CREATING A NON-PROFIT
CORPORATION
(Tax)
CHAPTER ONE : COMMONLY ASKED QUESTIONS ………………………………..1
CHAPTER TWO :STEPS FOR INCORPORATION………………………………………23
CHAPTER THREE : ADVANTAGES OF INCORPORATION……………………….30
CHAPTER FOUR: TAX EXEMPTIONS………………………………………………………42
CHAPTER FIVE : ARTICLES OF INCORPORATION………………………………..141
CHAPTER SIX : BY-LAWS ……………………………………………………………………..214
CHAPTER SEVEN: FIRST MEETING OF DIRECTORS………………………………241
CHAPTER EIGHT: MEMBERSHIP CERTIFICATE……………………………………..251
CHAPTER NINE : AFTERWARDS-POST INCORPORATION ACTS ………….256
CHAPTER TEN: AMENDMENT OF ARTICLES…………………………………………267
CHAPTER ELEVEN : CORPORATE MEETINGS………………………………………..275
CHAPTER TWELVE: CERTIFICATES FOR CORPORATE RESOLUTIONS….289
CHAPTER THIRTEEN : STATE LAWS……………………………………………………….297
INDEX ……………………………………………………………………………………………………350
address the needs of the average person. Each volume of the series is designed
with the intent of serving as a guide and tool with which to help the reader
cut through legal jargon and better understand and appreciate the reader’s
rights under the law.
As a self-help “HOW TO” book for forming a typical non-profit
corporation, this work covers the basic problems are to be faced by individuals
attempting to form a non-profit corporation. It covers, in detail, the
steps and procedures necessary to be taken in order to get a federal and
state tax exemption for the corporation.
This book covers the initial set up of the incorporation and the actions
thereafter. Incorporation is basically easy if taken in an orderly approach
and nothing fancy is sought to be done. The steps are outlined in the order
that they should be considered and acted upon. If the reader has any doubts
upon how something should be done, an attorney should be consulted on that
issue. Even with a consultation with an attorney, it should still be cheaper
for the reader to incorporation himself. Normally, an attorney is paid
between $500.00 to $2,000.00 to do a normal incorporation. Therefore, if
needed, a person can consult with an attorney while doing the work himself
and still save money. In fact, many questions that a person may have over
the procedure ofincorporation can be answered with a simple phone call
to the State’s Department of Corporation or Securities.
It may seem overwhelming or intimidating to incorporate a non-profit
corporation without going to an attorney but it should not be so. It does
take time to prepare the documents and make the various decisions for the
corporation such as management, fiscal year and purpose. However, the book
lays out and explains in detail the steps to be followed. Also the book
contains sample Articles, Minutes, By-Laws, and Membership Certificates
for most states. These items could be used in most states should the incorporator
choose not to purchase a corporate kit for the state in question, which
usually runs about $50.00.
A corporation exists when the Articles of Incorporation are filed and
the membership certificates issued. So the basic steps needed to incorporate
are filing of the Articles of Incorporation and then issuance of the membership
certificates. When those steps are accomplished, the incorporation is complete.
By carefully using this book, those steps can easily be taken.
GOOD LUCK
activity. People can work together in an unincorporated association, a
non-profit trust or a non-profit corporation. There are different tax considerations
and legal consequences involved in each form of operation.
The main advantage that a non-profit corporation has a non-profit trust
or association is that the member is not personally liable for the debts
of the corporation or the actions of the employees. In an unincorporated
association, if an associate or employee does an act in scope of their
employment that injures another person, then each of the members of the
association may, depending on state law, become personally liable to pay
for the resulting damages. A non-profit trust can be created in all states.
Such a trust, however, carries with it its own special limitations on management
and generally too cumbersome for use by a small group. In addition, there
is still the question of personal liability of the directors or trustees
of a non-profit trust for the actions undertaken by employees or other
directors or trustees.The risk of personal liability for belonging to an
unincorporated association, especially if an officer or director, and the
complicated management of non-profit trust are prime reasons for incorporating
as a non-profit corporation.
After a non-profit corporation is formed, the yearly requirements for
meetings and record keeping are not much more than required for any other
non-corporate business. I have answered all of the general questions usually
asked by a person considering incorporation. It might take longer to read
this chapter than it would to actually incorporate. Incorporation is easy
and I often refer to it as a one time insurance policy because it terminates
personal liability against the shareholders.
particular state’s law. As a distinct legal entity, a corporation is considered
to be separate and apart from all of the people who own, control or operate
it.
A corporation holds most of the rights of a legal person. As such, a
corporation is capable of validly executing contracts, incurring debts,
holding title to both real and personal property and paying taxes.
The attractiveness of corporations stems from the very fact that they
are held to be separate legal entities from its owners, the shareholders,
which gives them unique advantages over both sole proprietorships and partnerships.
purpose of such a corporation is not to make money but instead to provide
some type of beneficial service to the public, hence the name, nonprofit.
The non-profit corporation is formed by one or more persons for the benefit
of the public, the mutual benefit of its members or for religious purposes.
Most non-profit corporations are formed for religious, charitable, literary,
scientific or educational purposes.
Stock is not issued in a non-profit corporation nor are profits from
the corporation, if any, distributed to the members. Most non-profit corporations
are required by state law to transfer their assets to another non-profit
corporation upon dissolution of
the corporation or to give the assets to the State. A non-profit corporation
is usually organized to obtain an exemption from state or federal taxes
on its operations. A non-profit corporation is not automatically exempt
from federal taxation. A non-profit corporation must file an application
with the I.R.S. for tax exempt status and have the application approved.
Except for the profit motive, a non-profit corporation operates the
same as any other corporation. While stock is not issued in a non-profit
corporation, memberships can be issued. Nonprofit corporations can sue
in court, acquire property and do anything not inconsistent with its stated
non-profit status.
its business. Such corporate authority is granted by both the statutory
law in the states where the corporation was formed along with specific
grants of authority to the corporation in its Articles of Incorporation.
The Articles of Incorporation for a corporation must state the purpose
for which it was incorporated. For a non-profit corporation, the Articles
it must state what religious, charitable, literary, scientific or educational
purpose it hopes to accomplish. The Articles for a for-profit corporation
usually state that it is being incorporated to conduct any legal business
in the state.
Under most state laws, a corporation is given certain powers in order
to operate:
1. the right to adopt and use a corporate seal;
2. to adopt, amend and repeal By-laws;
3. to do business in other states;
4. issue and trade in its own stock pursuant to state law;
5. make donations to non-profit organizations;
6. operate pension plans for employees;
7. make loans to shareholders, directors and employees;
8. participate in joint ventures with other persons, and trusts and
corporations.
With the above powers, a corporation is able to act and do nearly everything
that an individual or partnership can do.
with the Secretary of State. It is the filing of the Articles that is the
first and most important stepin forming a corporation.
Incorporators are the founders of a corporation. Incorporators adopt
the initial by-laws for the corporation and appoint the first set of directors.
After the directors are appointed, the incorporators resign and turn the
management of the corporation over to them.
Incorporators, along with other persons, can also be promoters of the
corporation. Promoters make the initial arrangements for the money, property,
and whatever else is needed to establish the corporation. A corporation
is not liable for any pre-formation contract executed by any promoter unless
the contract is later ratified by the board of directors or the benefit
of the contract is accepted by the corporation. However, the promoter may
be personally liable for any pre-incorporation contract that he executes
unless it is spelled out that the contract is only to become effective
when the corporation is actually formed and the contract is ratified by
the corporate board of directors. Usually, there is not a problem with
pre-formation contracts because the incorporator is also the main or sole
shareholder of the corporation and thus controls the corporation.
Articles of Incorporation that can be used in the individual states
are set forth in the CHAPTER ARTICLES.
to manage the corporation. The board of directors is the term referring
to all of the directors. Directors are not required to be members of the
corporation although they usually are members in the non-profit corporation.
Decisions concerning the management of the corporation are made by a
majority vote of the directors. The board of directors appoint the officers
of the corporation who run the day to day business of the corporation.
The officers implement the wider plans and future visions of the board.
Directors are permitted reasonable compensation for their services.
In small corporations, the directors usually serve for free since they
are usually shareholders and are protecting their investments.
TO A CORPORATION?
usurp a corporate benefit, that is take for himself a benefit that could
go to the corporation. In short, a director owes to the corporation the
right of first refusal on any business opportunities that the director
becomes aware that could affect the corporation. For example, if the corporation
is in the paving business, a director could not form a competing paving
business and solicit business from the corporation’s existing clients.
When a director has a personal interest on a matter before the board,
the director is only allowed to vote on it if:
1. the director’s interest has been fully disclosed to the board, and
2. the contract is just and reasonable.
A director is not personally liable for the debts of the corporation.
A director can not be sued, by shareholders, for losses incurred as a result
of the director’s actions or decisions provided that they were undertaken
in a reasonable and prudent manner.
carry out the corporation’s day to day business. The exact responsibility
and authority of each officer is set out in the By-laws as adopted by the
incorporator and as amended by the board of directors.
Normally, the corporate slate of officers consists of the president
or chief executive officer, the vice president, treasurer and secretary.
The officers do not have the authority to engage in major business transactions
since these are entirely within the province of the board of directors.
As agents of the corporation, officers have the authority to bind the
corporation by their actions. As such, the officers execute contracts for
the corporation and likewise can subject the corporation to liability for
damages arising from their negligent or intentional acts committed on the
corporation’s behalf.
As with directors, corporate officers are not personally liable for
the debts of the corporation. Corporate officers remain, as individuals,
personally liable for any torts, civil wrongs, that they commit. For example,
if the President of the corporation gets involved in an auto accident while
traveling on corporate business both the president and the corporation
can be sued for damages. On the other hand if the President signs a contract
for the corporation, then only the corporation can be sued for any breach
of the contract.
certificates in the corporation and thus have the right to vote in the
election of corporate directors. Members are not personally liable for
the debts of the corporation.
Members, in addition to electing the directors, also are required to
vote for the following acts:
1. any amendment of the Articles of Incorporation;
2. any sale, option or lease of substantially all of the corporation’s
assets,
3. any merger or consolidation of the corporation with another corporation.
In addition to the above, members can unilaterally hold a meeting to:
1. amend the by-laws,
2. remove and replace directors, and
3. dissolve the corporation.
There must be an annual member’s meeting each year in order for the
shareholders to review and approve or reject the actions of the board of
directors for the previous year. The members also will re-elect or replace
the directors for another year.
Members are given just one vote per member. A member can own only one
membership certificate. A majority of those members voting is needed to
carry the resolution, the matter voted upon.
OF A CORPORATION?
is the limited liability that it provides its shareholders or members.
As a corporation, the most that its members, can lose in a lawsuit against
the corporation is the assets that they contributed to the corporation.
This limited liability for corporate shareholders is vastly different
from an unincorporated association where the associates may be found to
be totally liable for all debts of the association. In such an instance,
the creditors of the association can seek and attach every dollar and piece
of property that each associate owns in order to settle a judgment against
the association. Such personal attachment to satisfy corporate debts can
not be done against the assets of a member.
It is to cut off this unlimited liability that non-profit corporations
are formed so as to pursue charitable or public purpose goals. Few people
would ever participate in an organization for the public good, if by doing
so, they risked losing everything that they have earned or will earn in
the future.
derived from its normal activities, if it applies and receives a federal
and state tax exemption. Chapter 8, Tax Exemptions, covers in detail how
a tax emption is obtained. A non-profit corporation will only have to pay
taxes on its unrelated business income. Under the Internal Revenue Code,
unrelated business income is that income derived by a non-profit corporationwhich
has not connection with and thus is unrelated to purposes for which the
tax exemption was granted. All unrelated business income is taxed under
regular corporate tax rules and regular corporate tax rates apply to that
unrelated business income.
words, a corporation will legally exist forever unless it is dissolved
or terminated under state law. The fact that a non-profit corporation continues
onward regardless of the death of its members, is what gives the corporation
its stability. Most people are reluctant to participate in or deal with
a charitable or public service entity which is not a corporation and thus
may terminate upon the sudden death of any member. The stability of a corporation
derives from its continuity of existence beyond that of its shareholders.
CORPORATION?
state to state. In California, the costs for filing the Articles of Incorporation
and the minimum franchise tax fee is about a $115 (There is also an $800
franchise tax fee which is refunded upon the corporation receiving a California
State Tax Exemption). In Nevada, the fee is just $25 plus another $10 for
the statement of Registered Agent. In addition, the corporate books, which
include the minute books, membership book and the corporate seal, costs
between $75.00 to $125.00. The attorney fees, if one is used, is normally
around $800.00 to $1,000.00 in California.
The cost for applying for the Federal Tax exemption is $375.Most states
will automatically grant a state tax exemption once the Federal Tax Exemption
is obtained.
The cost of incorporation should be looked upon as a one time insurance
premium. Once the non-profit corporation, the members are protected from
individual liability from then forward for the actions of corporation or
its employees. Peace of mind is an important consideration in addition
to cost when deciding to incorporate.
PAY A MEMBER?
paid to a member, for the value of work actually performed is deductible
by the corporation as normal salary and is not considered as illegal self-dealing.
In a non-profit corporation, the members are not permitted to share
in the profits of the corporation. This is the fundamental difference between
a non-profit corporation and a for profit corporation. If the I.R.S. were
to find that a member was paid excessively for the work that was actually
done then the corporation could lose its tax-exempt status.
AN ASSOCIATION AND
which usually engage in non-profit activities. An association, because
it is not incorporated will not be given tax-exempt status under the law.
As such, the association will be taxed on the income that it derives using
corporate tax rates. The association is taxed as corporate tax rates even
though it isaccomplishing goals and purposes that would entitle it to a
tax exemption if it were a non-profit corporation. Associates of an association
may also become personally liable for the debts and obligations incurred
by the association under state law. Many states consider association the
same as partnerships and thus apply partnership liability rules. Because
of its informal nature, an association does not have to keep minutes, hold
regular meetings or comply with the requirements which a corporation must
meet.
A non-profit corporation protects its members from liability for the
debts and obligations of the corporation. A non-profit corporation can
also apply for a federal state tax exemption for income derived from activities
that qualify for tax exemption. A non-profit corp[oration is required to
keep minutes, hold annual meetings of members and directors and keep complete
records.
in a non-profit corporation. Members of the non-profit corporation are
given membership certificates to reflect their membership. Members do not
own the non-profit corporation and have no right to share in the profits
of the corporation. By the virtue of their being members and owning a membership
certificate, the members can vote on the management of the non-profit corporation
pursuant to the terms of the By-Laws.
CORPORATION?
is, in fact, its legal death. Dissolution usually occurs upon any of the
following:
1. the members holding more than 50% of the membership certificates
in the corporation vote to do so;
2. the board of directors can dissolve the corporation when
(a) the corporation never issued any membership certificates and thus
was never really a corporation,
(b) the corporation has filed a chapter 7 bankruptcy petition,
(c) the corporation has disposed of all of its assets and hasn’t conducted
business for several years, usually five years.
3. creditors may file a legal action seeking involuntary dissolution
of the corporation in order to have their debts paid through the liquidation
of the corporate assets.
After dissolution has been approved or ordered, the corporation must
stop doing business except to the extent necessary to wind up the affairs
of the corporation. When resolution to dissolve is adopted or ordered,
the corporation is required to file a certificate of dissolution with the
secretary of state where it was incorporated.
DISTRIBUTED?
distribution is made to the extent of corporate assets as follows:
1. all federal and state taxes are paid,
2. all employee wages and benefits are paid,
3. all secured liabilities are paid,
4. all unsecured liabilities are paid,
5. the remaining funds, if any, are distributed to another tax empt
entity.
Since members in a non-profit corporation do not share in the profits
of the corporation, upon dissolution the assets of the non-profit corporation
must be turned over to another tax-exempt entity. Such assets can be turned
over to the United States Government if no other state or local tax exempt
entity wants them.
for a newly incorporated non-profit corporation. The incorporator contacts
such a company and requests the standard corporate kit for the state in
question, say Kansas. The incorporator gives the company the name of the
corporation, its date of incorporation and the number of shares of stock
to be issued. The supplier takes this information and prepares the corporate
kit. The complete corporate kit includes:
1. the corporate seal with the name, state and date of incorporation
on it,
2. the corporate minute book,
3. the corporate membership book,
4. blank membership certificates in the corporation’s name,
5. minutes for the first meeting of directors with spaces to be filled
in,
6. general by-laws to be adopted by the incorporator, and
7. the form to be filed with the secretary of state for the state’s
tax exemption.
A corporate kit generally costs between $50,00 and $75.00 andis quite
a bargain for the degree of work contained in it and the peace of mind
obtained in using it.
of the corporation. The by-laws are adopted by the incorporator and thereafter
can be amended by a majority vote of the members.
By-laws are an attempt to cover the many areas of potential conflict
within a corporation and the delegation of duties and responsibilities.
A copy of By-laws for use in most states follows in the BY-Laws chapter.
By-laws can be general in nature or more closely tailored to the needs
and desires of the members. Most By-laws will contain or mention most of
the issues covered in the By-laws Chapter.
By-laws are not set in concrete. Members can alter or amend the By-laws
by simply having a properly conducted meeting to do so. The purpose of
By-laws is to set up the procedure for the daily administration and management
of the corporation. As such, it is understood that as the corporation grows
and develops the Bylaws may have to be amended to keep pace with the new
requirements of the corporation.
really and truly exists. After the Articles of Incorporation are filed,
a corporation technically exists on paper. It does not exist in fact until
membership certificates are issued along with the appointment of officers
and directors to act for thecorporation.
The incorporator calls the first meeting of directors. At the meeting,
the incorporator appoints the first set of directors, adopts the By-laws
and then resigns as incorporator. The By-laws adopted by the incorporator
require that written notice be given to the directors of a meeting before
any action can be undertaken. The notice requirement to directors for a
meeting is contained all By-laws. For the First Meeting of Directors to
continue, the directors sign a waiver of notice agreeing to waive the required
written notice and to proceed forward with the meeting. Following the Minutes
Chapter is a waiver of notice of a corporation for its First Meeting of
Directors.
After the waiver is signed, the directors then take over the meeting.
The directors propose, consider and then adopt resolutions on such diverse
matters as the tax year, opening a bank account, choosing a membership
certificate and adopting the corporate seal. The directors then elect the
officers of the corporation. Finally and most importantly, the directors
issue membership certificates to the members. When the membership certificates
are issued, the incorporation is complete.
OFFICERS?
under its laws to annually file with the Secretary of State a list of its
officers and directors. Most importantly the corporation is required to
name the person appointed to receive personal service of documents for
the corporation in the state.
Also, and perhaps most important in the state’s view, is thefact that
this list of officers and directors must be accompanied by a fee usually
between $5.00 and $50.00. This list of officers and directors is open to
the public. Anyone wishing to sue a corporation can request a copy from
the Secretary of State to determine the name and address of the agent for
service of process.
NAME STATEMENT?
other than the exact corporate name in its Articles of Incorporation, then
the corporation must file a fictitious business name statement. The purpose
behind requiring the filing of a fictitious name statement is to give notice
to the world as to who actually is running the business. Usually the filing
is in the county clerk’s office where the business is being conducted under
the fictitious name. If the corporation does business under a fictitious
name in several counties then the filing must be in every county where
it does business.
