1. 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

2. 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.

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

4. 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

5. 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.

6. 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.

7. 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

8. 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?

9. 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.”

10. 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.”

11. 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.

12. 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

13. 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

14. 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.

15. 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

16. 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.

17. 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.

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

19. 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.

20. 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

21. 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).

22. 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

23. 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

24. 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.

25. 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.

26. 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

27. 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)

28. 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

29. 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

30. 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.

31. 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

32. 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

33. 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.

34. 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.

35. 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

36. …and finally…
THE END.