10 Essential Steps to Start a Nonprofit (cont’d)

STEP #8: WAYS TO LOSE YOUR TAX-EXEMPT STATUS

Most charities rely on donations to operate.  To attract donations, nonprofits will pursue tax-exempt status from the IRS so they can tell donors that their donations are deductible from their taxes.  People generally recognize the IRS code, 501c3, as an indicator that their donations are deductible.  Tax-exempt status makes it possible to secure grants, and makes the organization attractive to corporations and business who want to donate, for “good will” reasons and/or to receive a deduction off taxes.  Losing your tax-exempt status can be a huge blow to a charity, both financially and to the charity’s reputation.  Becoming knowledgeable on ways to lose tax-exempt status is crucial in running a tax-exempt nonprofit.

The federal government grants your organization tax-exempt status if you agree to certain behavior.  The government is saying, “we won’t make you pay certain taxes, but you now owe the public certain things (disclosure and accountability), and you must not do certain things.”  Not following the rules means that the IRS could revoke your organization’s tax-exempt status.

How to jeopardize your tax-exempt status:

  1. Inurement,” or private benefit.  First, as you read the definition of inurement, know that any amount can jeopardize tax-exempt status.  Second, inurement means to “benefit.”  The prohibition against inurement means that there shall be no using income or assets of a tax-exempt organization to unduly benefit an individual or organization that has a close relationship with the tax-exempt organization.  The inurement prohibition is absolute.  Assets and income are to be used to further the organization’s mission, period.
  2. Unrelated Business Income (UBI).  If your organization runs a business that produces income for your organization, but the purpose of the business is unrelated to your organization’s mission, then the organization is subject to tax on its income from the business.  If your tax-exempt organization provides clothing for shelters and low-income families, and receives income from a thrift store it runs, it is unlikely there would be a risk for UBI.  If your organization is a pet rescue and receives income from a nail salon business, the rescue might have UBI.
  3. Political campaign activity.  As with the inurement prohibition, any amount of political campaigning in support or opposition of a candidate is prohibited and could result in loss of 501c3 (tax exempt) status.  I counsel nonprofit clients that the organization can’t engage in political activity regarding a candidate, but can generally support or oppose an issue.  The tax-exempt “clean oceans” organizations can oppose a ballot initiative to ease pollution restrictions, for example.  I caution to proceed carefully, since tax-exempt status can be revoked if political activity is deemed to be “substantial,” and there are tests the IRS uses to determine this.

Guard your organization’s tax-exempt, 501c3 status.  Having to reapply is cumbersome if you lose this status, and it might give donors a reason to donate their money to an organization who has not behaved in ways that result in losing this designation.

If you have any questions about getting, maintaining, or losing tax-exempt status, email me at julie@juliemillslaw.com.

 

 

10 Essential Steps to Start a Nonprofit (cont’d)

STEP #7: EDUCATING YOUR BOARD

When I see articles on starting a nonprofit I rarely see “educate your board” yet this step is crucial.  Educate about what?  Why?

Educate about what? Inform about liabilities board members might face, educate about their duties and rights, educate on actions that could jeopardize the organization, particularly its tax-exempt status .  This list is not exhaustive.

Why?  Board members need to know what they are required to do, what laws govern their actions, how they can unwittingly get into trouble, among other reasons “why.”  In some situations, although uncommon, board members can face personal liability.

People have good intentions when forming a nonprofit that will pursue a charitable cause.  There are legal responsibilities and potential liabilities if you don’t do what you are supposed to as a board member.  Unfortunately, awareness of these duties and liabilities often comes after there’s an issue.

Board member responsibilities, in general (can be in addition to state law requirements):

  1. Duty of Care: duty to exercise reasonable care when he or she makes a decision for the organization. Reasonable care is what an “ordinarily prudent” person in a similar situation would do.
  2. Duty of Loyalty: A board member must never use information gained through his/her position for personal gain and must always act in the best interests of the organization.
  3. Duty of Obedience to the Mission: A board member must be faithful to the organization’s mission.  He or she cannot act in a way that is inconsistent with the organization’s goals. The board member is trusted by the public to manage donated funds to fulfill the organization’s mission.