NUMBER?
all employers are required to have one. Once a non-profit corporation is
incorporated, the corporation needs a number because the corporation becomes
an employer.
A Federal I.D. number is obtained by filing Form SS-4 with the I.R.S..
The corporation should file for the I.D. number as soon as possible after
the Articles are filed. If the corporation wishes to receive a federal
tax exemption, then the Form SS-4 must be filed with the application for
tax exemption if it was not filed earlier.
In its simplest sense, a corporation of any type is merely a license to
do business in a particular manner. In that sense the articles of incorporation
should be considered an application that becomes the license when filed
by the secretary of state. In fact in legal parlance a corporation is considered
as having been “licensed to do business” once the articles are
filed. In a few states the term “articles of incorporation” is
not used but instead it is entitled a “certificate of incorporation”
or a “charter of incorporation.” In any event, whatever a state
calls the formation document, they all require the same basic information.
The act of incorporating a nonprofit business is simple. All it entails
is the filing of the articles of incorporation and the subsequent issuance
of membership certificates. The actual act of incorporating is no more
than having the articles file-stamped in the secretary of state’s office
(this can also be accomplished by mail). There are many companies that
provide corporate kits which include basic articles, minutes and bylaws
specifically designed for use in just one state. The usual cost is between
$50 and $100. Unfortunately, the corporate kit does not address the many
issues or provide the information containedin this book for issues occurring
after the incorporation. This book goes beyond and provides guidance and
advice on considerations that arise in forming any corporation. The articles
contained in this book are a starting point for any incorporation. Before
filing any articles the reader should decide any additional provisions
wanted in the articles. In addition, the reader should read those provisions
in the state’s corporation code (available in most public libraries) to
ensure the state law has not changed. A reader of this book may purchase
a corporate kit for a particular state to supplement this book.
This book is designed to provide the user with a detailed analysis of
the problems, issues and procedures faced in the formation of any nonprofit
corporation, particular by those of a small local nonprofit organization.
There are many choices that an incorporator must face in forming a nonprofit
corporation. Those choices can be difficult given the many options available
and the particular concerns of each business. Neither this book nor any
book can replace the cold, practical consideration of the actual person
forming the corporation. That person knows the purpose behind the incorporation
and how the corporation will be operated. This book will steer the incorporator
to those provisions and issues of concern and their most practical use.
This book is intended to be used for the creation small or local nonprofit
corporations. It allows small groups of individuals to create a nonprofit
corporation to accomplishlocal charitable, educational, community safety
or ecological concerns with as little expense as possible. For purposes
of this book, a large nonprofit corporation is one that has many chapters
throughout a state or the country. While there is no difference in the
formation of a large or small nonprofit corporation, the applications for
federal and state tax exemptions are more complicated for the larger one.
In addition, the bylaws are more complex to accommodate the concerns and
rights of members from all the chapters.
This book is for use by those individuals who seek to incorporate a
single nonprofit corporation which will not have chapters with as little
expense as possible. Whether the reader actually employs the articles,
minutes, bylaws, resolutions and agreements in this book is not as important
as providing him with the information contained here so he can make informed
decisions.
the articles of incorporation and issue the membership certificates. In
arriving at this result, the corporation will go through the following
steps:
not a partnership or sole-proprietorship. As such, the name usually must
contain the word “Incorporated,” “Corporation” or “Limited.”
The name must not mislead the public into believing it is an agent of the
federal or stategovernment. The name of the corporation must not mention
or suggest involvement in a regulated or licensed field unless the corporation
has that license.
In practice the main concern is whether the proposed name is so similar
to an existing corporation’s name as to mislead the public. No state will
permit two corporations to have the same name or names so similar that
they are confusing.
To avoid the possibility of having the articles rejected because of
similarity to the name of an existing corporation, the incorporator should
conduct a name search with the secretary of state’s office. If the name
is not already reserved or in use, it can be reserved for a fee, usually
$3 to $10, for 60 days or longer. The search can be done by mailing a request
with the proposed name and a check for the search to the secretary of state.
Telephone the secretary of state’s office to determine the amount of the
check and where to send it. A search through the secretary of state’s office
will take perhaps 30 days. There are attorney service firms near the state
capitol that will do the name search and reservation within two days for
about $30. From these firms can also usually be purchased a corporate kit
for use in the state, if desired.
If the corporation will be doing business in other states, it must be
aware that it may have to operate under a fictitious name if the corporate
name is substantially similar to an existing business in any of those states.
A corporate name does not have to be reserved. If theincorporator feels
the chosen name is unique, he can simply submit the articles for filing.
If the corporate name is unique, the articles will be accepted. If a similar
name has already been taken, the secretary of state will reject the articles.
If it is discovered later that the articles were mistakenly filed and that
a corporation with a similar name already existed, the secretary of state
will require an amendment to be filed changing the name to one that is
not similar to an existing corporation, or the secretary of state will
cancel the incorporation.
and files the articles of incorporation. This book contains a detailed
chapter for preparing the articles. Each state has it own requirements
for the contents of the articles. This book provides a general set of articles
sufficient for most states. The reader should nonetheless familiarize himself
with the particular corporation law of the state where the corporation
will be formed.
The articles contained in this book are skeleton articles. They may
be retyped with additional provisions added. Moreover, a particular state
may require provisions added to the articles to conform to changes in state
law.
After the articles are prepared, they are filed with the secretary of
state’s office. Most states require the articles to be file in triplicate
and all originally signed by theincorporator. Therefore, four or more copies
should be filed so the corporation will receive a conformed, file-stamped
copy. The filing can be made by mail; it will take 30 to 60 days for return.
The alternative is to use an attorney service firm to file the articles.
Such a firm usually takes only a week to get the articles returned and
charges about $50 for the service. The advantage of using an attorney service
firm is that any necessary corrections can be made faster.
At the time that the articles are filed, the incorporator must pay the
filing fee and the yearly franchise fee for the corporation. The fee for
formation of a nonprofit corporation is much less than that of a profit-making
corporation. In Nevada, for instance, the fee is only $35 which includes
$10 for the resident agent form. Telephone the secretary of state’s office
to obtain the correct amount of the fees. An attorney service firm also
will know the amount of fees.
That means the corporation exists on paper only. Until membership certificates
are issued it does not exist at law (de jure). It is the fact that the
nonprofit corporation has outstanding membership certificates in the hands
of its members that is the defining characteristic of a nonprofit corporation.
Once the articles are filed, the incorporator calls a special meeting
of directors. In most states, the initial directors are named in the articles.
In other states, theincorporator appoints the first directors at the meeting.
At the first special meeting, the bylaws are adopted by the corporation.
This is an important step because adoption of the bylaws creates the officer
positions of the corporation and governs daily operations. The officers
of the corporation are then appointed.
The most important matter of business at the first meeting of directors
is the issuance of membership certificates. When the membership certificates
are issued to those persons or entities which are to become the nonprofit
corporations’ members, the incorporation is complete. The chapter entitled
“First Meeting of Directors” amply covers the first meeting.
The matters undertaken thereafter are general housekeeping chores. They
deal with filing the respective state notices of tax exemption, filing
or publishing the articles, filing a fictitious name statement if necessary,
and establishing the proper accounting procedures. These matters are discussed
in the chapter “Afterwards: Post Incorporation Acts.”
the next consideration should be whether or not to incorporate. Almost
always there will be some person who will feel that the organization is
too small and its operations too personal to need incorporation. Such were
the arguments that were presented to the Aviation Association of a small
Nevada county shortly after it was formed. The significant advantages of
incorporation as a nonprofit corporation were discussed. In the end it
was approved to incorporate the association and seek a federal tax exemption.
A corporation is an artificial entity created in conformity with a particular
state’s law. As a distinct legal entity, a corporation is considered to
be separate and apart from all of the people who own, control or operate
it. A corporation holds most of the rights of a legal person. A corporation
is able to execute contracts, incur debts, hold title to both real and
personal property and pay taxes. The attractiveness of corporations stems
from the very fact that they are held to be separate legal entities from
the owners (the shareholders). This gives them unique advantages over both
sole proprietorships and partnerships.
A nonprofit corporation is a special type of corporation with its own
body of law. The primary purpose of such a corporation is to provide some
type of beneficial service to the public and notto make money, hence the
name “nonprofit.” A nonprofit corporation is formed by one or
more persons for the benefit of the public, for the mutual benefit of its
members or for religious objectives. Most nonprofit corporations are formed
for religious, charitable, literary, scientific or educational purposes.
Stock is not issued in a nonprofit corporation, nor are any profits
from the corporation distributed to the members. Most nonprofit corporations
are required by state law to transfer their assets to another nonprofit
corporation or give the assets to the state upon dissolution. A nonprofit
corporation is usually organized to obtain an exemption from state or federal
taxes on its operations. A nonprofit corporation is not automatically exempt
from federal taxation. A nonprofit corporation must file an application
with the IRS for tax exempt status and have the application approved.
The following arguments support of incorporation of any non-profit entity.
These arguments apply to any group which is considering engaging in nonprofit
activities.
association is that a member is not personally liable for the debts of
the corporation or the actions of the employees. In an unincorporated association,
if an associate or employee does an act in the scope of employment that
injures another person, each member of the association may (depending on
state law) become personally liable to pay for the resultingdamages.
A few states apply the partnership liability rules to unincorporated
associations. These states find that all members of an unincorporated association
are liable for the payment of all debts of and all judgments against the
association. In these states the liability is absolute, and it makes no
difference whether the member agreed to the incurring of the debt or even
knew about it. As long as the person was a member of the association, the
member is responsible for payment of all debts and liabilities of the association.
Most states, however, do not apply the absolute partnership liability
rule to an association. These states will find a member liable for the
debts of or judgments against the association only if the member had consented
to the action which resulted in the debt or judgment. This limitation of
liability for an association is not as great a protection as it seems.
The courts of these states have held that if a member consents to an action
being taken by a fellow member or employee, that member is responsible
for all damages resulting from that person’s conduct in performing that
action. This is known the theory of Respondeat Superior under the state’s
agency and partnership law. If a member agrees to the association pursuing
a certain endeavor or course of conduct, that member will be personally
liable for the debts incurred by the association in that pursuit. The member
will have to be on record opposing the conduct to avoid such liability.
Corollary: A member who initially opposed the association’s conduct will
be foundliable for resulting damages if he subsequently ratified the conduct
by either word or deed.
The main advantage of a corporation, whether a profit or nonprofit corporation,
over an association is the assured limited liability it provides its shareholders
or members. As a corporation, the most that its members can lose in a lawsuit
against the corporation is the assets they contributed to the corporation.
This limited liability for corporate shareholders is vastly different from
an unincorporated association where the associates may be found to be totally
liable for all debts. The creditors of the association can seek and attach
every dollar and piece of property that each associate owns to settle a
judgment. Such personal attachment to satisfy corporate debts cannot be
done against the assets of a member of a nonprofit corporation.
Few people would ever participate in an organization for the public
good if they risked losing everything they had earned or will earn. At
the meeting of the Aviation Association of Douglas County, the members
were asked if they owned a house, a car, a plane, a pension plan or if
they were employed. They were asked to look around the room, and they were
told that under state law each one was personally liable for payment of
any association debt or judgment which occurred from a act or policy to
which he agreed. They were reminded that they had not worked all of their
adult life to become a benevolent insurance company for other people’s
actions. They were told that every state has enacted a nonprofit corporation
law to permit people like themselves to get togetherand operate for charitable
purposes without incurring personal liability. When all was considered,
the Aviation Association voted unanimously to seek nonprofit corporate
status. Even those persons who were initially opposed voted for the incorporation.
Yet the other advantages of incorporating had not even been discussed.
It is the risk of personal liability by belonging to an unincorporated
association (especially as an officer or director) that is the prime reason
behind incorporating as a nonprofit corporation.
usually can qualify to receive federal and state tax exemptions that an
unincorporated association usually cannot receive. A qualified nonprofit
corporation which obtains federal and state tax exemptions will not have
to pay any taxes on the income that is derived from its related business
activities. By not having to pay taxes, the corporation will have 30% to
40% more in income to apply towards its exempt goals.
In addition, contributions to most tax-exempt nonprofit organizations
are tax deductible: see section 501(c)(3) organizations for which this
book is designed. This means that a person or entity making contributions
to such an organization will be permitted to deduct the value of the contribution
on the donor income tax return. It is very beneficial for a nonprofit corporation
to receive a 501(c)(3) tax exemption rather than an exemption under the
other 501(c) subsections. Once anorganization receives a 501(c)(3) tax
exemption, all contributions to it are tax deductible. Tax deductibility
of contributions is a prime incentive for donors to make contributions
to an organization.
A 501(c)(3) tax exemption is the most desired status. It is advantageous
for a nonprofit organization to have a 501(c)(3) tax exemption because
contributions to the organization are tax deductible by the donor. A contribution
to a tax-exempt organization that is not tax deductible cannot be used
to reduce the donor’s federal income tax: the contribution is made in after-tax
dollars. Most donors want the tax advantage of being able to include a
portion of their contributions on their income tax return as a deduction.
More money is contributed to an organization if the contributions are tax
deductible.
Another advantage of receiving a federal tax exemption is that gifts
made to the organization after the death of the donor are deducted dollar-for-dollar
from the gross estate of the donor. Federal tax law requires that all estates
over $600,000 that pass to someone other than the donor’s spouse be taxed
on a progressive scale which reaches 55%. Gifts to a 501(c)(3) organization
reduce the gross estate of the donor for tax purposes.
is the availability of federal and state grants. Both federal and state
governments have many agencies which will bestow grants to qualified nonprofit
corporations. Such grants are notusually available to unincorporated associations.
Information for state grants can be difficult to obtain unless the state
publishes a list of such grants. If such a list is not published, information
on state grants can be obtained from state legislators.
It is much easier to get information on federal grants. The U.S. Printing
Office, Washington, D.C. publishes the Catalog of Federal Domestic Assistance
which lists every federal agency which gives grants. These grants are almost
always limited to nonprofit corporations or other governmental agencies.
A few of the grants from federal programs for which a nonprofit corporation
formed through the use of this book might be interested are:
DRUG ABUSE RESEARCH PROGRAM
PUBLIC HEALTH SERVICE
MS. McKENNEY
DEPARTMENT OF HEALTH AND HUMAN SERVICES, EPS-216
BETHESDA, MD 20892
(301) 443-6021
Grants are given to develop new knowledge for the treatment and diagnosis
of drug abuse and intravenous related AIDS. Annual funds available: $191,205,000.
HUMAN GENOME RESEARCH PROGRAM
PUBLIC HEALTH SERVICE
DR. MARK GUYER
DEPARTMENT OF HEALTH AND HUMAN SERVICES, EPS-216
BETHESDA, MD 20892
(301) 496-0844
Grants are given to develop new knowledge for DNA sequences of the genomes
for humans for use in developing treatment for genetic diseases. Annual
funds available: $78,000,000.
CANCER CAUSE AND PREVENTION RESEARCH PROGRAM
NATIONAL CANCER INSTITUTE
NATIONAL INSTITUTES OF HEALTH
MR. LEO BUSHER, JR.
DEPARTMENT OF HEALTH AND HUMAN SERVICES, EPS-216
BETHESDA, MD 20892
(301) 496-7753
Grants are given to develop new knowledge for the treatment and diagnosis
of cancer. Annual funds available: $286,888,000.
Another related program is CANCER DETECTION AND DIAGNOSIS AND RESEARCH
to help identify cancer early enough to use the latest treatments. Annual
funds for this program: $75,000,000.
RURAL HEALTH RESEARCH CENTERS PROGRAMS
OFFICE OF RURAL HEALTH POLICY
PUBLIC HEALTH SERVICE
DEPARTMENT OF HEALTH SERVICES
DR. TAYLOR
PARKLAWN BLDG, ROOM 14-22
5600 FISHERS LANE
ROCKVILLE, MD. 20857
(301) 443-0835
Grants to support the development of rural health research centers to
provide an information base and a policy analysis on rural health issues.
Annual funds available: $1,800,000.
MENTAL HEALTH RESEARCH GRANTS PROGRAM
NATIONAL INSTITUTE OF HEALTH
PUBLIC HEALTH SERVICE
DEPARTMENT OF HEALTH SERVICES
MR. RINGLER
PARKLAWN BLDG, ROOM 7C-15
5600 FISHERS LANE
ROCKVILLE, MD. 20857
(301) 443-3065
Grants to support research into and to improve treatment methods of
mental illness and behavioral disorders. Annual funds available: $257,000,000.
BIOLOGICAL RESPONSE TO ENVIRONMENTAL HEALTH
HAZARDS PROGRAM
DIVISION OF EXTRAMURAL RESEARCH AND TRAINING
DR. SCHONWALDER
NIEHS, NATIONAL INSTITUTE OF HEALTH
DEPARTMENT OF HEALTH AND HUMAN RESOURCES
P.O. BOX 12233
RESEARCH TRIANGLE PARK, NC. 27709
(919) 541-7634
Grants are available to promote the understanding of how chemical and
physical agents cause diseases. Annual funds available: $65,000,000.
ENERGY RELATED INVENTION PROGRAMS
OFFICE OF ENERGY RELATED INVENTIONS
NATIONAL INSTITUTE OF STANDARDS AND TECHNOLOGY
MR. GEORGE LEWITT
GAITERSBURG, MD. 20899
(301) 975-5500
Grants are available to develop non-nuclear energy technologyby promoting
promising energy-related inventions. Annual funds available: $5,700,000.
BASIC ENERGY SCIENCES
DEPARTMENT OF ENERGY
OFFICE OF ENERGY RESEARCH
MR. WILLIAM BURRIER
MAIL STOP G-236
WASHINGTON, D.C. 20545
(301) 354-4946
Grants are available to support fundamental research and activities
in basic science and advanced technology concepts in fields related to
energy. Annual funds available: $438,000,000.
CONSERVATION RESEARCH AND DEVELOPMENT PROGRAMS
OFFICE OF MANAGEMENT AND RESOURCES
CONSERVATION AND RENEWABLE ENERGY
MS. JUDY SEWELL
WASHINGTON, D.C. 20585
(202) 586-9320
Grants are available to research energy conservation technologies into
the areas of buildings, industry and transportation. Annual funds available:
$2,000,000.
PROMOTION OF THE ARTS PROGRAMS
NATIONAL ENDOWMENT OF THE ARTS
1100 PENNSYLVANIA AVENUE, NW.
WASHINGTON, D.C. 20506
(202) 682-5435
Grants are available for projects designed to support the various arts.
DESIGN ARTS ($3,686,000), DANCE ($8,500,000), LITERATURE ($4,435,000),
MEDIA ($11,700,000), THEATER ($9,600,000), VISUAL ARTS ($5,300,000), FOLK
ARTS ($2,800,000).
In addition to receiving grants, nonprofit corporations can receive
donations and loans of personal property from government agencies and other
nonprofit corporations. Some of the programs which are available to eligible
nonprofit corporations are:
ARTS EXHIBITS
THE SMITHSONIAN INSTITUTE
1100 JEFFERSON DR., S.W., ROOM 3145
(202) 357-3168
The Smithsonian Institute Traveling Exhibition Service works with local
nonprofit organizations to sponsor between 80 and 100 exhibits each year
throughout the United States. Over half of the exhibits are in rural counties.
