Doing Good While Doing It Right: What You Need To Know About Establishing a Non-Profit
There are countless ways that individuals and entities can engage in philanthropic, charitable, educational, and other noble endeavors focused on helping others or supporting a cause. But it takes more than good intentions to do so in a manner that both effectively advances your goals and comports with the law.
Forming a not-for-profit entity as a vessel for your efforts is not necessarily complicated, but it is a lot more involved than setting up a lemonade stand. If you want to attract donors, you need to give them the confidence that you’re running a professional, transparent, and legally compliant operation that directs their money towards the underlying cause you support. Importantly, you need to be able to assure donors that their contributions are indeed tax-deductible.
That is why consulting with experienced counsel can be critical if you are considering launching a non-profit. A qualified not-for-profit attorney can position you for success, keep you out of unwanted and avoidable legal trouble, and maximize the good you do.
Your Not-For-Profit Business Is Still A Business. You Need To Run It Like One.
One of the biggest fundamental errors that people make when embarking on a non-profit endeavor is failing to recognize that they are establishing a business. It may be in the business of making the world a better place rather than selling widgets, but it is a type of business nonetheless. That means establishing it like one and running it like one. Failing to do either of those can expose those in charge to the same potential legal liabilities faced by owners and managers of for-profit enterprises.
Setting Up Your Non-Profit
The first step in the process is selecting and forming the optimal not-for-profit entity structure. This means incorporating under the laws of a specific state, just like any corporation or limited liability corporation must do.
You need to prepare and file the appropriate paperwork and pay the necessary fees with the secretary of state (or equivalent authority) of the state in which you incorporate. This includes Articles of Incorporation which contain such information as the entity’s:
- Registered Agent and Office
- Directors and Incorporators
The two most common tax designations for not-for-profits are: a public charity and a private foundation. Each has different requirements regarding fundraising and expenditures.
A public charity:
- Requires fundraising or collecting fees from services or products from at least 30% of the general public, subject to some exceptions.
- If fundraising, the entity may be required to register under certain state agencies depending on which state you are fundraising in.
- The entity is responsible to donors for how their donations are expended.
A private foundation:
- Can be funded solely by one person.
- Is often used by more wealthy individuals and families to concentrate their philanthropy.
- Is subject to a higher level of regulatory oversight by the IRS
- Is subject to an excise tax on net investment income and minimum yearly expenditures for its charitable purposes.
Establishing a not-for-profit entity is not a matter of “set it and forget it.” Such entities have ongoing obligations regarding filings and reporting to the state and must comply with many corporate formalities when running the enterprise. Failure to comply with any of these requirements can result in the business's involuntary dissolution and potentially expose the owners and managers to legal problems.
This means preparing and filing bylaws, holding meetings, preparing minutes, establishing proper voting procedures, and submitting yearly tax filings at both the state and federal levels, among other obligations.
Additionally, fundraisers and charitable organizations In Illinois and almost all other states must register each year with the Attorney General's office so that potential donors can access important information such as income, expenditures, programs, and administration before giving to the charity.
Tax-Exempt Status Is Not Automatic
While charitable donations may come from the bottom of the heart, donors also reasonably expect that their contributions will be tax-deductible. But too many people make the mistake of assuming that if they have properly formed a charitable or not-for-profit entity, then all donations to the entity are therefore tax-deductible.
Absolutely not so.
Obtaining the coveted 501(c)(3) designation from the Internal Revenue Service (IRS), which bestows tax-exempt status on an organization, is an entirely separate process from establishing the entity itself.
It involves a completing a Form 1023 along with many other required documents that must be prepared and submitted to the IRS for review. IRS Publication 557: Tax-Exempt Status For Your Organization contains detailed information on what charitable organizations must do to get the IRS’s tax-exemption blessing.
Let Us Help You Help Others
Starting and running a not-for-profit charitable organization can be a profoundly rewarding experience that can improve the lives of individuals and make communities better places to live. Doing so the right way can ensure that your efforts bear the most fruit. If you are considering launching a non-profit venture, we welcome the opportunity to help. Please contact one of the not-for-profit attorneys at Latimer LeVay Fyock today.