Board members should have bylaws in place that govern the functioning of the organization.  They should be apprised of potential legal pitfalls that could impact them or the organization.  There should be short primers provided on open records laws, aka “Sunshine Laws,” and how they impact board meetings and public attendance; a primer on insurance, waivers and releases for events, protocol to be followed if someone is injured at an organization event; fundraising do’s and don’ts, liability with alcohol at fundraisers; political activity and what is permitted; among many other topics relevant to nonprofits.

Sitting on the board of a charitable organization can be rewarding, and board members do have a responsibility to educate themselves on what liability they could face.  Moreover, nonprofits should educate their boards on personal and organizational liability so board members can act accordingly, and avoid making decisions that unknowingly put themselves or the organization at risk.

If you have questions about board member liability, contact me at julie@juliemillslaw.com.

10 Essential Steps to Start a Nonprofit (cont’d)

STEP #6: ADDITIONAL FILINGS; APPLICATIONS; REGISTRATIONS

Depending upon the nature of your nonprofit or what activities you undertake for fundraising–e.g., bake sales, pet bakery sales, bingo tournaments, etc.–you might be required to register with other agencies or organizations.  For many nonprofits, it’s highly recommended that you register with certain organizations.  The listings below are often specific to Ohio, so be certain to check with your state’s agency or organization for registration information.

Places where you might be required to register:

Places where you might decide to register; information you might need:

For information about where you should register, email me at julie@juliemillslaw.com.

10 Essential Steps to Start a Nonprofit (cont’d)

You created a nonprofit corporation under your state’s corporation laws.  You presented your nonprofit corporation to the IRS and requested tax-exempt status.  Congratulations, you just received your Determination Letter from the IRS that grants your nonprofit tax-exempt status!  You are a 501(c)(3) tax-exempt, nonprofit organization.  By this time, you are probably ready to start soliciting donations from the public, who you’re certain will be anxious to contribute to your worthy cause.  Are you finished with the applying, registering, filing, etc?  No!

STEP #5: REGISTER YOUR CHARITY WITH THE ATTORNEY GENERAL

In Ohio, a charity that solicits donations from the public must register with the Ohio Attorney General.  Ohio law requires such registration, and other states likely have similar charitable registration laws.  At this point, my clients are often tired of registering, filing, and applying, and some tax-exempt nonprofits actually overlook this important step in the process.

It helps to see the big picture with many legal processes.  Here, you create an entity in your state to do business, whether it’s for-profit or nonprofit.  As a nonprofit, you want to attract donors, so you decided to offer them a tax deduction for their donation by asking the IRS for permission to do that–having your nonprofit become tax exempt.  Since you are asking the public for their money, the attorney general enters the picture as the agency in charge of protecting the public.  To protect people about to donate their money, the attorney general ensures that charities in its state are legitimate.  There are many unscrupulous people who use fake charities to attract donations and the attorney general is tasked with protecting people from giving money to scams.  Fake charities tend to mimic the name or mission of popular charities, particularly veteran organizations, breast cancer charities, and charities that pop up after disasters.

In Ohio, the Ohio Revised Code requires charities to register with the Ohio Attorney General, and to file annual registration statements.  There are charities that are exempt from this requirement.  If your organization contracts with a professional fundraiser or solicitor, parts of the Ohio Revised Code govern your contractual relationship–in other words, special attention is paid to these arrangements.  Certain disclosures need to be made to the public for any organization asking the public to donate, and records of all fundraising activity need maintained for 3 years whether you hire a professional fundraiser or not.

Clients sometimes wonder at this point why all of this work is needed when they just want to “do good.”  There is much initial work involved, and annual registrations and other actions must be followed, but the main reason clients must follow these steps is to make sure that people are giving money to legitimate causes.

If you have any questions about registering your Ohio charity with the Ohio Attorney General, email me at julie@juliemillslaw.com.