BOOKS
LIBRARY OF CONGRESS
EXCHANGE AND GIFT DIVISION
1ST & INDEPENDENCE STREETS, S.E.
MADISON BUILDING, ROOM 303
WASHINGTON, D.C. 20540
(202) 707-9511
Free books can be obtained from the Library of Congress. The Library
of Congress first offers books for sale. Books which are not sold can then
be given or sold to nonprofit corporations.
FOOD AND SURPLUS COMMODITIES
USDA FOOD DISTRIBUTION PROGRAM
3100 PARK CENTER DRIVE, ROOM 502
ALEXANDRIA, VA. 22302
(703) 756-3660
Nonprofit groups may apply for surplus commodities held by the Agricultural
Department. Such commodities include flour, oils, milk and cheese. A nonprofit
corporation which runs a food bank or food kitchen can qualify for such
commodities.
HOUSING FOR THE HOMELESS PROGRAM
DIVISION OF HEALTH AND HUMAN SERVICES
MS. JUDY BREITMAN
PARKLAWN BLDG, ROOM 17A-10
5600 FISHERS LANE
ROCKVILLE, MD. 20857
(301) 443-2265
A nonprofit corporation which provides housing for the homeless may
lease or be deeded title to unused federal real property to aid in its
operations. A list of available property can be obtained by calling 1-800-927-7588.
The publication “Obtaining Federal Property for the Homeless: Questions
and Answers about Federal Property Programs” can be obtained from
the above agency.
MISCELLANEOUS PROPERTY
OFFICE OF TRANSPORTATION AND PROPERTY MANAGEMENT
DIRECTOR, PROPERTY MANAGEMENT
WASHINGTON, D.C. 20406
(703) 557-1234
The General Services Administration (GSA) donates property to nonprofit
organizations which has not been sold. Such property is usually sold for
2% of its value plus a handling fee. The property handled by the GSA can
be anything that the federal government owns. The nonprofit organization
will make a request for property that will aid its exempt purposes.
All of the above programs and many others not mentioned are available
to nonprofit corporations. To access such programs, the corporation must
contact the agency administering the program andask for the appropriate
application and information. Most agencies are very happy to reply because
the more interest they have, the more money they can seek from Congress
and the bigger they can grow.
should incorporate. Every state has enacted a nonprofit corporation act
to protect individuals engaged in nonprofit activity from the personal
liability for the debts of the organization in which they are involved.
This protection is not available to individuals engaged in an unincorporated
association even though it exists for nonprofit purposes. For this reason
if no other the organization should incorporate.
In addition to the limited liability for its members, a nonprofit corporation
has a significant tax advantage over an unincorporated association if it
gets a federal tax exemption under section 501(c)(3) of the Internal Revenue
Code. Contributions to such a nonprofit corporation are tax deductible
to the donor. The tax deductibility is a great incentive for donors to
contribute to a nonprofit corporation rather than an unincorporated association
to which such contributions are not deductible.
Finally, a nonprofit corporation is able to tap into a wide variety
of state and federal programs which are not available to unincorporated
associations. Such programs may result in the corporation having access
to funds or property which are not available to unincorporated associations.
Based upon the foregoing discussion, it is generally in the best interest
of any group intending to operate for nonprofit purposes to become a nonprofit
corporation and to seek federal and state tax exemptions.
to conduct nonprofit activities is because a nonprofit corporation usually
can receive federal and state tax exemptions while an unincorporated association
usually cannot receive them. A qualified nonprofit corporation which obtains
federal and state tax exemptions will not have to pay any taxes on the
income that is derived from its related business activities. By not having
to pay taxes, the corporation will have 30% to 40% more income to apply
towards its exempt goals. For example, assume that an unincorporated association
operates an art museum earning $100,000 per year after expenses. Since
it does not have a nonprofit federal exemption, it will have to pay approximately
$28,000 in taxes. On the other hand, an art museum that is a nonprofit
corporation, with a federal tax exemption, would not pay any federal taxes
for its exempt activities.
Another significant reason for seeking a federal tax exemption is that
contributions to section 501(c)(3) tax exempt nonprofit organizations (those
for which this book is designed) are tax deductible to the donor. This
means that a person or entity making contributions to such an organization
will be permitted to deduct the value of the contribution from reported
income on the donor’s tax return. It is very beneficial for a nonprofit
corporation toreceive a 501(c)(3) tax exemption instead of an exemption
under the other 501(c) subsections. Once an organization receives a 501(c)(3)
tax exemption, all contributions to it are tax deductible. Tax deductibility
of contributions is a prime incentive for donors to make contributions
to an organization. Example: John Smith wishes to give $150,000 to charity.
If Smith gives it to an unincorporated association, he will not get a tax
deduction. Instead, if Smith gives it to a tax section 501(c)(3) organization
(defined below) the contribution will be deductible. Smith is in a 33%
tax bracket. He will save $50,000 on his taxes: his actual cost of the
gift is $100,000, and the charity gets $150,000. The donor to a 501(c)(3)
nonprofit corporation receives a premium for the contribution in the amount
he can deduct from his taxable income. As a result, donors are more willing
to make their contributions to an organization when the donor will be able
to deduct the value of the contributions and thus reduce his tax liability.
Another aspect of an organization having a federal tax exemption is
that gifts made to the organization after the death of the donor are deducted
dollar for dollar from the gross estate of the donor. Federal tax law requires
all estates over $600,000 that pass to someone other than the donor’s spouse
be taxed on a progressive scale that reaches 55%. Gifts to a 501(c)(3)
organization reduce the gross estate of the donor for tax purposes. For
example, assume that John Smith, a widower, has an estate of $2,100,000.
Smith’s last will gave $1,000,000 to a local homelessshelter which is a
nonprofit corporation with a federal tax exemption. Smith’s estate is then
reduced to $1,100,000. The taxable estate is $500,000 ($1,100,000 minus
the $600,000 unified credit). The state tax is $155,800 If the gift had
not been made the taxable estate would have been $1,500,000. The estate
tax would have been $555,800.
A nonprofit corporation also can receive a state exemption from taxes.
Many states will not require any forms to be filed to get a state tax exemption
because they grant such exemptions automatically to nonprofit corporations.
Other states will grant the exemption only after the corporation receives
the federal tax exemption and will then retroactively apply the tax exemption.
After receipt of the state tax exemption, the corporation should contact
the local county tax agency to determine if any forms must be completed
to be exempt from local real property and personal property taxes. Such
exemptions are automatically granted once the organization receives the
state income tax exemption. The State’s Laws chapter lists the taxing agency
for each state that governs the granting of state tax exemptions.
There are two types of tax exempt organizations: those to which contributions
are deductible and those to which contributions are not deductible. This
book can be used to incorporate a nonprofit corporation. In applying for
tax exemption, this book is geared to those nonprofit corporations to which
contributions will be deductible by the donor. The reason for this is that
nearly all nonprofit corporations which receive a tax exemption qualify
as asection 501(c)(3) organization and thus contributions to them are deductible.
This book will discuss in a general way those special tax-exempt corporations
to which contributions will not be deductible, and it will detail how to
complete a tax exemption application and discuss other aspects of the donor-deductible-contribution
nonprofit corporation.
CONTRIBUTIONS NOT
organizations are permitted to receive a federal tax exemption. However
the tax law does not allow contributions made to these designated nonprofit
organizations to be deductible by the donor on his tax return. These nonprofit
organizations are treated differently than the majority of nonprofit corporations
formed under section 501(c)(3) (discussed below) that are not only tax
deductible but contributions to them are deductible by the donors. These
organizations must complete IRS FORM 1024 to receive a tax exemption. Form
1024 is similar to FORM 1023 used by nonprofit corporations seeking an
exemption under section 501(c)(3). An organization that must file FORM
1024 can review how FORM 1023 is completed in this book and use it for
reference. Such an organization should also review IRS publication 557
“Tax-exempt Status for Your Organization” before completing the
tax exemption application. FORM 1024 and Publication 557 can be obtained
free from the IRS by calling 1-800-TAX FORM.
DONATIONS
usually will not be deductible:
1. Section 501(c)(2). CORPORATIONS HOLDING TITLE TO PROPERTY FOR EXEMPT
ORGANIZATIONS. Such nonprofit corporations exist to hold and manage property
for other tax exempt organizations. Form 1024 is used to get the tax exemption.
Contributions to the nonprofit corporation are not deductible to the donor.
2. Section 501(c)(4). CIVIL LEAGUES, SOCIAL WELFARE ORGANIZATIONS OR
LOCAL EMPLOYEE ASSOCIATION. Such organizations exist exclusively to promote
social welfare or employee associations which are composed of employees
from one employer for charitable, educational or recreational purposes.
Examples: volunteer fire companies, search and rescue companies, homeowners
associations. Form 1024 is used to get the tax exemption. Contributions
to the nonprofit corporation are usually not deductible to the donor. Such
contributions can be deductible only when they are to be used exclusively
for public purposes rather than to benefit the members of the organization.
3. Section 501(c)(5). LABOR, AGRICULTURAL OR HORTICULTURAL ORGANIZATION.
Such nonprofit corporations are composed of workers to promote their industry
and protect their jobs. Form 1024 is used to get the tax exemption. Contributions
to the nonprofit corporation are not deductible to the donor.
4. Section 501(c)(6). BUSINESS LEAGUES, CHAMBER OF COMMERCE OR BOARDS
OF TRADE. Such nonprofit corporations are composed of persons to improve
business in general or particular industries. Form 1024 is used to get
the tax exemption. Contributions to the nonprofit corporation are not deductible
to the donor.
5. Section 501(c)(7). SOCIAL AND RECREATIONAL CLUBS. Such organizations
exist exclusively to promote pleasure, recreation and other nonprofit purposes.
Examples: model flying clubs, bowling clubs, search or hunting clubs. Form
1024 is used to get the tax exemption. Contributions to the nonprofit corporation
are not deductible to the donor.
6. Section 501(c)(8). FRATERNAL BENEFICIARY SOCIETIES. Such groups are
organized under a lodge system for the exclusive benefit of its members.
They usually provide benefits such as life, medical or accident insurance
to their members. Examples: Lions, Moose, Shriners. Form 1024 is used to
get the tax exemption. Contributions to the nonprofit corporation areusually
not deductible to the donor. Some contributions may be deductible if used
exclusively for section 501(c)(3) purposes.
7. Section 501(c)(9). VOLUNTARY EMPLOYEE BENEFICIARY ASSOCIATIONS. Such
groups of employees are organized to provide benefits to their members.
None of the earnings inure to the benefit of any individual member except
in accordance with the group benefit plans. Form 1024 is used to get the
exemption. Contributions to the nonprofit corporation are not deductible
to the donor.
8. Section 501(c)(10). DOMESTIC FRATERNAL SOCIETIES. Such groups are
organized under a lodge system exclusively for religious, charitable, scientific,
literary, educational or fraternal purposes. They do not provide benefits
such as life, medical or accident insurance to their members. Form 1024
is used to get the exemption. Contributions to the nonprofit corporation
are usually not deductible to the donor. Some contributions may be deductible
if used exclusively for section 501(c)(3) purposes.
9. Section 501(c)(11). LOCAL TEACHER RETIREMENT FUND ASSOCIATIONS. Such
nonprofit corporations are formed to receive money from public taxes, from
assessments on the teaching salaries of its members and investment income.
Such funds are used exclusively to provide retirement benefits for the
members. No form is used to get the tax exemption instead a letter requesting
the exemption is sent to the local IRS District Director. Contributions
to the nonprofit corporation are not deductible to the donor.
10. Section 501(c)(12). BENEVOLENT LIFE INSURANCE ASSOCIATIONS, MUTUAL
WATER AND TELEPHONE COMPANIES. Such organizations exist on a mutual or
cooperative basis to provide life insurance, water or telephone service
to their members. Eighty five percent (85%) of the income must come from
the members and the income must be used exclusively for expenses of the
organization. Form 1024 is used to get the exemption. Contributions to
the nonprofit corporation are not deductible to the donor.
11. Section 501(c)(13). CEMETERY COMPANIES. Such organizations exist
exclusively to provide cemetery services to their members. Form 1024 is
used to get the exemption. Unlike most non-501(c)(3) tax exempt organizations,
contributions to this nonprofit corporation are usually deductible to the
donor.
12. Section 501(c)(14). CREDIT UNIONS. Such nonprofit corporations are
formed to provide mutual financial services to their members. They are
organized without stock and fornonprofit purposes. No form is used to get
the tax exemption instead a letter requesting the exemption is sent to
the local IRS District Director. Contributions to the nonprofit corporation
are not deductible to the donor.
13. Section 501(c)(15). MUTUAL INSURANCE COMPANIES. Such organizations
exist on a mutual or cooperative basis to provide life insurance to their
members. Form 1024 is used to get the exemption. Contributions to the nonprofit
corporation are not deductible to the donor.
14. Section 501(c)(16). FARMERS COOPERATIVES. Such nonprofit associations
are formed to provide for the marketing of their members’ produce or products
on a cooperative basis. No form is used to get the tax exemption instead
a letter requesting the exemption is sent to the local IRS District Director.
Contributions to the nonprofit corporation are not deductible to the donor.
Note subparagraph 19 below.
15. Section 501(c)(17). WAR VETERAN ORGANIZATIONS. Such organizations
exist to provide benefits to their members. Form 1024 is used to get the
exemption. Contributions to this nonprofit corporation are usually not
deductible to the donor. Contributions will be deductible if 90% of the
members of the organization are war veterans.
16. Section 501(c)(20). GROUP LEGAL SERVICE ORGANIZATIONS. Such organizations
exist exclusively to provide a qualified legal services plan to their members.
Form 1024 is used to get the exemption. Contributions to such nonprofit
corporations are not deductible to the donor.
17. Section 501(c)(25). TITLE HOLDING COMPANIES. Such nonprofit corporations
exist to hold and manage property. Income from the property is distributed
to 501(c)(3) tax exempt entities that are the shareholders of the corporation.
Form 1024 is used to get the tax exemption. Contributions to the nonprofit
corporation are not deductible to the donor.
18. Section 501(d). RELIGIOUS AND APOSTOLIC ORGANIZATIONS. Such organizations
engage in common business for the benefit of their members. Each member’s
share is included on his tax return. No form is used to get the tax exemption
instead a letter requesting the exemption is sent to the local IRS District
Director. Contributions to the nonprofit corporation are not deductible
to the donor. This is a seldom-used provision for getting a tax exemption
because a religious organization can usually qualify for a 501(c)(3) tax
exemption which bestows more favorable tax treatment.
19. Section 512(a). FARMERS COOPERATIVE ASSOCIATIONS. Theseare farmers’
cooperatives which exist to market the members’ products and to purchase
equipment. Form 1028, not Form 1024, is used to get the exemption. Contributions
to the nonprofit corporation is not deductible.
A nonprofit corporation which is formed to accomplish any of the above
purpose will receive a federal tax exemption. Contributions to such a corporation,
however, will usually not be deductible. This rule is not hard and fast.
It is possible for a non-501(c)(3) corporation (one of the above) to establish
a fund from which it will conduct only activities that would otherwise
satisfy 501(c)(3) purposes. Contributions to this special fund will be
tax deductible. The rules for establishing this separate 501(c)(3) fund
are covered in Publication 557.
CONTRIBUTIONS
tax exemption under IRC section 501(c)(3) will be deductible to the donor.
A 501(c)(3) tax exemption is the most desirable form in the IRS inventory.
It is advantageous for a nonprofit organization to have a 501(c)(3) tax
exemption because its permits deductions to the organization to be tax
deductible by the donor. A contribution to a tax exempt organization which
is not tax deductible cannot be used by the donor to reduce his federal
income tax: the contribution is made in after-tax dollars. Most donors
want the tax advantage of being able to deduct a portion of their contributions
from their personal reportable income on their income tax return. Moreover,
more money can be contributed to the organization if the contributions
are deductible.
Section 501(c)(3) organizations are nonprofit corporations which are
formed exclusively to accomplish one or more of the following purposes:
1. Religious purposes,
2. Charitable purposes,
3. Scientific purposes,
4. Literary purposes, or
5. Educational purposes.
A nonprofit corporation that is formed exclusively to pursue one or
more of the above purposes will receive a federal tax exemption under section
501(c)(3). It is relatively easy for a tax exempt organization to qualify
for 501(c)(3) tax exempt status. An important aspect to remember is that
whatever activity is undertaken, its function must be to achieve or further
one or more of the stated purposes:
both formalized churches and the auxiliaries. The IRS does not question
tenets of faith as long as they are not against the law. As long as the
activities of the organization foster religious worship or advance a religious
purpose or belief, the organization will be found to have a religious purpose
and qualify for a 501(c)(3) tax exemption.
Nearly any activity which furthers the advancement of religion will
satisfy the religious purposes test. It is not uncommon for such an activity
to satisfy a charitable or educational purpose while satisfying a religious
purpose as well. For example, assume that a religious organization operates
a soup kitchen for the destitute. It would qualify for a 501(c)(3) tax
exemption both as a religious organization and as a charitable organization.
Publishing a newsletter to promote religious belief or interests has been
held to promote religion and qualify for a 501(c)(3) tax exemption.
An organization has the option of applying for a 501(c)(3) tax exemption
as either a church or a religious organization. If the organization qualifies
as a church, it will receive automatic public charity status. An automatic
public charity does not have to meet public support standards in order
to maintain its tax exemption. All other 501(c)(3) organizations must maintain
a minimum of public support to continue to receive their public charity
status (as discussed below). To be considered a church, theIRS and the
courts will closely examine the operation of the organization. Any organization
seeking church status will be required to complete a special IRS schedule
which, among other matters, will investigate the following:
1. Whether or not the organization practices a recognized creed.
2. The government of the organization.
3. The doctrine of the organization.
4. Whether or not the organization has ordained ministers or clergy.
5. Whether or not the organization has formal meetings and services.
6. Whether or not the organization has places of worship.
Most of us tend to know if an organization really qualifies as a church
or is just a religiously affiliated organization. From a practical standpoint,
both types of organization will get a tax exemption. The religiously affiliated
organization, however, will have to be concerned with satisfying the public
support requirement for maintaining the tax exemption.
organizations qualify for their tax exemption. The reason for this is that
the word charitable is broadly defined to encompass anything that is “beneficial
to the public interest.” Most nonprofit corporations have activities
that satisfy an educational, literary or scientific purpose that will usually
also satisfy a charitable purpose.
A charity exists to benefit the public. The public is defined as being
an indefinite number of persons rather than defined individuals. A charity
can exist to aid a particular group as long as the group is open and the
persons to receive the benefit are not specifically identified. For example,
assume that a nonprofit organization formed to aid the homeless in a city
has a charitable purpose; an organization to aid specially named homeless
persons. Such a nonprofit organization will not have a charitable purposefor
tax purposes.
“Charitable purpose” is, as stated above, broadly defined.
A charitable purpose is anything that aids the public. Examples of charitable
purposes have been:
1. Protecting the environment.
2. Providing food to the elderly.
3. Providing education.
4. Providing medical services to the indigent.
5. Operating a museum.
6. Operating a library.
7. Operating a park.
8. Operating a hospital.
A charity is permitted to make money from its activities. It is just
not permitted to distribute the money earned to any shareholder or member.
