Essentials of Not-For-Profit Incorporation and Tax Exemption © Community Exchange Series Hosted by: Council Member Laurie Cumbo Presented by: Jacques L. David January 28, 2017

Roadmap to the Presentation The presentation begins with a practical introduction to creating a not-for-profit corporation in New York State. The presentation follows with a discussion of how to obtain tax exempt status and to comply with annual reporting requirements.

Not-for-Profit Incorporation Agenda Part I Not-for-Profit Incorporation

Types of New York State “other than for-profit” Corporations Not-for-profit corporations Formed under the Not-for-Profit Corporation Law Educational corporations Formed under the Education Law Religious corporations Formed under the Religious Corporations Law Cooperative corporations Formed under the Cooperative Corporations Law, except for workers cooperatives, which may be formed for-profit

What is a Not-for-Profit Corporation? A not-for-profit corporation is an entity chartered by the state and often is required to register with the state charities bureau. Tax exempt status is obtained from the federal government following incorporation.

What is a Not-for-Profit Corporation? Nonprofits are formed for many different purposes, including making a profit. But profits must be used to support nonprofit activities No part of the nonprofit’s assets or income may benefit the nonprofit’s board, directors, officers or members except for the payment of reasonable compensation for services rendered to the organization.

Why Form a Not-for-Profit Corporation? Limited liability Perpetual existence Clear corporate rules to follow Easier to attract funding and obtain federal and state tax exempt status

Is the Organization Ready to Incorporate? Does the organization have a clear, well-defined mission and a core group to do the work required to achieve that mission? Does the organization have nonprofit purposes? Has the organization identified a population in need of its services? Does the organization have a plan, including a detailed description of activities and a budget?

Types of New York State Not-for-Profit Corporations: Charitable Charitable Corporations Defined in the N-PCL as “charitable, educational, religious, scientific, literary, cultural or for the prevention of cruelty to children or animals.”

Types of New York State Not-for-Profit Corporations: Non-Charitable Defined in the N-PCL as “other than a charitable corporation, including but not limited to, one formed for any one or more of the following non-pecuniary purposes: civic, patriotic, political, social, fraternal, athletic, agricultural, horticultural, or animal husbandry, or for the purpose of operating a professional, commercial, industrial, trade or service association.”

Steps to Not-for-Profit Incorporation Reserve the name of the entity with the New York Department of State (optional). Draft a certificate of incorporation Be careful to state charitable purposes, if 501(c)(3) status will be sought.

Elements of the Certificate of Incorporation Name of the Corporation Type: Charitable or Non-Charitable Whether the Corporation will have members Statement of corporate purposes Statement that the Corporation does not require approval or consent of any organization or governmental agency Statement that Corporation is not formed for profit

Elements of the Certificate of Incorporation (cont’d) Statement that no substantial part of corporate resources will be devoted to carrying out propaganda or lobbying activities Statement that corporation will not participate in, or intervene in, any political campaign Names and addresses of initial directors (at least 3) Name of Incorporator (must be at least 18 years old) Dissolution statement 13

Steps to Not-for-Profit Incorporation (cont’d) Obtain waivers or approvals, if required, from state or city agencies. Submit the certificate of incorporation, together with any waivers or approvals (and the applicable filing fees), to the Department of State for filing. Upon the filing of the certificate of incorporation, the incorporation becomes effective and the entity’s corporate existence commences.

Steps to Not-for-Profit Incorporation (cont’d) The corporation must then hold an initial organizational meeting at which the following matters are typically addressed: Adoption of the by-laws Election of the directors and officers Designation of a bank or credit union for the organization’s accounts Authorization to apply for 501(c)(3) (or other applicable) tax exempt status and to register the organization as a charity

Steps to Not-for-Profit Incorporation (cont’d) In lieu of holding an initial organizational meeting, the initial directors may pass a unanimous written consent covering the matters otherwise addressed at a meeting. However, it is recommended that a new corporation hold a meeting, to ensure that the board of directors understands its role and is fully engaged in the affairs of the organization.

Registration Requirements for Charitable Organizations Charitable organizations (and other nonprofits that solicit donations in New York) must register with the New York State Attorney General’s Charities Bureau by filing Form CHAR410. Each registered nonprofit must annually file Form CHAR500 with the Charities Bureau.

Federal, State & Local Tax Exemptions Agenda Part II Federal, State & Local Tax Exemptions

Why Apply for Federal Tax Exemption? The organization will be exempt from paying federal tax on income. Donors to 501(c)(3) tax exempt organizations receive tax deductions for their donations. The organization will have an easier time obtaining state and local tax exemptions. Many nonprofits cannot survive unless recognized as a 501(c)(3) organization. Bulk mailing discounts are available.

