sponsored in a day or less, although a couple of weeks is more typical.

Efficiency - Especially for small groups, having someone else provide most of your administrative, or infrastructure functions may be cheaper than doing it yourself. This is especially true if you are a group that is only expecting to be in existence for a short period of time.

Convenience - Most groups, start-up or otherwise, want to focus their energy on their charitable activities. Having to create and maintain an infrastructure can be distracting from the mission of the group.

Necessity - There are some funding sources that will not fund brand-new groups. One way around this restriction is to become part of a group that has some history.

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What are the disadvantages?As a sponsored project of an already existing 501(c)(3), your

"parent organization" may be legally responsible for everything you do (this will depend on the nature of the fiscal sponsorship agreement). This includes the responsibility to comply with the terms of the grants you have been awarded and how you operate. If you and your sponsor disagree, you may be forced to "do it their way". The fiscal sponsor may also own the products of your work when you exit the relationship (again, this depends on the agreement).

Some foundations have policies that do not permit them to make grants through fiscal sponsors.

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What are some of the services typically provided by fiscal sponsors?There is really no such thing as a "typical" bundle of services provided by a sponsor. The services

available from sponsors vary from nothing to those listed below that are often provided by a professional sponsor.

Federal, state and local tax & informational returns

Receipt and acknowledgment of tax-deductible donations and grants

Monthly financial statements

Financial record-keeping

Independent Audit

Check processing and issuance for expenses, I-9s, 1099s

Directors' & Officers, Volunteer, & General Liability Insurance

Technical assistance on personnel issues

General Administration

Legal advice

Grant progress reports

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How do I go about looking for a fiscal sponsor?

Some of the places to inquire about fiscal sponsorship services are: a local technical assistance provider such as the members of the California Management Assistance Partnership (C-MAP), a local community foundation, legal firms that specialize in nonprofits, prospective funders, the internet under "fiscal sponsorship".

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What can a fiscal sponsor provide us that we couldn’t do on our own?A fiscal sponsor can often provide useful advice and help point you in the right direction. Hopefully the sponsor will also have solid experience in the areas where they are providing services to you. But the bottom line is, except for groups needing to get around being new with funders, if you wanted to put in the resources necessary to do everything on your own, you could do it all yourself.

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Are there organizations that are "in the business" of fiscal sponsorship?Yes. Some 501(c)(3)'s have received permission from the IRS to support "a very wide variety of charitable and educational activities". Fees and services can vary widely so it is important to understand each sponsor's "personality".

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Do we need an attorney to work out a fiscal sponsorship agreement?When a project sets up a relationship where it voluntarily gives up some control over its activities, it is always a good idea to have a written contract. Often a sponsor will have a standard contract that it uses with new projects. A good contract will have a procedure outlined in it as to how to terminate the relationship if for some reason either side becomes uncomfortable. Read the contract carefully and don't be afraid to ask the sponsor questions. The sponsorship agreement is a legally enforceable document so unless the group has experience in this area, a review of the document by an attorney paid to represent your interests is a good idea. Make sure you know what you are getting yourself into.

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Do you have an example of a fiscal sponsorship agreement between two nonprofits? http://www.compasspoint.org/askgenie/details.php?id=90

Do you have an example of a fiscal sponsorship agreement between a professional fiscal sponsor and its projects?http://www.compasspoint.org/askgenie/details.php?id=91

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What happens if we want to leave a fiscal sponsor?

It is important to both the you and the sponsor that the terms of the relationship are in writing before the relationship begins. If you don't and later decide you want to leave you may find that the sponsor wants to keep the project but not you. Any good sponsorship agreement will have a mechanism to deal with how to terminate the relationship. There are certain legal restrictions on how the project's activities and assets are severed from the sponsor but that should be disclosed in the sponsorship agreement.

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We’ve decided to become an independent nonprofit, what are the steps we should take?

If you have decided to separate from your current sponsor and don't want to affiliate with another the process to become independent begins with informing your current sponsor of your decision.

Most often you will next create a nonprofit (public benefit) corporation that will file applications with both the IRS and state taxing authority asking to be exempt from income tax. From the time the applications are submitted it usually takes four to six months [Note: this was a standard estimate, but recent lore puts this timeline more into the 8-12 months timeline] to receive your determination letters (notice that exemption has been granted). When you receive your notice it may be retroactive to the date of your original application (or the date of incorporation, depending on the time frame between formation and the exemption application).

The final step is arranging to have your sponsor transfer the project's assets and liabilities to the new nonprofit.

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September 2006* None of this presentation is intended as legal advice, but

rather as a compiled list of other resources for your information. 25

Disclaimer

The information contained in this presentation has been prepared by YNPN and is not intended to constitute legal advice. YNPN has used reasonable efforts in collecting, preparing, and providing this information, but does not guarantee its accuracy, completeness, adequacy, or currency. YNPN is a California nonprofit public benefit corporation and is affiliated with its chapters solely pursuant to the terms of an affiliation agreement.