The profits of the charity must be used to achieve or further the charitable
purpose for which the nonprofit corporation was formed.
PURPOSES.
so much that the definition of “charitable purpose” must be included.
The test is whether the public is benefited by the activity performed by
the nonprofit corporation. Scientific research to find a cure for a disease
or add to human knowledge qualifies for a tax exemption as both a scientific
and charitable purpose. In applying for a tax exemption under any of these
purposes, the application should be broadly drawn to highlight the charitable
aspect of the activity as well.
The above five purposes are the only ones for which a 501(c)(3) tax
exempt nonprofit corporation can be formed. A tax exempt corporation cannot
mix 501(c)(3) purposes with any of the other 501(c) subsections discussed
above. If it does, the corporation will still be tax exempt, but it will
be tax exempt under the other 501(c) subsection and not section 501(c)(3).
Example: A 501(c)(3) organization also performs functions as a civic league.
It may lose its 501(c)(3) status and be treated asa 501(c)(4) nonprofit
corporation.
There are two types of 501(c)(3) tax exempt organizations: the public
charity and the private foundation. The differences between the two types
are in the percentage of contributions which a donor may deduct on his
income tax return and operating limitations. The differences are discussed
in detail below.
public charity. The advantages of a public charity over a private foundations
are:
1. Contributions to a public charity are deductible to 50% of the donor’s
adjusted gross income. Contributions to private foundations are deductible
only to 30% of the donor’s adjusted gross income.
2. A public charity does not have the operating limitations which are
placed upon a private foundation.
3. A public charity does not have to pay the 2% excise tax that a private
foundation must pay.
These advantages make it desirable for a nonprofit corporation to be
classified as a public charity rather than a private foundation. The Congress,
however, is concerned with collecting as much tax revenue as possible.
More tax revenue will be collected if a 501(c)(3) organization is treated
as a private foundation. For this reason, Congress has decreed that a 501(c)(3)
tax exempt organization will be classified as a private foundation unless
it can prove that it is a public charity.
In order for a 501(c)(3) organization to prove that it is entitled to
public charity status, it must pass one of three tests. The three tests
which determine if a 501(c)(3) tax-exempt organization should be classified
as public charity are:
1. The automatic charity test.
2. The public support test.
3. The general support test.
charities and do not have to pass either of the two following tests. Nonprofit
corporations that qualify for public charity status have as their main
purpose the operation of
1. Churches rather than mere religiously affiliated groups. A determination
that an organization is a church rather than just a religious organization
requires, as discussed above, that detailed information regarding its operation
be submitted. If such a favorable determination is made, the church need
not be concerned with ever having to satisfy either of the two other tests
in order to maintain its public charity status. Churches are governed by
section 509(a)(1) and 170(b)(1)(A)(i) of the Internal Revenue Code.
2. Schools. For a school to be classified as a public charity, the IRS
looks at its operations and particularity how formalized it is and whether
it has a regularly enrolled student body. The more the school takes on
the attributes of a traditional school, the more likely it will be classified
as a public charity. Schools are governed by section 509(a)(1) and 170(b)(1)(A)(ii)
of the Internal Revenue Code.
3. Hospitals and Medical Research Organizations. Nearly any nonprofit
organization that provides health care in any form (such as medical clinics,
drug abuse centers, mental health clinics) will qualify as a public charity.
Organizations which are involved in medical education or research will
receive public charity status only if they are associated with a hospital
and provide medical care to patients in the hospital. Such organizations
are governed by section 509(a)(1) and 170(b)(1)(A)(iii) of the Internal
Revenue Code.
4. Public Safety Organizations. Nonprofit organizations which are formed
to conduct public safety tests automatically qualify for public charity
status. Such tax exemption is governed by IRS section 509(a)(4).
5. Supporting Organizations. Under IRS 509(a)(3), an organization which
is formed solely to aid in the operationof another public charity (except
for a public safety organization) will itself also be classified as a public
charity. In other words, if a public charity has a subsidiary or affiliate
organization, that subsidiary or affiliated organization also qualifies
as a public charity.
While it is desirable for a 501(c)(3) organization to be classified
as a public charity, few such organizations qualify. An organization which
does not meet the public charity requirement may still be classified as
a public charity if it passes either of the two public support tests defined
below.
if:
1. At least 1/3 of its total support per year is derived from:
(a) Support from government agencies,
(b) Contributions from the general public, or
(c) A combination of (a) and (b), or
2. It meets an “attraction of public support requirement”
and at least 1/10 of its total support over a four-year period is derived
from:
(a) Support from government agencies,
(b) Contributions from the general public, or
(c) A combination of (a) and (b).
In determining public support membership, fees and dues are treated
as public support as long as the members do not receive a benefit in exchange
for them. As long as the fees and dues are solely to acquire and maintain
membership, they are counted as public support. If the fees and dues are
used to purchase a benefit from the organization (such as use of it facilities)
they are not considered public support. The defining point is whether the
member receives anything of value for the fees or dues.
Investment income is not considered public support but is considered
in calculating the corporation’s total support. Hence, an organization
with large investment income may have problemssatisfying the public support
percentages. In the same vein, income derived from unrelated business activities
(those not furthering the exempt purpose of the organization) is not counted
as public support but is counted towards total support.
Income derived from the sale of assets or from the performing of tax
exempt activities is not counted in any way. Such income is not counted
either for total support or public support of the corporation. Income derived
from performing exempt activities includes admission fees for public events
and fees charged for hosting seminars or for selling merchandise related
to the corporation’s exempt purposes.
TEST
total support, all funds that the corporation receives during the four-year
period are included. When calculating the public support percentage, however,
there are limitations on the amounts of contributions from certain individuals
which can be considered.
In determining the percentage of public support, there is a limitation
on the amount that an individual, trust or corporation contributes to the
nonprofit corporation that can be counted toward public support. The total
amount of contributions from any individual, trust or corporation for any
four-year period which will be counted towards a nonprofit corporation’s
public support cannot exceed 2% of the corporation’s total support. This
limitation only applies to contributions from the public. There is no limitation
on the amount of contributions from government agencies or other public
supported organizations that can be included in calculating total public
support. For example, assume that ABC nonprofit corporation received $100,000
in total support over four years. $60,000 came from government grants and
$40,000 from the public. George Smith contributed $20,000. In calculating
total public support, the $60,000 from government sources is counted in
total, the $20,000 from other public sources is also counted in total.
Smith’s contribution is limited to $4,000 (2%of the total $100,000). The
total public support is $84,000 (84%). Since public support percent is
over 33%, the organization qualifies as a public charity.
On the other hand if ABC nonprofit corporation received $1,000,000 in
total support over four years with $300,000 coming from three people each
and $100,000 from a fourth person, the limitation on contributions from
each individual would be 2% of $1,000,000 or $20,000. The total public
support would be $80,000. The corporation would fail this test because
public support would be only 8%.
As with any rule, there are exceptions to the 2% limitation on public
contributions when calculating support. If the contribution takes the form
of an unusual contribution, it will not be counted either for public support
or total support. An unusual grant is considered to be one that:
(1) Was given to the organization to further its tax exempt purpose,
(2) Was unexpected in the sense that it is not routinely given to the
organization or has been given in an unusually large amount, and
(3) Because of the size of the grant, counting it in support calculations
would prevent the organization from meeting public support test.
If an organization is found to have received an unusual grant, the value
of the grant will not be considered in determining the percentage of public
support. It is to the advantage of an organization to strive to maintain
a level of public support so that it will meet the required minimum standards.
will still be classified as a public charity if it has at least 10% public
support and satisfies an IRS requirement of attracting public support.
In determining if an organization has been attracting public support,
the IRS evaluates several separate factors, none of whichare determinative
in itself. The IRS looks at:
1. Whether the organization is actively seeking funds from the public
or relying mainly on old sources of funding. An important consideration
is whether the corporation is actively seeking new members and soliciting
support from government and private sources.
2. Whether most of the organization’s funds come from the community
and government agencies or a group of individuals with special interests.
The broader the source of funding, the better the IRS likes it and the
greater the chances of being found to be publicly supported.
3. Whether the board of directors represents the community at large.
Toward this end, the IRS likes to see public officials on the board as
representatives of the public.
4. Whether the corporation provides facilities or services to the public.
Examples of such activities include operating a museum, holding concerts
and giving seminars.
If an organization is able to pass this test, it will be classified
as a public charity. If the corporation is unable to pass this test, it
may still achieve public charity status if it passes the General Support
Test below.
(iii). GENERAL SUPPORT TEST
A 501(c)(3) tax exempt corporation will be classified as a public charity
if it passes the general support test. Under this test, the corporation
will be a public charity if:
1. It receives 1/3 of its total support each year (rather than over
four years) from qualified public support. What makes the general support
test better than the public support test is that gross receipt from the
performing of tax exempt activities are counted both for total support
and public support. Hence organizations that will support themselves through
the admission fees of their tax exempt activities will be more likely to
pass this test than the public support test. Gifts, government grants,
public contributions and membership fees are treated in the same manner
as in the public supporttest above.
2. The organization must not receive more than 1/3 of its total support
from unrelated business income or investment income.
In place of the 2% limitation used in the public support test, this
test has a limitation of $5,000 or 1% of total support that can be received
from individuals, corporations or entities for the performance of any tax
exempt activity. This limitation applies only to performance of tax exempt
activities, it does not apply to contributions, membership fees or grants
to the organization that are not receipts or payments for the performance
of tax exempt activities. For example assume that ABC Orchestra nonprofit
corporation holds a charitable auction to buy new instruments. The corporation
earned $250,000 for the year. At the auction, it sold John Smith a violin
for $50,000. The greater of $5,000 or 1% of $250,000 (which is $2,500)
will be counted as the public support from John Smith.
Grants are not subject to the $5,000-or-1% limitation if they are not
for the performance of tax-exempt activities; the person or entity making
the grant does not expect to receive any personal benefit from the performance
of the tax-exempt activity. This issue most often arises where a tax-exempt
entity is given a grant which is specifically dedicated for use in conducting
tax-exempt activities that somehow benefits the donor. Thus the grant is
for performance of tax-exempt activities and is therefore subject to the
$5,000-or-1% limitation. For example, assume that a farmer gives to a nonprofit
scientific research corporation specifically for use to develop bug-resistant
crops. The grant is subject to the limitations. As with the public support
test, when the grant is found to be unusual, it is excluded from both the
total support and public support calculations for the general support test.
The general support test is the test by which most 501(c)(3) organizations
will receive their public charity designation. This test is most useful
for self-sustaining organizations which must rely upon themselves to survive.
tests, it will be classified as a private foundation and treated accordingly.
Even if a tax-exempt corporation cannot become a public charity, becoming
a private foundation still delivers strong advantages.
either a public charity or a private foundation. If the organization fails
to meet any of the three tests for a public charity, it will be classified
as a private foundation. If a private foundation is going to be a private
operating foundation (one that performs activities or provides services
rather than merely distributing funds to other tax-exempt organizations),
it is required to meet its own special income test and one of the three
following tests: an assets test, an endowments test or a support test.
It is assumed that the nonprofit corporation being formed will seek public
charity status. If a private foundation is being created, the instructions
for completing Form 1023 are still valid, but Publication 557 should be
read prior to completing the application.
The IRS assumes that all 501(c)(3) organizations are private foundations
unless they can prove by their applications that they are entitled to public
charity status. Unless the tax-exempt organization applies for public charity
status (submits Form 1023) within 15 months of formation (or within any
granted extension) it will be classified as a private foundation even though
it would otherwise qualify as a public charity.
The main difference between a public charity and a private foundation
is who runs it and where does it get its money. A public charity must receive
a minimum amount of support from the general public or governmental agencies.
In addition, public charities must have boards which are open to the public.
By comparison, private foundations do not have fixed minimums for public
or government support. In addition, the boards for privatefoundations are
often closed to input from the public. Private foundations often are established
by wealthy families, (Ford Foundation, Rockefeller Foundation) etc. and
are often controlled by members of that family. The funds for many private
foundations come mostly from endowments provided by the creators of the
foundation and subsequent investment income.
Because private foundations usually have a close relationship with its
founders, Congress has imposed special operating restrictions on them.
The purpose of these restrictions is to assure that private foundations
are not used to give any special tax benefits to their creators. These
limitations are covered in IRS Publication 578, TAX INFORMATION FOR
PRIVATE FOUNDATIONS AND FOUNDATION MANAGERS, and are as follows:
1. Contributions are tax deductible to a private foundation only to
a maximum of 30% of the donor’s adjusted gross income as opposed to 50%
of the donor’s gross income for contribution to public charities. IRS Publication
526 CHARITABLE CONTRIBUTIONS discusses the rules for contributions
to private foundations.
2. There is a 2% excise tax (reduced to 1% for certain private foundations)
on the net investment income of the private foundation. This tax does not
apply to public charities.
3. There are restrictions on self-dealing between the private foundation
and the disqualified persons. Under the IRC, disqualified persons are:
a. Officers, directors and managers of the private foundation,
b. Substantial contributors to the private foundation, and
c. Persons or entitles owning 20% of the voting power of a corporation,
partnership, or association which is a substantial contributor to the private
foundation.
For self-dealing there is an excise tax of 5% on theamount involved
in the transaction. In addition, the foundation manager involved in the
self-dealing is assessed another 2 1/2% excise tax. If a disqualified person
other than a foundation manager is involved in the self-dealing, that person
is assessed an excise tax of 200% of the amount involved in the self dealing.
4. There are limitations on investments in private businesses, and
5. A private foundation must not make investments which could jeopardize
the ability of the organization to carry on its tax exempt purposes.
In order for a nonprofit corporation to receive a tax exemption as a
private foundation, the articles of incorporation for the organization
must meet the following provisions:
1. The corporation will distribute its income for each tax year and
in such manner as not to become subject to the tax on undistributed income
imposed by section 4942 of the Internal Revenue Code of 1954 or corresponding
provisions of Federal Tax Laws.
2. The corporation will not engage in any act of self-dealing as defined
in section 4941(d) of the Internal Revenue Code of 1954 or corresponding
provisions of any subsequent Federal tax laws.
3. The corporation will not retain any excess business holdings as defined
in section 4943(c) of the Internal Revenue Code of 1954 or corresponding
provisions of any subsequent Federal tax laws.
4. The corporation will not make any investments in such manner as to
subject it to tax under section 4944 of the Internal Revenue Code, or corresponding
provisions of any subsequent Federal Tax Laws.
5. The corporation will not make any taxable expenditures as defined
in section 4945(d) of the Internal Revenue Code of 1954 or corresponding
provisions of any subsequent Federal Tax Laws.
The Articles of Incorporation contained in this book include these provisions.
Hence if the IRS finds the corporation does not qualify as a public charity
but does qualify as a private foundation, the tax exemption as a private
foundation could then be issued. Without such provisions, the tax exemption
would be denied, and the corporation would have to amend the articles to
get the private foundation tax exemption.
CORPORATIONS OPERATE
that apply whether or not they are public charities or private foundations.
There is a unique limitation on how a 501(c)(3) organization can operate.
A corporation might offer to sell to the public or offer services to the
public which could be obtained free from the federal government or for
a nominal fee. If it does, section 6711 requires the corporation to include
a statement in its offering materials (or otherwise inform the client)
that such information or services can be obtained for free or at a nominal
charge from the government. Failure to disclose this information will subject
the corporation to fine. This matter is discussed in detail in Publication
557.
A 501(c)(3) organization is forbidden from substantially engaging in
activities that are not related to furthering the tax exempt purposes for
which the organization was formed. It is recognized most nonprofit organization
must engage in some unrelated business activities to raise money to survive.
The prohibition applies only where a disproportionate amount of the organization’s
time, energy and resources are used in unrelated business activities and
the tax-exempt purposes suffer.
A 501(c)(3) organization is prohibited from being formed or operated
in such a way as to bestow special benefits on particular individuals rather
than the public at large. Specifically, to prevent this benefit of private
persons or entities, a 501(c)(3) corporation is:
1. Prohibited from distributing any of its net earnings orprofits to
any person or entity that is a member, shareholder or contributor, and
2. Required upon dissolution to distribute its assets to another tax-exempt
organization or government entity rather than to any person, member, shareholder
or non-tax exempt entity.
A 501(c)(3) tax-exempt organization is permitted to pay reasonable salaries
to its directors, salaries and employees without violating the prohibition.
Such salaries and payments are permitted as long as the above persons substantially
engage in activities to further the exempt purposes of the organization.
must file a Form 1023 along with several other forms. The application and
all accompanying forms will be sent to the Internal Revenue office where
Form 8718 is to be sent.
In addition to Form 1023, the corporation must apply for a federal identification
number if it had not done so previously. An identification number is obtained
by filing a Form SS-4. Following this chapter is a blank Form SS-4 and
its instructions.
Few things from the government are free, and that includes filing for
tax exempt status. Every organization applying for a tax exemption must
file Form 8718 “USER FEE FOR EXEMPTION DETERMINATION LETTER.”
This form is simple to complete. A new organization that expects to average
less than $10,000 per year for the next four years will check that box
on the form and submit a check in the amount of $150. If the organization
expects to earn more than $10,000 per year, it checks the next box and
pays $465. If the organization pays the $150 and actually averages more
than $10,000 for the next four years, the IRS will bill it for an additional
$315.
is simply a statement of the basic information regardingthe corporation.
Line 1 (a-d) lists the name and address of the corporation.
Line 2 lists the identification number of the corporation. If the corporation
has not yet received one, it should write “applied for” and attach
Form SS-4 to the application.
Line 3 is the name and phone number of the person the IRS is to contact
if they have questions.
Line 4 requires listing the date for closing of the corporation’s fiscal
year. Most corporations use a calendar year for their fiscal year so the
date would be December 31.
Line 5 requires listing the date the articles of incorporation were
filed.
Line 6 requires the corporation to fill in a maximum of three activity
codes that best describe the activity of the corporation. The codes are
on the last page of Form 1023. A corporation should use three codes to
make their statement of activity as broad as possible.
Line 7 applies to special tax-exempt organizations and usually will
be left blank. Section 501(e) organizations are those that will perform
cooperative services to hospitals. Section 501(f) organizations are those
performing collective investment services for educational organizations.
Section 501(k) applies to child-care organizations. Such organizations
will qualify for 501(c)(3) exemption if they meet special requirements
which are set forth under “Child Care Centers” in Publication
557.
Line 8 requires the organization to state if this application is its
first. Some organizations will have had their first application denied,
and they have reorganized so they can reapply. If such is the case, a letter
of explanation should accompany the application.
On Line 9 the corporation must state whether it will be required to
file a Form 990. Most 501(c)(3) organizations will have to file a Form
990. Form 557 lists the few organizations (which are usually automatic
public charities) that will not have to file a Form 990.
Line 10 requires the corporation to state if it previously filed a tax
return. This is important because if the corporation has been in existence
for more than 15 months prior to filing the application and did not revive
an extension, it might be barred from receiving a public charity status.
Line 11 requires the organization to state whether it is a corporation,
trust or association. If the organization is a nonprofit corporation, which
it would be if it uses the forms in this book, it must also attach copies
of its articles of incorporation and bylaws.
INFORMATION
the answers is not sufficient, separate pages should be attached to explain
further. An example of the form of attachments:
“Attachment for Part 1. Line 2.