Limits on 501(c)(3) Tax Exempt Organizations The organization must be organized and operated exclusively for one of the following purposes: Religious Charitable Scientific Literary Educational Testing for public safety For prevention of cruelty to children or animals To foster national or international sports competition

Limits on 501(c)(3) Tax Exempt Organizations (cont’d) The organization must be organized to serve a charitable class (and not solely to benefit an individual). No private inurement. Examples include: Excessive compensation to employees Certain business relationships between the corporation and its directors and officers The IRS imposes “intermediate sanctions” in private inurement cases (IRC Sec. 4958).

Limits on 501(c)(3) Tax Exempt Organizations (cont’d) Not more than minor activity influencing legislation (no more than ~5% of total revenues). “Lobbying” means attempting to influence legislation If engaging in lobbying, take the “h election” (“lobbying expenditures test”): The organization can do additional lobbying by making the “501(h) election” Can spend ~20% of revenues on lobbying

Limits on 501(c)(3) Tax Exempt Organizations (cont’d) No intervention in political campaigns No purposes that violate the law or public policy Limit on revenues from unrelated business income Tax on unrelated business income Conservation of charitable assets

Limits on 501(c)(3) Tax Exempt Organizations (cont’d) If the organization dissolves, its assets must be distributed to another 501(c)(3) organization. A significant portion of revenues must come from public sources, otherwise the organization will be treated as a private foundation rather than a publicly supported charity, triggering additional, often crippling regulations.

Steps to Take Prior to Applying for Tax Exempt Status A 501(c)(3) nonprofit must be organized and operated exclusively for one of the charitable purposes outlined in the Internal Revenue Code. Failure to do so will result in denial or revocation of tax exempt status and other penalties and fines. Organizational requirements: Incorporate as a not-for-profit corporation State tax exempt purposes in the charter.

Applying for Federal Tax Exempt Status Obtain an Employer Identification Number (“EIN”) using IRS Form SS-4 Complete and file IRS Form 1023 for recognition as a 501(c)(3) organization or Form 1024 for recognition as a 501(c)(4), (5), (6), (7) or (10) organization

Applying for Federal Tax Exempt Status: 1023-EZ File Form 1023-EZ within the first 27 months of the organization’s incorporation to ensure exemption begins retroactively on the date of incorporation. Pay $275 application fee, as applicable, depending on anticipated or actual revenues. (Annual gross receipts don’t exceed $50,000 in any of the past 3 years, and don’t exceed $50,000 in any of the next 3 years)

Applying for Federal Tax Exempt Status: 1023-EZ Key elements of the Form 1023-EZ include: Applicant Information (name, address, EIN, phone, information about officer or directors) Organizational Structure (e.g. corporation, unincorporated association, or trust, date and state of incorporation, information about organizing documents) Description of nonprofit activities and activities that organization will not engage in Information to determine classification as a public charity or private foundation

Federal Reporting Requirements for Exempt Organization Which Forms Do Exempt Organizations File? IRS Form 990-N (e-Postcard): Gross receipts normally ≤ $50,000 IRS Form 990 E-Z or 990: Gross receipts < $200,000, and Total assets < $500,000 IRS Form 990: Gross receipts ≥ $200,000, and Total assets ≥ $500,000

Federal Reporting Requirements for Exempt Organizations (cont’d) IRS Form 990-T (and corresponding New York State Form CT-13) Required to file if the organization has more than $1,000 in unrelated business income. The Pension Protection Act of 2006 provides for automatic revocation of tax exempt status upon failure to file the Form 990 for three consecutive years.

State and Local Tax Exemptions New York State corporate tax exemption New York State sales tax exemption Applies to New York State sales tax on receipts from the sale of personal property, sales, and admission charges (with certain exceptions) New York City corporate tax exemption

State and Local Tax Exemptions (cont’d) The New York State/City real property tax exemption. Some 501(c)(3) organizations that own real property are exempt from paying state and city property taxes under the following conditions: The lot must be owned by a nonprofit. The property must be used exclusively to carry out the organization’s exempt purposes

Fiscal Sponsorship Fiscal sponsors (the “sponsor”) are 501(c)(3) organizations that receive tax deductible contributions on behalf of organizations or persons that have not obtained 501(c)(3) status (the “project”). After taking an administrative fee, the 501(c)(3) sponsor then disburses the money to the project for uses that are appropriate for a 501(c)(3) exempt organization. A fiscal sponsor is responsible for the proper expenditure of the funds it disburses to a project.

Fiscal Sponsorship (cont’d) Fiscal sponsorship is usually only a short-term solution because of the administrative fees paid and the lack of autonomy. A fiscal sponsor and the non-501(c)(3) organization should have consistent purposes. The IRS has indicated that “control” and “discretion” are the hallmarks of a fiscal sponsorship: the sponsor must exercise control over the funds and discretion regarding disbursements.

Fiscal Sponsorship (cont’d) A written fiscal sponsorship agreement should be entered into setting forth provisions for: administrative fee to be charged by the sponsor mutual access to financial records the procedure for disbursing funds cooperation in preparing any necessary reports termination of the agreement

…and finally… THE END.