Additional sources of the corporation’s income will be:”
The point to remember is that the IRS will assume nothing. If the information
is incomplete or hard to understand, the application will be denied. Time
and care should be taken in completing the application to avoid having
to redo it later.
Line 1. The information herein is probably the most important of the
entire application. For that reason, this information should be carefully
drafted by the person with the most information and understanding on the
proposed operations of the corporation. The corporation is required in
this section to provide information that proves that the corporation will
engage in tax-exempt purposes. Information that specifically defines the
corporation’s purposes must be stated. A restatement of the corporation’s
purposes as stated in its articles of incorporation is insufficient. There
must be specific statements about what the corporation intends to do. Example:
An organization is being formed to promote the musical arts. The corporation
should state something to the effect that it will hold concerts open to
the public. The proceeds of the concerts will be used to fund concerts
and to employ local musicians.
The proposed activities of the corporation must be stated with particularity.
This includes when the activities will be held, where they will be held,
what they will be and who will be performing them. A point to remember:
Public charities will need to receive a minimum percentage of public support.
The application must therefore be written so that the IRS will understand
that the minimum requirement of public support will be met. If it is not
made clear that the required minimum of support is met, the organization
may be classified as a private foundation.
Line 2 requires a listing of all current and projected sources of funding.
The entity should rely most often on membership fees and dues. Government
grants and receipts from performance of tax-exempt activities should also
be stressed. The importance of unrelated business income and investment
income (income from activities which do not further the tax-exempt purposes
such as a museum or running a hotel) should not be overly stressed. Remember
a public charity must have a minimum percentage of public support; hence
all sources of public support should be stated.
Line 3 requires the fund-raising activities of the organization to be
stated. Most new corporations will not have decided how they will proceed
to raise moneys. That is usually an advantage. The corporation can state
that most of its fund raising will come from membership and dues, which
is public support. The corporation can also state that once it gets its
tax exempt status, it will apply for government grants to help promote
its tax-exempt purposes. The corporation seeking public charity status
should stress that it will continue to have an aggressive membership recruiting
activity. Another fund-raising activity which should be stressed is the
performance of the tax-exempt activity. For example, assume that a museum
states that many of its fund-raising activities will be special art shows
at which it charges the public small admission fees.
Line 4 requires a listing of the corporation’s officers and directors.
If any are public officials, they must be identified. The IRS likes to
see public officials serving as officers or directors. The IRS views them
as proof of public support. The IRS also requires that if any of the officers
or directors of the corporation become engaged in self-dealing with the
corporation, their relationship will be disclosed. There are severe penalties
for disqualified persons engaging in self-dealing with a private foundation.
Such relationships must be disclosed to the IRS.
Lines 5, 6, 7 and 10 involve the disclosing of any relationship with
another organization. Most nonprofit corporations are not controlled by
another corporation or accountable to anotherorganization. Thus most corporations
seeking tax exemption will mark “no” to these questions. Any
“yes” answers must be explained with particularity.
Line 8 requires that the corporation state what assets are used in performing
its exempt function. Example, a nonprofit museum states its real property
and its art inventory. If the activity is entirely performed by volunteers,
the answer is “none” with an explanation as to why it is none.
Line 9 requires an answer of whether or not it will be funded by a tax-exempt
bond offering. The answer is almost always “no.” Generally, only
nonprofit organizations intimately related to a government unit will qualify
for such bond financing; that is not the ordinary nonprofit corporation.
Line 11 requires information about whether the corporation is a membership
organization. If so, the subparts a, b and c must be answered. The only
issue of concern is 11(c) where any benefits for membership must be stated.
Remember dues received in exchange for benefits other than voting rights
are not considered public support. Most corporations should write “beyond
voting rights, the members receive no special benefits in exchange for
their dues; see corporate bylaws.”
Line 12(a) requires the organization to state whether or not it will
charge the public for providing services, benefits or products. This is
entirely permissible. It is understood that nonprofit corporations need
to make money in order to pay their expenses. As such, the corporation
must explain how the charges will be calculated and attach any fee schedule.
Line 12(b) requires the corporation to state whether or not its benefits,
services or products will be restricted to specific individuals. The usual
answer is “no.” Discrimination that is too narrow could prevent
the granting of tax exemption. Limitation to a specific group is permissible
when the group is large and related to the specific purpose of the organization.
Examples: helping the homeless, abused children or the elderly.
Line 13 requires the corporation to state whether or not itwill be influencing
legislation. The answer should almost always be “no.” Any “yes”
answer could jeopardize the tax exemption. Generally, 501(c)(3) organizations
are forbidden from engaging in political activities. Any such organization
which does so could lose its tax-exempt status. A discussion of the limitation
of political activities is set forth in Publication 557.
Line 14’s response should follow that one given in line 13. A 501(c)(3)
corporation is not permitted to participate in political campaigns. Such
participation is limited to providing nonpartisan voter education. Most
organizations should refrain from all political campaigns and attempts
to legislate or first consult a tax attorney. Generally, such activities
will invalidate a tax exemption.
C. PART III. TECHNICAL REQUIREMENTS
Line 1 requires the corporation to state if it is filing the application
within 15 months. If “yes” (as it should be), go to line 8.
Lines 2 through 7 apply to an organization that files for a tax exemption
under section 501(c)(3) more than 15 months after formation. By completing
these lines, the organization is attempting to get relief from the rule
that the excessive delay in filing requires the corporation to be limited
to private foundation status, even if it otherwise qualifies as a public
charity.
Line 8 requires the corporation to state whether or not it is a public
foundation. If the answer is “no” (because it is seeking public
charity status), the corporation skips to line 10. If the answer is “yes,”
the corporation goes to line 9.
Line 9 requires that the corporation must state whether or not it is
a private operating foundation (one that conducts exempt activities as
opposed to one which merely distributes money to other exempt organizations).
The corporation then goes to Part 4.
Line 10 requires a corporation seeking to be a private foundation to
check which of the boxes best fits why it should be so classified. If the
organization is seeking public charity status (church, school, hospital,
medical research organization, orsupport organization) for other tax-exempt
organizations, it must complete special schedules A, B, C or D, respectively.
Most 501(c)(3) organizations are not formed for such purposes and do not
have to complete any additional schedules in order to receive tax exempt
status as a public charity.
Line 10, box h is for organizations which qualify under the public support
test.
Line 10, box i pertains to those organizations which satisfy the general
support test.
Line 10, box j applies to those organizations which believe they qualify
under either the public support or general support test but are unsure
which one. By checking this box, the organization leaves it to the IRS
to apply both tests and grant the exemption if either test is met.
If boxes a through f are marked, the corporation then goes to question
15. If box g is marked, the corporation goes to Line 12. If either box
h, i or j is marked, the corporation goes to Line 11.
Line 11 requires the organization to state whether or not it is seeking
a definitive ruling or an advance ruling. A definitive ruling is a final
statement of whether the corporation qualifies henceforth as a public charity
or as a private foundation. To receive a definitive statement, the corporation
must have been in existence for at least eight months and have received
sufficient support during that time for the IRS to make its decision. Generally,
a new corporation will not have enough support for several years for the
IRS to issue a definitive ruling. In such an event, the IRS will issue
an advance ruling, even though a definitive ruling had been requested.
The definitive ruling will only be issued when the IRS has sufficient information
to make a determination on the organization’s status.
An advance ruling is a temporary ruling by the IRS of whether the corporation
qualifies as a private foundation or a public charity. Any new corporation
in existence for less than eight months before filing for the application
is limited and can only request the advance ruling. The IRS usually only
grants advanceruling unless the organization has a great many financial
records. Therefore, most organizations should simply apply for the advance
ruling. The IRS will look at the submitted financial information. Then
it usually grants an advance ruling for a public charity when it appears
that the anticipated sources of support qualify the corporation as a public
charity. At the end of a 5-year period, the IRS will review the financial
records of the corporation. If the public support over this period satisfies
either of the public charity support tests, the corporation will receive
a definitive ruling to that effect. If the public support received by the
corporation fails both of the public support tests, the corporation will
be classified as a private foundation and have to pay a 2% excise tax on
its investment income for those years. The advance ruling is sought by
submitting Form 872-C.
Line 12 requires that any unusual grants be disclosed at this time.
The purpose of disclosing unusual grants is such grants are not used in
calculating total or public support under the support tests for public
charities.
Line 13 is completed only by a corporation that is seeking a definitive
ruling under the public support test. If the corporation is seeking an
advance ruling instead (which most corporations should seek), this line
is left blank.
Line 14 is completed by a corporation which is only seeking a definitive
ruling under the general support test. If the corporation is seeking an
advance ruling instead (which most corporations should seek), this line
is left blank.
On Line 15 each question must be answered with a truthful “yes”
or “no” concerning the applicant. If any question is answered
“yes,” the appropriate schedule must also be attached. Generally,
most nonprofit corporations which will be formed using this book will answer
“no” to all of the questions. The possible exception would be
a nonprofit corporation that is going to act as a private operating foundation.
Such a corporation will have to complete Schedule E.
make its determination of whether or not the corporation should receive
a tax exemption. There will be no hard financial data for the newly formed
corporations. The corporation can submit projected financial data, and
the IRS will base its determination on that data.
Instructions for completing Part 4 are covered in Form 1023. The point
to remember in completing Part 4 is that although the information is an
estimate, it must be reasonable. If reasonable, the IRS will base a determination
upon this information.
Another point to bear in mind when completing this application is that
if the organization is not shown to meet the minimum support standards
for a public charity, the application to receive a tax exemption as a public
charity will be denied. Should denial occur, the group should consider
a plan to increase projected fund-raising activities to meet the minimums
or plan to apply for tax exemption as a private operating foundation. Obtain
IRS Publication 558 from the IRS by calling 1-800-TAX FORM.
Exempt Status for Your Organization” and Package 1023 “Application
for Recognition for Exemption” are available from the U. S. Government
Printing Office in Washington, D. C. or through the IRS. Forms that follow
herein are:
1.Form 8718 “User Fee for Exempt Organization Determination Letter
Request”
2.Form SS-4 “Application for Employer Identification Number”
No corporation can exist without filing articles. The articles are filed
with the secretary of state of the state in which the corporation is being
formed. Out-of-state corporations (called foreign corporations) are also
required to register with the secretary of state so their operations can
be monitored.
Each state has its own requirements concerning the contents of the articles
of incorporation for a corporation formed under its laws. The articles
of incorporation used in this book are designed to meet the requirements
of all states. If the articles are rejected in a particular state because
of some recent change, the user will be told what provision needs to be
changed, and the change will be easy to incorporate in the articles which
can then be refiled.
The purpose of this book is to aid the user in forming a nonprofit corporation
inexpensively. The normal cost of attorney fees for an incorporation is
from $500 to several thousand dollars. Therefore, even if some minor retyping
or additions to the articles are needed, the cost savings makes it worthwhile.
that does not violate state law. The reason thecorporation might want certain
matters in the articles rather than the bylaws is that the articles cannot
easily be amended. Most articles, however, contain only the bare basics
required under state law. All states require the articles to contain the
following minimum information:
name of a proposed corporation must not be so similar to an existing corporation
as to be confusing. Should that happen, the new corporation can be sued
for trade infringement. To avoid that confusion, unless absolutely sure
that no other corporation has a similar name, the incorporator should contact
the secretary of state’s office and search for the name. Sometimes it is
free, but usually the secretary of state will charge for a name search
and will for a fee reserve the proposed name for the new corporation, if
available.
In each state there are attorney service companies located in the state’s
capital that will do the name search, reservation and file the articles
for a slight fee (usually $50). This is a bargain when the incorporator
does not live near the secretary of state’s office. The attorney service
companies are listed in the phone book for the state capital.
Previously, a corporation had to state what specific type of business it
was going to do. Today, most states will accepta simple statement that
the corporation is formed to do any business which is legal and in furtherance
of its stated nonprofit goals.
state to receive process (accept service of a complaint and legal notification
of all orders). Usually this is no problem because the shareholders live
in the state and one of them agrees to be the resident agent. Most states,
such as California, require the articles to name only the agent and give
his address.
acceptance of the appointment. For states that require the agent to sign
an acceptance there is a general acceptance form for the notification.
Every corporation should file an acceptance of appointment with their articles.
If the acceptance is not required under state law, the secretary of state
will simply return it. New York has a special requirement that the incorporator
appoint the secretary of state the agent for service of process. Following
this chapter are sample articles for a New York corporation.
process. Persons or entities that own a membership certificate are members
of the corporation as long as they pay their annual dues. Only those persons
and entities who possess membership certificates and are valid members
of the corporationcan participate in the management of the corporation.
Determination of the type of membership certificate which the corporation
will adopt is made at the first meeting of directors.
listed in the articles. The State Laws chapter lists the minimum number
of directors that a nonprofit corporation formed in that state must have.
existence. Unlike a partnership or an association, it can survive the death
of its owners. The articles in this book make it clear that the corporation
is intended to have perpetual existence and survive the death of all members.
corporate meetings and contains sample minutes. The more removed the corporate
management is from that of a normal corporation, the greater the likelihood
of a successful creditor challenge that the business is not truly a nonprofit
corporation but is the alter ego of its members. In that circumstance,
the corporation will be treated as a partnership, and the members will
become individually and personally liable for the debts of the non-profit
corporation.
of Columbia and Arkansas are the others) where the incorporator does not
file the articles directly with the secretary of state or the department
of corporations. Instead, the incorporator files the articles and two copies
with the probate judge of the county where the corporation will have its
registered office. The judge then issues a certificate of incorporation
to the incorporators. Within 10 days of filing of the articles, the probate
judge sends the original articles to the secretary of state.
ALASKA
DEPARTMENT OF COMMERCE
CORPORATIONS DIVISION
Pouch D
Juneau, AK 99811
ARIZONA
CORPORATIONS COMMISSION
PHOENIX, AZ 85007
ARKANSAS. Arkansas is rare. It is one of three jurisdictions (District
of Columbia and Arizona are the others) where the incorporator does not
file the articles directly with the secretary of state or the department
of corporations. Instead, the incorporator files the articles and two copies
with the circuit court of the county where the corporation will have its
registered office. The judge of the court then issues an approval of the
articles of incorporation. The judge sends the approval and two copies
of the articles to the secretary of state for filing.
CALIFORNIA
SECRETARY OF STATE
SACRAMENTO, CA 95814
COLORADO
SECRETARY OF STATE
DENVER, CO 80302
CONNECTICUT
SECRETARY OF STATE
HARTFORD, CT 06115
DELAWARE
SECRETARY OF STATE
DOVER, DE 19903
DISTRICT OF COLUMBIA is different. It is one of three jurisdictions
(Alabama and Arkansas are the others) where the incorporator does not file
the articles directly with the secretary of state or the department of
corporations. Instead, the incorporator files the articles and a copy with
the mayor’s office of the District of Columbia. The mayor then issues a
certificate of incorporation if the articles are in order.
END OF SAMPLE VIEW
III. BASIC ARTICLES FOR THE FOLLOWING STATES
ALABAMA
ALASKA
ARIZONA
ARKANSAS
COLORADO
FLORIDA
GEORGIA
HAWAII
IDAHO
IOWA
KANSAS
KENTUCKY
MAINE
MARYLAND
MISSOURI
MISSISSIPP
INEBRASKA
NEW MEXICO
NEVADA
TEXAS
UTAH
N. DAKOTA
OHIO
RHODE ISLANDVERMONT
VIRGINIA
WASHINGTON
WEST VIRGINIA
WISCONSIN
WYOMING
Most of the states have adopted either the Model Nonprofit Corporation
Law or the Revised Model Nonprofit Law. As a result the following basic
set of articles can be used in each of the foregoing states. The remaining
states have either not adopted the above laws or have imposed their own
additional requirements and are therefore treated separately.
NOTE: Vermont calls its formation “Articles of Association”
Note: Arizona has a special requirement under section 10-128 that a
“Certificate of Disclosure” accompany the Articles of Incorporation.
This “Certificate of Disclosure” applies to the corporation’s
directors and officers and any person or entity which has 10% or more membership
or beneficial or proprietary interest in the corporation. The disclosure
statement is required to list with particularity any of the following matters
that relate to any of the above persons or entities:
1. All felony convictions involving security violations.
2. Any criminal conviction or civil judgments for consumer fraud.
3. Any criminal convictions or civil judgments for antitrust Activities.
4. Any convictions for theft.
5. Any civil or criminal judgments for restraint of trade for the previous
seven years.
6. Any other federal injunctions, federal judgments or decrees of any
type within the last seven years.
A “Certificate of Disclosure” for use in Arkansas follows
this first set of basic articles.
FOR
except for the Second Article. Each of the state’s have their own requirements
for the Second Article.
Minnesota requires that the Second Article state that the corporation
is formed pursuant to Chapter 317A of the Minnesota Nonprofit Corporation
Act.
North Carolina requires that the Second Article state that the corporation
was formed after the effective date of the North Carolina Nonprofit Corporation
Act.
Pennsylvania requires that the Second Article state that the corporation
was incorporated under the Pennsylvania Nonprofit Corporation Law of 1988.
formed under its Nonprofit Public Benefit Corporation Law and is formed
for either or both public or charitable purposes. California also requires
that if an existing corporation is being formed it must have the name of
the organization listed.
FOR
OKLAHOMA
law. These states, however, call their formation documents “Certificates
of Incorporation” rather than “Articles of Incorporation”
and require a more detailed statement of membership qualifications and
rights. the basic “Certificate of Incorporation” that follows
will satisfy the filing requirements for these states.
BASIC CERTIFICATE NOT PRESENTED FOR PREVIEW
FOR
DAKOTA
revised nonprofit corporation law. Even so, they require a more detailed
statement of membership qualifications and rights in their articles than
the general set of articles for the first set of states (Arizona through
Vermont). The basic set that follows will satisfy the filing requirements
for the District of Columbia and South Dakota.
These articles can, if the incorporator so elects, also be used for
the states covered in the first set (Arizona through Vermont). This set
of articles should not be used for those states, however, if it is foreseeable
that in the future changes in membership qualifications or rights might
occur. In such an event these articles should not be used for those states
because implementing those changes would require the filing an amendment
to the articles. Remember, anything placed into the articles can only be
changed by filing an amendment to the articles. To be flexible in operations,
a corporation should only put in the articles that information required
under state law plus whatever other information it deems vital to the operation
of the corporation. All other matters can be addressed in the bylaws.
FOR ILLINOIS
which the other states do not require. Illinois requires a social club
to state that it will obey all liquor laws. The corporation must state
if it or is not a condominium or cooperative. An optional provision for
release of liability for directors is also permissible.
FOR
law. These states, however, require a more detailed statement of membership
qualifications and rights along with a statement of corporation’s property
and a general financing scheme. The basic articles of incorporation which
follows will satisfy the filing requirements for these states.
These articles can also be used for New Hampshire and Louisiana which
requires the statement of memberships rights and qualifications but does
not require a statement of corporation’s property or financing scheme.
Note: Most new corporations will not have any property upon formation,
and so none will be listed. The financing scheme is only required in Michigan.
The financing scheme must support the corporation’s nonprofit purpose.
FOR
and Oregon. These states have a requirement that the corporation actually
state in the articles whether it is being formed as a public benefit, mutual
benefit or religious corporation. Most states do not require a nonprofit
corporation to be limited to just public benefit (activities to benefit
the public), mutual benefit (activities to benefits its members) or religious
purposes and allow them to engage in activities to further any or all of
the purposes. The incorporators must choose one of the selections under
the second article that best defines its purpose. The filing fee for South
Carolina is $25.00
FOR
is presented separately. New York divides its nonprofit corporations into
four types. Type A corporations engage in activities for the benefit of
its members. Type B corporations are charitable organizations for educational,
scientific, literary or cultural purposes. Type C corporations perform
business activities. Type D corporations are federal tax exempt corporations
that are exempt under some other New York Law. There are separate laws
for incorporating religious organizations under the New York Religious
Corporations Law. The certificate in this book assumes that the corporation
will seek a 501(c)(3) tax exemption as a charitable, educational, scientific
or literary corporation: the corporation will be a New York Type B corporation.
If an existing association is being incorporated, the incorporators
must also file an affidavit which states that they constitute the majority
of the members on the committee of the existing organization that was authorized
to incorporate the association.
New York also requires types B and C nonprofit corporations to get the
approval of a New York Supreme Court judge (the equivalent of a superior
court or district court judge in other states) before the secretary of
state can file the certificate of incorporation.
Moreover, the New York Attorney General must approve certain nonprofit
corporations in accordance with H-PCL sec. 404. To receive this approval,
send the certificate to the New York Attorney General office for signature:
New York State Department of Law
Charities Bureau
120 Broadway
New York, NY 10271
(212) 341-2000
Once the certificate is signed and returned, it can be filed. The approval
is routine; it notifies the New York Attorney General of the existence
of the corporation.
PREVIEW
FOR
nonprofit corporation a “Charter of Incorporation.” The following
is a basic “Charter of Incorporation” for a corporation formed
under Tennessee law. Tennessee law requires that the charter actually state
whether the corporation is being formed as a public benefit, mutual benefit
or religious corporation. Most states do not have this requirement because
it limits the activities of the corporation to just activities involving
only the furthering of a public benefit (activities to benefit the public),
mutual benefit (activities to benefit its members) or religious purposes.
Most states permit their nonprofit corporations to engage in any activities
that would further any or all of the above purposes. The incorporators
for a Tennessee corporation must choose one of the selections under the
second article that best defines its purpose.
BASIC CHARTER NOT PRESNTED FOR PREVIEW
and operation of the corporation. At the first meeting of directors, when
the corporation is formed, the bylaws are adopted by the incorporator.
While the articles of incorporation establish the governing structure of
the corporation, the bylaws regulate the management of the business and
conduct of the corporation The bylaws prescribe the rights and duties of
the members of the corporation towards the corporation and among themselves
in relation to its management and its affairs.
In its decision Casady v. Modern Metal & Spinning Mfg. (1961) 188
Cal.App.2d 728, the California Court of Appeals expressed the position
of most states when it stated that bylaws are to be construed as a contract
between the shareholders (members of a nonprofit corporation) and the corporation
and also as a contract between the shareholders or members.
Bylaws attempt to resolve the many areas of potential conflict within
a corporation. Bylaws assign duties and responsibilities. Bylaws can be
general in nature or closely tailored to the needs and desires of the members.
Most bylaws contain most of the issues covered in the sample bylaws following
this chapter.
Bylaws are not set in concrete. Members of a nonprofit corporation can
alter or amend the bylaws by simply holding ameeting and voting chapter.
The purpose of bylaws is to establish the procedures for the daily administration
and management of the corporation. As the corporation develops, the bylaws
can be amended to keep pace with new requirements.
law recognized that a fundamental element of corporate law was that a corporation
has the inherent right to make bylaws, but the bylaws, old or amended,
cannot conflict with federal or state laws, or the articles of incorporation.
Bylaws always must be reasonable under the overall circumstances of each
situation they address.
While a corporation has the right to adopt bylaws, it is not required
to do so. Yet should a corporation fail to adopt any bylaws, the authority
to perform those acts that are normally defined by the bylaws is vested
in the Board of Directors. The failure of a corporation to adopt bylaws
can have disastrous results. A court might find that a real corporation
was never truly intended to be created. The prime proof of the existence
of a corporation is the manner in which it operated. A business that acts
as a partnership will be treated as a partnership even though it is incorporated.
Not having bylaws is evidence to infer that a corporation really was never
intended to be created.
All things considered, there is no valid justification for a corporation
not to adopt bylaws. Not adopting bylaws may result in the corporation
losing its shield against personal liability forthe members. There just
is no reason to endure such a risk.
adopting the initial bylaws at the first meeting of directors. Most bylaws
are originally adopted by the incorporator at this meeting. In fact, the
minutes of the first meeting of directors that are contained in this book
call for the incorporator to adopt the original bylaws for the corporation.
The second method of adopting bylaws is at a meeting of members wherein
a majority of the members approve the bylaws. The third method of adopting
or changing bylaws is at a meeting of the board of directors wherein a
majority of the board adopts or repeals the bylaws.
There are some bylaws, however, that can only be changed by the members.
A bylaw changing the number of directors for a corporation can only be
changed by a majority vote of the members. Likewise, members alone determine
if a board of directors can be changed from a variable board to a fixed
board or vice versa.
The articles of incorporation may require more than a simple majority
of votes to approve any change of the bylaws. In addition, the articles
may restrict or eliminate the power of the board of directors to adopt,
alter, amend or in any way affect the bylaws.
The original or a copy of the bylaws that are certified to be a true
copy executed by the corporate secretary or assistant secretary is prima
facie evidence of the adoption of those bylaws and the matters stated in
them.
a way as to sustain their validity. When a bylaw is subject to different
constructions, the one most in harmony and accordance with state law is
the one given effect.
A bylaw cannot overrule or violate the articles of a corporation. For
that reason, all bylaws must be construed in such a manner as not to violate
the articles. Any bylaw that can not be so construed is automatically rendered
void and invalid by operation of law.
Unless a bylaw specifically states that it is intended to operate retroactively,
it will not do so. In addition, a bylaw cannot operate retroactively if
by doing so it unfairly and unreasonably violates the rights of members.
Example: If the bylaw changes the number of directors. It cannot be applied
retroactively because it would invalidate every past action taken by the
board.
the members. Just as the members can enact bylaws for their protection,
they can waive that protection without having to repeal the bylaws in question.
Example: A situation occurs for the benefit of the corporation, and the
officers act in the best interests of the company. The members find they
must ratify the conduct of the business but that the ratification will
specifically and intentionally violate one or more of the bylaws. Without
suchan express waiver of the bylaws, the board of directors and the officers
will not have the authority to complete the anticipated transaction.
Ratification of the proposed or completed act must be done by the same
number of members needed to adopt or repeal a bylaw. Example: A bylaw requires
the president to get board approval before executing a contract on behalf
of the corporation. Without board approval, the president executes a favorable
contract for the corporation. Unless a majority of the members ratify the
president’s conduct that was undertaken in violation of the bylaws, the
contract is invalid.
as amended, are required to be kept at its principal executive office in
every state where it does business.
The bylaws are required to be kept open for inspection by the members
at all reasonable times during regular business hours. When the principal
place of business is outside the state of incorporation, most states require
that the corporation furnish copies of the bylaws as amended to the members
upon request.
on the following pages.
the Corporation, shall be in the City of or such other place as designated
by resolution of the Board of Directors of the Corporation.
Section 2. OTHER OFFICES. The Board of Directors may also elect to open
other offices of the Corporation both within and without the State of to
conduct the business of the Corporation.
Member shall hold more than one membership in the Corporation. All Members
shall have the same rights, privileges, restrictions and conditions. Any
person, partnership, corporation,association or other legal entity can
be a Member of the Corporation. There is no limitation on the number of
Members of the Corporation. Membership interests in the Corporation are
not transferable.
Section 2. MEMBERSHIP DUES. Anyone wishing to become a Member of the
Corporation shall pay an application fee of . Upon admission to the Corporation,
each Member shall pay annual dues to the Corporation of .
Section 3. MEMBERSHIP BOOK. The Corporation shall maintain a membership
book listing the name and address of each corporate Member. The book shall
also contain the date the membership of any Member in the Corporation ceases.
The membership book will be kept in the principal place of business of
the Corporation.
Section 4. NONLIABILITY OF MEMBERS. No Member by virtue of just being
a Member of the Corporation shall be liable for the debts, liabilities
or obligations of the Corporation.
Section 5. TERMINATION OF MEMBERSHIP. A Member’s membership interest
in the Corporation shall terminate on the occurrence of any of the following
events:
a.Upon receipt by an Officer or Director of a Member’s written resignation
of membership in the Corporation,
b. Upon death of a Member if a natural person or the dissolution of
the Member if a corporation, partnership or association,
c. Upon the failure of a Member to pay membership dues bythe due date.
Termination of membership for non-payment of dues occurs automatically
without notice being given by the Corporation. Membership may be reinstated
in full if delinquent dues are paid within thirty (30) days of the due
date, or
d. If, after being given an opportunity to be heard, the Board of Directors
for the Corporation finds that a Member has engaged in conduct that violates
the purposes for which the Corporation was formed, or has breached the
duty of good faith owed to the Corporation to such a degree that the Member’s
membership interest in the Corporation should be terminated. In the event
of a termination, the Member so terminated will receive a pro-rated refund
of dues paid to the Corporation.
Section 6. ANNUAL MEETINGS. At least one meeting of the Members will
be held each year. This annual meeting will be held at the principal office
of the Corporation designated in Article 1 or such other place as chosen
by the Board of Directors.
The annual meeting of Members shall be held on a date and at a time
designated by the Board of Directors beginning in the year 199___. The
purpose of the annual meeting will be to transact any and all business
of the Corporation including but not limited to the election of the Board
of Directors and the ratification of the acts of the Board of Directors
undertaken since the last meeting of members.
Section 7. SPECIAL MEETINGS. Special meetings of the Membersmay be called
for any purpose or purposes by:
a. A majority of the Board of Directors, or
b. A written request of Members owning a majority of the membership
certificates of the Corporation.
All requests for a special meeting of Members must state the reason
for which the special meeting of Members is being sought. Requests to have
a special meeting of Members will be considered served on the Board of
Directors of the Corporation if they are given to any member of the Board
of Directors or any Officer of the Corporation by either personal delivery
or certified mail.
Upon receipt of a valid request for a special meeting by a Member, the
Board of Directors will schedule a special meeting at a date not less than
thirty (30) days nor no more than sixty (60) days from the receipt of the
request. The Board of Directors shall give notice of the special meetings
to all members entitled to vote.
If the Board of Directors fails to give the notice of the special meeting,
the person or persons making the request for the special meeting may set
the date and time of the special meeting and give the notice themselves.
Section 8. NOTICES OF MEETINGS. Notices of all Member meetings shall
be in writing and must be signed by the President, Vice President or Secretary
of the Corporation. All notices of a Members meeting must contain a statement
about the purpose for which the meeting is to be called and any special
business which is to be conducted therein. The notice must also state the
date, time andplace of the meeting. The notice must be either delivered
or mailed to each Member at least fifteen (15) days before the meeting.
If the notice is mailed, it must be sent to the last known address of the
Member as it appears on the Corporation’s books. Upon such mailing the
service shall be deemed complete. If the Corporation does not have an address
of a Member or knows that the address it has is no longer valid, it shall
give notice to that Member by publishing it at least once in a newspaper
of general circulation in the county of the Corporation’s principal office.
Personal delivery of a notice to any officer of a corporation, a member
of an association, or any partner of a partnership which is a Member of
this corporation shall constitute valid service on the Member corporation,
partnership or association.
The officer of the Corporation giving notice of the meeting shall file
a declaration with the minutes of the Corporation stating that notice of
the meeting has been duly given to all Members entitled to vote.
If a meeting is adjourned after being properly called for less than
thirty (30) days, no new notice need be given to the Members. If a meeting
is adjourned for more than thirty (30) days, a new notice of the date,
time and place or the resumptions of the meeting must be given to the Members.
Section 9. BUSINESS AT THE MEETING. At a special meeting of Members,
the business transacted therein shall be limited to that which is stated
in the notice of the meeting unless all of the Corporation’s Members are
present in person or by proxy and allagree to additional business being
conducted.
Section 10. QUORUM FOR MEETING. If Members representing a majority of
the corporate membership certificates issued, outstanding and entitled
to vote are present either in person or by proxy, a quorum shall exist
for conducting the meeting. If, however, a quorum does not exist either
in person or by proxy, a valid meeting cannot be held.
If a quorum is present when the meeting is called, the Members may continue
to hold the meeting and transact business until adjournment, even if some
Members leave so that a quorum is no longer present, provided a majority
of members who constituted the initial quorum still remain.
Section 11. MAJORITY RULES. At a duly called meeting with a present
quorum, the vote of Members holding a majority of the membership certificates
of the Corporation, either in person or by proxy, shall determine the passage
of any corporate resolution or other business matter unless either state
law or the Articles of Incorporation require a different percentage of
vote.
Section 12. RECORDS DATE. Only those persons or entities who are shown
to be the owners of corporate stock in the records of the Corporation on
the day of any meeting of Members or such other day as fixed by the Board
of Directors shall be entitled to vote.
Section 13. PROXIES. At any Member meeting, a Member may be represented
by a person or persons to vote for the Member. A proxy must be in writing
and designate under what terms the personholding the proxy may vote. A
proxy shall not be valid for more than ninety (90) days after the date
of its execution unless the Member executing it specifies the time for
which it will last, but in no event shall it remain in force for more than
two years from the date of its execution. Once duly created, a proxy shall
remain in effect until it expires, is revoked or another proxy is subsequently
given to another person.
Section 14. ACTION TAKEN WITHOUT A MEETING. Except for the election
of Directors, Members can without a meeting undertake any business that
would otherwise require a meeting if authorized by the written consent
of Members holding a majority of voting power, unless state law or the
Articles of Incorporation require a higher voting percentage.
Section 15. CONSENTS TO MEETINGS. The actions undertaken at a meeting
of Members, that was not properly called and noticed shall nevertheless
be valid if:
a. A quorum was present either in person or proxy, and
b. Each of the Members entitled to vote and who were not present in
person or by proxy sign a written waiver of notice or a consent to the
holding of such meeting and the approval of the actions taken therein.
All such waivers and consents must be filed with the corporate books
and made a part of the minutes of the corporate meeting therein. A Member’s
attendance of a meeting which was not properly called and noticed shall
constitute a waiver of notice unless anobjection is made on the record
at the meeting.
Section 16. CONDUCT OF MEETING. The President, if present and if not
then the Vice President, shall call a meeting of Members together and preside
over the meeting as the Chairman. If neither the President or the Vice
President are present, the Members shall appoint a person to serve as the
Chairman. The Secretary of the Corporation, if present and if not a person
chosen by the Members, shall serve as the secretary of the meeting of Members.
its Board of Directors shall be . All Directors shall be of legal age and
at least one Director shall be an American citizen. The Directors shall
be elected at the annual meeting of Members except where a vacancy is filled
pursuant to Section 4 below. Each Director shall hold office until a successor
is elected or appointed. Directors do not need to be Members of the Corporation.
Section 2. STANDARD OF CARE. Each Director shall perform his duties,
including those of being a Member on any corporate board, in good faith.
Each Director shall execute all duties through the use of the standard
as to what in the Director’s opinion is in the best interests of the Corporation.
In making all decisions a Director shall utilize such reasonable care and
inquiry as a reasonably prudent person in a like situation would employ.
Section 3. VACANCIES ON THE BOARD. Vacancies on the Board andnew positions
created by increasing the number of Directors may be filled by a vote of
the majority of the remaining Directors even though they may constitute
less than a majority of the full Board.
A vacancy on the Board shall be deemed to exist upon the death, resignation,
or removal of any Director, an increase in the number of Directors or a
failure of the Members to fill all Board vacancies at any meeting of Members
to elect Directors.
The Members may elect Directors at any time to fill vacancies on the
Board which have not been filled by the Directors. Such election shall
require a consent of Members holding a majority of the Corporation’s voting
stock.
Section 4. REMOVAL OF DIRECTORS. The Members may at any time remove
the entire Board of Directors or any individual Director as provided by
these Bylaws. The remaining board, or the Members, at a special meeting,
may elect directors to fill such vacancies as may result.
Section 5. POWERS OF THE BOARD OF DIRECTORS. The Board of Directors,
unless closely held corporate status is elected, is responsible for the
management of the Corporation’s business and legal affairs. Towards this
end, the Board will exercise all of the corporate powers to do such lawful
acts which are not prohibited by either state law or the Articles of Incorporation.
meetings of the Board, both regular and special, pursuant to these Bylaws.
Such meetings may be held both within and withoutthe state of incorporation
as designated by the Board.
Section 7. ANNUAL MEETINGS. Regular meetings of the Board of Directors
may be held without notice at such time and place as set by the Board of
Directors.
The Board of Directors shall hold an annual meeting without notice immediately
after and at the same place as the annual meeting of members.
Regular non-annual meetings of the Board of Directors (weekly, monthly
or quarterly) shall be held at the corporate offices or such other place
as may be designated, as follows:
Time of the Meeting:
Date of the Meeting:
If the date for the regular meeting falls on a holiday or weekend, the
meeting shall be held on the next business day. No notice for a regular
meeting set in these Bylaws need be given.
Section 8. SPECIAL MEETINGS. Special meetings of the Board of Directors
may be called by the President or Secretary upon receipt of a written request
to do so from a Director. Written notice of Special Meetings shall be given
to each Director at least fifteen (15) days prior to the meeting. Such
notice shall be given either personally to each director or by mail.
If the notice is mailed, then it must be sent to the last known address
of the Director as it appears on the Corporation’s books. Upon such mailing
the service shall be deemed complete. If the Corporation does not have
an address of a Director or knows that the address it has is no longer
valid, it shall give noticeto that Director by publishing it at least once
in a newspaper of general circulation in the county of the Corporation’s
principal office.
The actions taken at a special meeting of Directors which was not properly
called and noticed will nonetheless be considered valid if:
a.All of the Directors are present at the meeting and sign a written
consent to the meeting and the actions taken thereunder, or
b. A majority of the Directors are present at the meeting and those
Directors not present sign a written consent to the meeting and the actions
taken thereunder. Such consent may be given either before or after the
meeting has been held.
If a Director attends a special meeting which was not properly called
and noticed without objecting upon arrival, that Director waives such notice
and the actions taken thereunder shall be as valid as if the meeting was
properly called.
Section 9. QUORUM. At any meeting of the Board of Directors no action
may be undertaken unless a quorum of Directors is present. A quorum of
Directors shall constitute a majority of duly elected and appointed Directors.
Unless state law specifies a higher percentage, every act or resolution
of the Board shall need only a majority vote of the quorum to pass.
Section 10. RESIGNATION. A Director may resign at any time effective
upon giving written notice to the Board of Directors.Upon notice of the
resignation the Board shall notify the members and either fill the vacancy
by appointment or schedule a special meeting of Members for the election
of a new Director.
Section 11. COMPENSATION OF DIRECTORS. The corporation shall pay any
expenses incurred by its Directors in attending any meeting of the Board.
In addition, the Directors may be paid a salary or a fixed amount for attending
the meeting as set by the Board. The receipt of any payment for services
rendered as a Director shall not prevent the person from serving the Corporation
in any other capacity and receiving compensation for such other work.
authority to create as it deems necessary committees of one or more Directors
to exercise the powers of the Board of Directors in specified areas of
the Corporation’s business and legal affairs. A committee so formed may
be given the power to affix the corporate seal to documents which it may
execute.
Section 13. COMMITTEE MINUTES. All committees created by the Board shall
keep regular and detailed records of their activities and make regular
reports to the full Board of Directors.
Section 14. CONSULTANTS. The Board of Directors have the authority to
appoint one or more persons to serve as consultants to the Board. Such
consultants perform such special assignments as delegated to them by the
President and furnish such consultations on such matters as requested by
the Board.
and Members must be in writing and given by personal delivery, by telegram
or by mail. If the notice is mailed, then it must be sent to the last known
address of the Director or Member as it appears on the Corporation’s books.
Upon such mailing the service shall be deemed complete. If the Corporation
does not have an address of a Director or Member or knows that the address
it has is no longer valid, it shall give notice to that Director or Member
by publishing it at least once in a newspaper of general circulation in
the county of the Corporation’s principal office.
Section 2. WAIVER OF NOTICE. If a person who is entitled to vote
at any meeting, be it a Members or Directors meeting, is not given such
a valid notice of the meeting, no action undertaken at such meeting will
be valid unless the person gives a valid waiver of notice. A waiver of
notice is accomplished by:
a. Being present at the meeting and either not objecting to the meeting
or entering oral consent to the meeting on the record, or
b. Executing a written waiver of notice for the meeting and the business
to be transacted therein.
Once a waiver of notice has been validly executed, the transaction undertaken
at the meeting, if a quorum was present, shall be as valid as if the meeting
had been properly called and noticed.
of the Corporation. The initial Officers of the Corporation shall be the
President, Vice President, Secretary and Treasurer. The Board may appoint
assistants to the above officers as it deems appropriate. Any person can
hold two or more offices unless precluded by state law. The election of
officers shall normally occur, except for the filling of vacancies, at
the annual meeting of Directors following the annual meeting of Members.
Section 2. OFFICERS’ SALARIES. The Board of Directors shall set by resolution
the salaries and compensation to be paid by the Corporation to the officers.
Section 3. OFFICERS’ TERM OF OFFICE. The term of office for the officers
of the Corporation shall continue to the their death, resignation or removal.
Any officer may be removed from office by the Board at any time by a majority
vote. Any vacancy in any office of the Corporation shall be filled by the
Board of Directors.
Any officer may resign at any time by giving written notice to the Board
of Directors. A resignation shall take effect on the date specified in
the notice unless the Board of Directors votes to have a sooner date and
removes the resigning officer prior to the effective date of the resignation.
END OF CHAPTER PREVIEW
a corporation is the issuance of the membership certificates. The issuance
of membership certificates actually creates the true corporate status.
Before membership certificates can be issued there must be a meeting of
the directors to authorize the corporation to issue a set amount of membership
certificates.
The first official meeting of the corporation is called either a “Special
Meeting of Directors” or more commonly the “First Meeting of
Directors.” It is a meeting of directors because there are no shareholders
at that time because the membership certificates have not yet been issued.
The meeting is called by the incorporators who adopt the corporate bylaws,
appoint the initial directors (if they are not named in the articles) and
resigns. After the resignation of the incorporator, the directors conduct
the meeting and sign a waiver of notice that permits the meeting to proceed.
of officers. The directors appoint the president, vice president, treasurer
and secretary along with any assistant officers. After their appointment,
the corporate officers assumetheir duties as specified in the bylaws.
The directors may also at that time fix the corporate salary for the
officers or (as is more usual) reserve the fixing of salaries to another
time. This reservation of time for setting the corporate salaries is usually
used in newly established corporations that need time and capital to get
in operation. The salary is later established once the corporation starts
business.
the corporation. This is an important detail because it is the actual issuance
of the membership certificates to members that completes the incorporation.
The membership certificate is the title document that the members possess
to evidence their ownership interest. The directors by approving the membership
certificates approve the form of the ownership documentation. Membership
certificates cannot be sold by the corporation until the form of the membership
certificates is approved.
C. AUTHORIZING BANK ACCOUNTS
The directors must authorize the president to open a corporate bank
account. Likewise, the directors authorize who may be the signatory on
the accounts. Usually, the directors permit the president and treasurer
to sign on the corporate accounts. The directors may authorize special
smaller accounts on which other agents may sign.
D. AUTHORIZING PRINCIPAL EXECUTIVE OFFICE
executive office for the corporation. Even so, the directors should adopt
a location where the principal executive office will be located at the
first meeting. It is at this location that the future director meetings
will be held unless changed by a corporate resolution or waiver.
by the directors. Therefore the directors approve the corporation’s issuance
of membership certificates pursuant to the state law at the first meeting.
The directors determine at this time the annual dues to be paid by a member
of the corporation.
The issuance of the membership certificates completes the corporation.
The ownership of a membership certificate makes the member and bestows
the rights of participation in the corporation.
This requirement was once required to prove corporate approval of a contract.
At one time, no corporate contract could be enforced unless it had the
corporate seal affixed to it.
Once the articles are filed, the corporate seal can be ordered from
most printing companies or attorney service firms for $10. All that is
needed to create the seal is the name of the corporation, its state of
incorporation and its date of incorporation. The cheapest corporate seal
is a rubber stamp. The traditional seal isa clamp-like device that crimps
a piece of paper and imprints the corporate name.
The following minutes call for the approval of a corporate seal if the
corporation decides to get a seal. When the seal is obtained, the seal’s
imprint should be placed in the clause.
of a fiscal year. A corporation can have any fiscal year. Since a nonprofit
corporation usually will not have to pay taxes, it is better to simply
use a calendar year as its fiscal year. The minutes for the first meeting
used in this book calls for a calendar year to be the fiscal year. If the
corporation does not want a calendar year, it can change that clause to
state the fiscal year as adopted before executing the minutes.
1. Waiver of Notice of Special Meeting of Board of Directors.
2. Action of Incorporator and Minutes of Special Meeting of the Board
of Directors.
NOT PRESENTED
or nonprofit corporation, is that its ownership is reflected by either
a stock or membership certificate. All of the rights and interests in a
corporation which a member in a nonprofit corporation may possess derives
from the fact that the member owns membership certificates in the corporation.
Not all nonprofit corporations actually issue a formal membership certificate.
Some rely instead on the receipt for the payment of annual dues as proof
of membership. Nevertheless, most nonprofit corporations do issue some
form of membership certificate.
A membership certificate operates as a title document, much in the same
vein as a deed is a title document to a piece of real property. A membership
certificate states on its face that a certain person or entity is to be
treated as owning and controlling the number of shares designated on the
membership certificate.
Control of a corporation is usually determined by a majority vote of
the outstanding membership certificates of the nonprofit corporation. Membership
can be issued as either voting or non-voting certificates; although most
often the certificates are of a voting nature. One important difference
between a membership certificate in a nonprofit corporation and a share
of stock in aregular for-profit corporation are the rights to share in
the corporation’s profits. In a nonprofit corporation, the members have
no right to receive any dividends from the corporation. On the other hand,
in a regular for-profit corporation such a right exists, and the stock
can be issued as either common stock (that is with ordinary rights) or
as preferred stock (with special rights, usually including guaranteed dividends,
special voting rights, or special conversion rights that turn the preferred
stock into common stock or bonds).
Following this chapter are general membership certificates for a nonprofit
corporation. Fancy engraved membership certificates can be purchased at
a nominal price from most print shops. For the normal, small nonprofit
corporation the membership certificate in this book is sufficient. All
that has to be done is for the membership certificate to be completed.
The issuance of the certificate is reflected on the membership certificate.
The membership certificate must be signed by both the president and secretary.
The certificate should be signed in blue ink to show that it is an original
membership certificate and not a copy.
Following this chapter also is a membership register for the corporation.
The membership register is important because it names the owner for each
membership certificate that is issued. It is from the membership register
that the members eligible to vote at member meetings are determined. Under
the Bylaws, only the registered members on a certain date before a members
meeting can exercise voting privileges, even though the person may no longerown
the membership.
Unlike a regular corporation, in most nonprofit corporations member-ship
certificates are not transferable. Membership certificates cannot be sold
nor will they pass by gift, devise or descent. Membership in a nonprofit
corporation is only dependent upon the payment of dues and the opening
of the corporate Bylaws. A nonprofit corporation cannot discriminate in
the admission of members. Hence the easiest way for anyone to become a
member is to join the corporation rather than try to purchase a membership
certificate or wait for the death of a member to inherit a certificate.
These forms follow:
1. Membership Certificate
2. Membership Register
of the corporation of the various acts that may be required to be performed
after the incorporation is completed. The officers will be familiar with
most of the acts herein that may have to be performed if they had previously
operated a business.
This chapter discusses the general requirements most often encountered
by a newly incorporated corporation. There is no way that this chapter
will be able to cover each item in detail. Consequently references are
made to the appropriate code sections when available.
Many of the post incorporation acts pertain to tax filings. The treasurer
and president should work closely with the corporation’s tax advisor to
established appropriate accounting procedures for the corporation. Some
matters can be handled by the corporation’s accountant or bookkeeper while
others can only be handled by the officers. An understanding of what is
expected and by whom is of great importance for the smooth operation of
the business.
of business regardless of whether the business is conducted in a profit
or nonprofit mode. Example: A state mayrequire anyone disposing of hazardous
waste to have a state license or permit. The fact that the company doing
the hauling may or may not be a nonprofit corporation is irrelevant. It
is important that the corporation obtain all the necessary licenses and
permits for the operation of its business in the state.
State permits are not transferable. If a partnership or association
that has the necessary permits and licenses to do business should form
a nonprofit corporation to continue the work, it would have to reapply
for new state licenses and permits in its own name. A corporation, regardless
of whether it is a profit or nonprofit entity, is still a legal entity
in its own right and is treated separate and apart from its members and
any business in which they might have previously been engaged.
parishes, cities and other governmental entities to raise revenue by taxing
corporations, even nonprofit corporations, doing business in their jurisdictional
area. Unlike a regular for-profit corporation, nonprofit corporations do
not have a city or county income tax imposed on them. A nonprofit corporation,
however, may be subject to a straight license fee for a permit to conduct
business in the city or county. A nonprofit corporation, like a regular
corporation, should always consider whether there is a city or county business
license required to operate. Such licenses would be required regardless
of whether the business is operated for profit or not.
federal employer’s identification number (EIN) from the IRS. The application
for an EIN is Form SS-4. Form SS-4 must be filed within seven days after
the first payment of earnings to an employee. There is no filing fee for
the form and the IRS will give the corporation an identification number
upon the filing . This identification number will be used on all tax returns.
Form SS-4 and the instructions for completing it are in the Tax Exemptions
chapter. The SS-4 must be filed with the application for a Federal Tax
Exemption if it has not been filed earlier.
income tax to the IRS . Corporations are required to make their estimated
payments to an authorized commercial bank depository or a Federal Reserve
Bank by the statutory payment dates. Accompanying the payment is Federal
Deposit Form 8109. Instructions for the estimated tax are provided on IRS
Form 1120-W (Worksheet) “Corporation Estimated Tax.”
If a nonprofit corporation has obtained a federal tax exemption under
IRS Section 501, it will be exempt from taxes on income derived from its
ordinary related business activities. For income unrelated to its normal
activities, called “unrelated business income,” it must pay taxes
and comply with the payment of the estimated tax. An example of unrelated
business income is anonprofit corporation formed to save the environment,
and it operates a hotel in New York City. The income for the hotel will
be taxed as ordinary income, but contributions and fund raising for the
environmental operations will not be taxed.
it does business. Therefore, if a nonprofit corporation does business in
a state that has a corporate tax, the corporation will be taxed unless
it is recognized as exempt under that state’s laws. Example: Nevada has
no corporate income tax, but California does have a corporate tax. A Nevada
nonprofit corporation does business in California. It must pay California
tax on that portion of its income derived from its California operations
unless it applies and receives an exemption from the State of California.
It is very easy for a nonprofit corporation to obtain tax-exempt status
for activities conducted in a state. Many states automatically grant that
tax-exempt status once it is granted by the IRS. Usually, the corporation
applies for state tax exemption at the same time as it files for incorporation.
It involves nothing more than filing of a notice certificate with the State
Tax Agency stating that a nonprofit corporation was formed. The state agency
then issues a tax exemption statement or certificate. A nonprofit corporation
will still have to pay state taxes on all unrelated business income.
located within the state. This tax is in addition to its income tax and
business license and sales and use taxes. To avoid this tax, some airlines
doing business in California actually fly to Las Vegas or Reno just to
park the aircraft so they will not be taxed in California. A corporation
should be aware of the personal property tax a state may charge on corporate
assets located in the state. Generally, nonprofit corporations are not
subject to personal property taxes, but each state may have exceptions
to this rule. Care should be taken to ascertain if any personal property
is taxed by any state in which the nonprofit corporation will do business.
personal property, it the corporation must determine if it needs to obtain
a sales-and-use tax permit. Many states do not require a nonprofit corporation
to obtain sales-and-use permits.
Some states, however, do require a nonprofit corporation selling personal
property to collect a sales tax. In these states, as with personal property
taxes the form of the business does not matter. As long as goods subject
to the tax are sold, sales tax must be charged.
officers and directors with the secretary of state. The state uses the
filing to stay aware of the corporation.The form is usually mailed to the
corporation each year. The corporation must then complete it and mail it
back usually with a small fee.
tax and social security tax from all employees’ salary. Instructions for
federal withholding are in IRS Circular E, “Employer’s Tax Guide.”
The corporation must have each employee complete the Employee’s Withholding
Allowance Certificate Form W-4.
The withheld income and social security taxes are deposited in an authorized
commercial bank depository or a Federal Reserve Bank along with a Federal
Deposit Form 8109.
An “Employer’s Quarterly Federal Tax Return” (Form 941) is
required to be filed by the corporation before the end of the month following
each quarter.
If the taxes are not withheld or paid, any person whose duty it is to
make the payments will be 100% liable for all the taxes. This can work
a manifest injustice but remains the law.
In states that have income taxes, such as California, there must be
state payroll withholding as well. It is important that the corporation
understand its tax obligations for each state in which it will operate.
week during the current or preceding calendar year, or has paid wages of
$1,500 or more during any calendar year is subjectto the Federal Unemployment
Tax (FUTA).
The corporation may receive credit against FUTA for taxes paid into
a state’s unemployment fund. The taxes are deposited in an authorized commercial
bank depository or a Federal Reserve Bank along with a Federal Deposit
Form 8109. An “Employers Annual Federal Unemployment Tax Return”
(Form 940) must be filed by the corporation by January 31 of each year.
More information can be obtained from the IRS’s “Employer’s Tax Guide.”
and disability insurance for employees. For unemployment insurance, the
employers must make annual contributions to a state fund based on a percentage
of the employee’s payroll for a year.
The disability coverage is paid by withholding from the employees’ wages.
Some states, like California, permit the employer to elect private disability
insurance covered under a state-approved voluntary disability program.
If such an election is made, the employees are not required to pay disability
taxes to the state.
for any injuries to a worker on the job regardless of any negligence by
either the employer or the employee. The employee, however, cannot sue
the employer for punitive damages regardless of how egregious the employer’s
conductwas in causing the injury.
The employer must either carry workers compensation insurance through
a state fund or carry it through an approved private insurance carrier.
In some states the employer may be permitted to be self-insured provided
the company considered large enough and stable enough to do so.
Failure to carry the insurance could be disastrous for a corporation.
An injured employee could sue the corporation for punitive damages; if
the insurance was in place, the suit could not be filed.
than its own, it must conform to the state’s requirements for filing a
fictitious name statement. Most states require anyone, even a corporation,
that does business in a name other than its own to file a fictitious name
statement with the county clerk.
The purpose of such a filing is to provide the public a means of identifying
the owner of the business in the event of litigation or any other need
to contact the owner. For example, assume that ABCD Nonprofit Corporation
operates a restaurant named Guido’s. A patron suffers food poisoning. The
patron reads the fictitious-name filings and finds the name of the owner
in the event the employees would not divulge it.
contact the state taxing agency at the address shown in theState Laws chapter
to determine any forms that must be filed to receive a state tax exemption.
Many states will not require any forms to be filed because they grant such
exemptions automatically to nonprofit corporations. Other states will grant
the exemption only after the corporation receives the federal tax exemption
and will retroactively apply the tax exemption.
Once the state tax exemption is obtained, the corporation should then
contact the local county tax agency to determine any forms must complete
to be exempt from local real property and personal property taxes. Such
exemptions are automatic once the state exemption is obtained. Any required
forms are merely information forms for the local taxing agency.
ARTICLES
that the corporation also give notice in general to the public to be properly
formed. The states that have these extra notice provisions are:
Arizona:The corporation must publish a Notice of Incorporation within
60 days of the filing of the articles in a paper of general circulation.
Delaware:The corporation must file the articles with county clerk where
the corporation’s registered office is located within 20 days of the filing
with the secretary of state.
Georgia:The corporation must publish a notice of filing of the articles
of incorporation four times in a paper of general circulation. Form A100
is to be filed with thesecretary of state to verify the filing.
Illinois:The corporation must file the articles with the county recorder
within 15 days of filing the articles.
Kansas:The corporation must file the articles with the registrar of
deeds where the corporation’s registered office is located within 20 days
of the filing with the secretary of state.
Kentucky:The corporation must file the articles with the county clerk
where the corporation will have its registered office.
Louisiana: The corporation must file the articles with the county clerk
where the corporation will have its registered office.
Mississippi:The corporation must file the articles with the county clerk
where the corporation will have its registered office. In addition, the
articles must be published in a newspaper for that county.
Nebraska:The corporation must file the articles with the county clerk
where the corporation will have its registered office. In addition, the
articles must be published in a newspaper for that county.
Nevada:The corporation must file the articles with county clerk where
the corporation’s registered office is located within 60 days of the filing
with the secretary of state.
North Carolina: The corporation must file the articles with county clerk
where the corporation’s registeredoffice is located within 60 days of the
filing with the secretary of state.
Pennsylvania: The corporation must file the articles with the clerk
of the Court of Common Pleas where the corporation’s registered office
will be located. In addition, the corporation must publish a notice of
the filing of the articles in two papers of general circulation.
W. Virginia: The corporation must file the articles with the county
clerk where the corporation will have its registered office.
For those states which require publication of a notice that the articles
have been filed, the following should be sufficient:
Notice: Articles of Incorporation have been filed on (insert date) with
the secretary of state of the State of (insert state) incorporating (insert
name) as a nonprofit corporation. The name and address of the registered
agent for the corporation is (insert name and address). The principal place
of business of the corporation shall be (insert address).
unless an amendment of the articles of incorporation is filed. Amending
the articles is different from amending the bylaws. The matters covered
in the articles are those items required by law to be stated. It is public
information readily available to anyone upon request. Bylaws are just the
internal procedures adopted for the operation of the company and thus can
be changed at any time by a majority vote of the directors. The provisions
in the bylaws are optional whereas certain provisions in the articles are
mandated by law in order to define the rights and privileges of the members.
Amendments of the articles take two forms. Amendments before membership
certificates are issued simply requires the filing of a certificate of
amendment. The certificate states that no membership certificates have
been issued and lists the changes to be made in the articles. Some states,
such as Nevada, require that a state approved form be used for the amendment
of the articles. Following this chapter is the form used in Nevada for
the amendment of the articles for a corporation before a membership certificate
is issued. In most states, however, no set form is used as long as the
basic information is imparted. Following this chapter also is a certificate
of amendment form for states which do not haveapproved forms, such as California.
Amendments to the articles after membership certificates are issued
requires both the holding of a special meeting of the members to approve
the amendment and the subsequent filing of the certificate of amendment.
Nevada and a few other states require their own approved forms be used
for a corporation who has issued stock. Following this chapter is the Nevada
form for a certificate of amendment. Most states do not require approved
forms to be used. Following this chapter also is a certificate of amendment
form for states such as California, that do not have approved forms for
amendments by a corporation that has issued stock.
For reference purposes the corporation amending the articles in the
following example is a California corporation.
Some states, such as Nevada, require the signatures to the certificate
to be notarized. Other states, such as California, simply require a declaration
under penalty of perjury that the certificate was properly executed. The
certificates to cover both eventualities contain both the declaration and
the notary statement.
These forms follow:
1. Certificate of Amendment, Shares Issued
2. Certificate of Amendment, No Shares Issued
3. Declaration of Amendment by Incorporators
FORMS NOR PRESENTED FOR PREVIEW
and a partnership is that a corporation must have annual and special meetings
both of the members and of the directors to approve the business operations
of a corporation. If a corporation does not comply with the statutory requirements
for a corporation, the members will not be shielded from personal liability
for the corporation’s debts. The law forbids commingling of corporate assets
with members’ assets and always requires the business to be conducted in
the corporate form. If the corporation acts like a partnership or sole
proprietorship, it will be treated as one and the members will be treated
as partners with a partner’s liability for the corporation’s debts.
To avoid liability for the corporate debts, the members only need make
sure that the corporation is run as a corporation. To do that, there must
be at least one annual meeting of members each year. At the meeting, the
directors are elected for the next year, and the acts taken the previous
year by the corporation are either approved or rejected. Following this
chapter are sample minutes for the annual meeting of members for a corporation.
Additional resolutions may be added as needed. These samples will meet
the yearly requirements for an annual meeting.
Following this chapter also are sample minutes for the annual meeting
of directors of a corporation. Unlike an annual meeting ofmembers, no notice
is needed for this meeting because the bylaws state on what date and time
the meeting is to be held. At this meeting the directors elect the officers
for the corporation for the next year and approve or disapprove the acts
taken by the officers for the previous year.
Special business of the corporation is required to be handled by a special
meeting of the board of directors. Such special business consists of items
like the purchase of real estate and borrowing money. Following this chapter
is the form for a special meeting of directors. For a completed sample
of a special meeting of directors see the “Certificates for Corporate
Resolutions” chapter approving the purchase of real property.
Special meetings of members can also be called when necessary such as
when the directors want specific approval for their actions.
These forms follow:
1. Waiver if Notice of Annual Meeting of Members
2. Minutes of Annual Meeting of Members
3. Minutes of Annual Meeting of Directors
4. Waiver of Notice of Special Meeting of Members
5. Minutes of the Special Meeting of Members
6. Waiver of Notice of Special Meeting of Directors
7. Minutes of Special Meeting of Directors
of the corporation that is bestowed upon them by the board of directors
and the corporate bylaws. Hence many businesses and third parties require
a certificate of corporate resolution executed by the corporate secretary
stating that the board of directors had expressly granted the officer the
power to execute a particular contract.
In order to get the certificate, the Board of Directors must hold a
meeting and vote a resolution to grant the officer the specific power to
do the intended act. Certificates of corporate resolutions are usually
required when a corporate officer seeks to borrow money for the corporation,
purchase property on credit for the corporation or lease property for the
corporation.
A corporation is not bound by any acts of an officer it did not give
the officer either express or implied authority to do. Thus third parties,
particularly landlords and lenders, will not enter contracts with a corporation
without first having a certificate of corporate resolution stating that
the corporation approves the officer’s execution of the contract.
Following this chapter are minutes of a special meeting of directors
authorizing the corporation to purchase a specific piece of real property
and a certificate of corporate resolution documenting that approval. The
basic form of these minutes and certificate can be used for any transaction
for which a certificateof corporate resolution is needed.
Nonprofit Corporation incorporated under the laws of the State of CALIFORNIA
, do hereby waive notice of the time, place and purpose of a special
meeting of the Board of Directors of the Corporation. The directors designate
the 25TH day of JUNE 2015 at 10:00 AM , as the time
and 1999 TRUXTUN, UKIAH, CALIFORNIA as the place of said meeting,
the purpose of said meeting being to do the following acts: vote as to
whether the corporation should execute a contract for the purchase of real
property and to transact such other business related to the above acts.
Dated: ________________
______________________________
______________________________
______________________________
______________________________
on JUNE 25, 2015 at 10.A.M. at 1999 TRUXTUN, UKIAH, CALIFORNIA
.
The Directors present at the meeting were JOAN A. DOE, MARK K. SMITH
and JOHN Q. JONES who together constituted a quorum, being a majority
of the authorized number of Directors of the corporation.
A waiver of notice for this Meeting was signed by JOAN A. DOE, MARK
K. SMITH and JOHN Q. JONES .
MARK K. SMITH served as the Chairman of the meeting and JOAN
A. DOE served as the Secretary of the meeting.
As the first matter of business, the Chairman stated that the Corporation
should consider the purchase of the real property described below.
Upon motion duly made, seconded and carried it was
RESOLVED that this Corporation purchase the real property hereinafter
described from GEORGE QUICK, HORACE EMMET, PETE D. HOWELL and BEATRIZ F.
HOWELL for a total sales price including fees and costs of $432,545.35.
RESOLVED FURTHER that the President and Secretary of this Corporation
be and they hereby are authorized and directed to execute and deliver all
documents and papersnecessary in connection therewith and to affix the
seal of the Corporation thereto.
The property covered by the sale is as follows:
Parcel 21 as numbered and designated upon Parcel Map of Minor Subdivision
No. 13-91, filed for record 1-28-92 in Map Case of the County Recorder’s
Office of Mendocino County, California.
RESOLVED FURTHER that the President and Secretary of this Corporation
be and they hereby are authorized and directed to execute and deliver all
documents and papers necessary in connection therewith, and to affix the
seal of the corporation thereto.
There being no further business to come before the meeting, on motion
duly made, seconded and carried, the meeting was adjourned.
Dated: JUNE 25, 2015
JOAN A DOE, Secretary
ABCDE
CORPORATION
organized under the General Corporation Law to PURCHASE AND OWN REAL
PROPERTY ,
WHEREAS the Articles of Incorporation and Bylaws of this corporation
expressly provide that the powers of the Corporation are to be exercised
by the Board of Directors, and
WHEREAS the Board of Directors deem it to be in the best interests of
the Corporation in the economical transaction of its business to PURCHASE
THE REAL PROPERTY DESCRIBED BELOW therefore be it
described from GEORGE QUICK, HORACE EBBET, PETE D. HOWELL and BEATRIZ F.
HOWELL for a total sales price including fees and costs of $432,545.35.
RESOLVED FURTHER that the President and Secretary of this Corporation
be, and they hereby are authorized and directed to execute and deliver
all and all documents and papers necessary in connection therewith, and
to affix the seal of the Corporation thereto.
The property covered by the sale is as follows:
Parcel 21 as numbered and designated upon Parcel Map of Minor Subdivision
No. 13-91, filed for record 1-28-92 in Map Case of the County Recorder’s
Office of Mendocino County, California.
RESOLVED FURTHER that the President and Secretary of this Corporation
be and they hereby are, authorized and directed to execute and deliver
all documents and papers necessary in connection therewith and to affix
the seal of the Corporation thereto.
and acting Secretary of ABCDE CORPORATION , a California
Corporation.
That the foregoing Resolution of the Board of Directors of ABCDE
CORPORATION was duly adopted by the Board of Directors of this Corporation
at a special meeting duly called and held on JUNE 25, 2015 at the
Corporation’s principal place of business in MENDOCINO County, CALIFORNIA
and that the resolution has neither been modified nor rescinded and
is on the date of this certificate in full force and effect.
IN WITNESS WHEREOF I have hereunder set my hand and affixed the seal
of the Corporation this 25TH day of JUNE 2015 .
JOAN A. DOE, Secretary
this book as its relates to states and their requirements to form a nonprofit
corporation. Neither this chapter nor this book is intended to replace
the need for reviewing a state’s nonprofit corporation law. The purpose
of this book is to help a person or group form a nonprofit corporation
easily and inexpensively and to explain how a nonprofit corporation operates.
The articles of incorporation presented in this book are a basic type
that meets the current requirements of the various state laws. Before using
the articles, the incorporator should review the state law to be assured
that additional requirements were not recently added to the contents of
articles of incorporation. Any such new requirements can be added as additional
provisions. Also any optional provisions which the incorporators may wish
to add to the articles can be typed in this section.
Many states provide, upon request, sample articles of incorporation
through their secretary of state’s office. These states are listed in this
chapter. An incorporator may request a copy of those basic articles. The
incorporator then has the option of using the articles presented in this
book, using the basic articles of the state or creating a set of his own
as long as the minimum content requirements of state law are included in
the articles.
A nonprofit corporation must have at least one director. Many states
require that there be at least three directors. If the corporation is going
to operate in more than one state, it must satisfy the minimum number of
directors for each state. As a practical matter, the number of directors
in the corporation and whether they are public officials or not is one
of the factors the IRS uses in determining whether the corporation is publicly
supported. Most states require the initial directors and their addresses
be listed in the articles. Some state require that the names and addresses
of the incorporators also be listed in the articles. The articles in this
book list both the names and addresses of the incorporators and initial
directors.
Several states have special requirements after the articles are filed
with the secretary of state. Some states require that after the articles
are filed the corporation record a copy of the articles in the county where
the corporation will have its principal executive office. Other states
require that the corporation publish a notice of incorporation in a paper
of general circulation after incorporation. The states having such requirements
are listed in this chapter. State law should also be reviewed to assure
that additional requirements have not been added or that other states have
not added new requirements.
ALABAMA
NONPROFIT CORPORATION LAW
TITLE 10, CHAPTER 3A
ARTICLES OF INCORPORATION
SAMPLE: NOT PROVIDED BY SECRETARY OF STATE
NAME: The name cannot be similar to another corporation, be it profit
or nonprofit. The name cannot indicate that the corporation is formed for
a purpose not stated or permitted under the articles.
WHERE TO FILE: Alabama is unique. Alabama, Arkansas and the District
of Columbia are the only jurisdictions in which the incorporator does not
file the articles directly with the secretary of state or the department
of corporations. Instead, the incorporator files the articles and two copies
with the probate judge of the county wherein the corporation will have
its registered office. The judge then issues a certificate of incorporation
to the incorporators. Within 10 days of the filing of the articles, the
probate judge sends the original articles to the secretary of state.
ANNUAL REPORT: The corporation must file an annual report by March 15
on a form provided by the secretary of state which states:
1. The corporate name and states in which it is operating,
2. The name and address of the registered agent,
3. A statement of the business in which the corporation has engaged
in since the last annual report was filed; and
4. The names and addresses of the corporate officers.
STATE TAX EXEMPTION: There is a state tax exemption. The exemption is
administered by:
Alabama Department of Revenue
Income Tax Division
Corporate Income Tax Section
P.O. Box 327310
Montgomery, AL 36132-7310
(205) 242-2000
REQUIREMENTS: To receive the tax exemption, the corporation must submit:
1. A copy of its articles and bylaws.
2. Financial statements for the corporations.
3. An affidavit that the corporation exists to perform nonprofit purposes
and how it will raise its money and how it will spend it.
4. A federal determination letter, if any. If a federal tax exemption
has been sought, a copy of Form 1023 can be submitted to meet the requirements
of item 3.
5. Religious, benevolent and educational nonprofit corporations are
exempted from the annual permit fee of $10 to $100.
ALASKA
NONPROFIT CORPORATION LAW
NONPROFIT CORPORATION ACT, SECTION 10.06-208
ARTICLES OF INCORPORATION
SAMPLE: PROVIDED BY SECRETARY OF STATE
NAME: The name cannot be similar to another corporation, be it profit
or nonprofit. The name cannot indicate that the corporation is formed for
a purpose not stated or permitted under the articles of incorporation.
WHERE TO FILE:
ALASKA DEPARTMENT OF COMMERCE
CORPORATIONS DIVISION
Pouch D
Juneau, AK 99811
(907) 465-2530
ANNUAL REPORT: The corporation must file an annual report by July 2
on a form provided by the secretary of state which states:
1. The corporate name and states in which it is operating,
2. The name and address of the registered agent,
3. A statement of the business in which the corporation has engaged
since the last annual report was filed,
4. The names and addresses of the corporate directors and officers,
and
5. A financial statement and description of assets.
STATE TAX EXEMPTION: There is a state tax exemption. The exemption is
administered by:
Alaska Department of Revenue
State Office Building
P.O. BOX SA
Juneau, AK 99811-0400
(907) 465-2372
REQUIREMENTS: State tax exemption is automatic upon receipt of federal
exemption. A copy of the federal determination letter must be submitted.
ARIZONA
NONPROFIT CORPORATION LAW
ARIZONA REVISED STATUTES, TITLE 10,
CORPORATIONS AND ASSOCIATIONS, 10-1002
ARTICLES OF INCORPORATION
SAMPLE: PROVIDED BY SECRETARY OF STATE
NAME: The name cannot be similar to another corporation, be it profit
or nonprofit. The name cannot indicate that the corporation is formed for
a purpose not stated or permitted under the articles.
Under section 10-1084, a certificate of disclosure regarding conduct
of officers, directors and incorporators must accompany the articles. This
statement must disclose all criminal felonyconvictions, convictions for
theft, antitrust, restraint of trade and injunction within seven years.
WHERE TO FILE:
ARIZONA CORPORATIONS COMMISSION
P.O. BOX 6019
Phoenix, AZ 85005
(602) 255-3135
ANNUAL REPORT: The corporation must file an annual report by April 15
or 15th day of the 4th month of the corporation’s fiscal year which states:
1. The corporate name and states in which it is operating,
2. The name and address of the registered agent;
3. A statement of the business in which the corporation has engaged
since the last annual report was filed,
4. The names and addresses of the corporate officers, and
5. Statement of disclosure regarding conduct of officers, directors
and incorporators. This statement must disclose all criminal felony convictions,
convictions for theft, antitrust, restraint of trade and injunction within
seven years.
STATE TAX EXEMPTION: There is a state tax exemption. The exemption is
administered by:
Arizona Department of Revenue
Corporate Income Tax Section
1600 Washington Avenue
Phoenix, AZ 85007
(602) 542-3345 ext. 116
REQUIREMENTS: Automatic upon receipt of federal exemption. Must submit
a copy of the federal determination letter along with copies of the articles
and bylaws.
AFTERWARDS: The corporation must publish a notice of incorporation within
60 days of the filing of the articles in a paper of general circulation.
ARKANSAS
Advantages of Incorporating 3,11
Federal Tax Exemption 37
Financial Grants and Donations 38
Limited Liability for Members 34
Afterwards 239
Annual Statement of Officers 19,243
Business Licenses 240
Fictitious Name Filings 19,246
Estimated Taxes 241,242
Payroll Withholding 20,244
Personal Property Taxes 242
Publication or Recording of the Articles 247
Sales and Use Taxes 243
State Tax Exemptions 247
State Licenses 239
Unemployment Tax 22,244
Unemployment Compensation 245
Worker’s Compensation 245
Amendment of the Articles 251
Articles of Incorporation 89
Agent for Service of Process .91
Contents 89
Definition 89
Directors 92
Meetings 92
Membership Certificate 91
Name 90
Purpose 90
Term 92
Where to File 93
Basic Articles for
Alabama, Alaska, Arizona, Arkansas,
Colorado, Florida, Georgia, Hawaii,
Idaho, Iowa, Kansas, Kentucky, Maine,
Maryland, Missouri, Mississippi,
Nebraska, New Mexico, Nevada, N. Dakota,
Ohio, Rhode Island, Texas, Utah, Vermont,
Virginia, Washington, W. Virginia, Wisconsin 102
California 124
District of Columbia, South Dakota 140
Illinois 149
Indiana, Louisiana, Massachusetts,
Michigan, New Hampshire 157
Minnesota, N. Carolina, Pennsylvania 115
Montana, Oregon 167
Basic Certificate of Incorporation for
Connecticut, Delaware, New Jersey,
Oklahoma, 131
New York 176
Basic Charter of Incorporation for
Tennessee 185
Bylaws 17,193
Authority to Adopt 194
Basic Set 198
How Adopted 195
Construction 196
Location 197
Waiver 196
Commonly Asked Questions 3
Are Employees Liable for Taxes 23
Are Directors Employees 21
How Long Does a Corporation Last 12
How Are Profits Taxed 11
Must State Taxes Be Paid 24
Proceeds from Dissolution 16
Tax Differences Between Association & Nonprofit Corporation 13
What Are Membership Certificates 14
What Are Corporate Powers 5
What Is a Corporate Kit 16
What Is a Corporation 4
What Is a Federal Identification Number 20
What Is a Nonprofit Corporation 4
What Is a Tax Year 21
What Is a Wage and State Statement 22
What Is an Annual Statement of Officers 19
What Is Dissolution of a Corporation 15
What Is Federal Unemployment Tax 22
What Is Payroll Withholding 20
What Is the Corporation’s Tax Return 23
What Is the Cost of Formation 12
What Is the First Meeting of Directors 18
Who Are Directors 7
Who Are Members 10
Who Are Officers 9
Who Is an Incorporator 6
Certificates of Corporate Resolutions 273
Corporate Meetings 259
Basic Minutes for Member’s Meeting 262
Basic Minutes for Directors’ Meeting 265
Incorporation 89
Choosing a Name 90
Preparing and Filing the Articles 89,93
Issuance of Membership Certificates 91,223
First Meeting of Directors 92,221
Meeting of Directors 221
Adoption of Membership Certificates 222
Authorizing Bank Accounts 222
Basic Minutes 226
Corporate Seal 223
Election of Officers 221
Fiscal Year 224
Principal Office 223
Membership Certificate 233
Basic Certificate 236
Membership Register 237
State Laws 279
Tax Exemptions 45
Deductible Contributions to Tax Exempt Organizations 53
Nondeductible Contributions to Tax Exempt Organizations 48
Application 72
Identification of Applicant 73
Activities and Operational Information 75
Technical Requirements 79
Financial Data 82
Limitations on Operations 70
Disclosure of Free Government Services 71
No Substantial Unrelated Activities 71
No Special Benefits for Individuals 71
Religious Purposes 54
Charitable Purposes 55
Scientific, Education and Literary Purposes 56
Private Foundations 67
Operating Limitations 68,70
Required Provisions in Articles 68
Public Charities 27
Automatic Charity Test 58
Public Support Test 60
Attraction of Public Support 60,63
Limitations on Public Contributions 62
General Support Test 65