Not for Profit Organizations
NOT-FOR-PROFIT
ORGANIZATIONS
This section is designed to provide information to
community groups and organizations which may be considering incorporating as
"Not-For-Profit" organizations ("NPO"). We outline some of the reasons a group
may find it desirable to incorporate. We also explain the responsibilities and
obligations that accompany the act of incorporation. Finally, we discuss the
income tax ramifications of NPO's.
This section is not intended to contain a complete
statement of the law in the area of NPO's and changes in the law may occur from
time to time. This section should only be used as an information resource.
Anyone needing specific advice on their own legal position should consult their
lawyer.
"NOT -FOR-PROFIT" ORGANIZATIONS - AN
OVERVIEW
What is a "Not-For-Profit"
organization?
A "Not-for-Profit" organization is a group which is
organized for the purpose of social, religious, charitable, educational,
athletic, literary, political or other such activities. Although there are many
different kinds of "Not-For-Profit" organizations they all have one thing in
common. The people involved in the "Not-For-Profit" organization cannot use it
to make personal financial gain.
What are some examples of
"Not-For-Profit" organizations?
They include, for example, service clubs, sports
associations, theatre, dance and music groups, activity clubs, religious
fellowships, educational and literary societies and community services
associations.
Does "Not-For-Profit" mean the
organization can't make money?
No. "Not-For-Profit" organizations can, and do engage
in many activities that result in income or profit. However, the profits that
these organizations make must be held in trust for the organization and can only
be used in carrying out its goals and objectives.
Can "Not-For Profit" organizations
incorporate?
Yes. Although "incorporation" is often associated with
a formal business enterprise, "Not-For-Profit" organizations also can
incorporate. Incorporation simply means that a group of people with a common
goal have decided to formalize their relationship according to the requirements
set out in the law. The end result is a corporation that is viewed as a separate
legal entity.
Do "Not for Profit" organizations have
to incorporate?
No. "Not-For-Profit" organizations can be formal
(incorporated) or informal (unincorporated).
What should my group consider if it is
thinking about incorporating?
You may want to consider some of the following
benefits when you are considering incorporating:
(1) Distinct Legal Entity
An incorporated organization has a separate legal personality
distinct from its members. Generally it can sue and be sued in its own capacity.
It provides a formal legal status for those associated with it.
(2) Limited Liability
Members of an incorporated organization are not normally
personally liable for its debts and obligations. However, directors may incur
personal liability in certain circumstances.
(3) Perpetual Existence
An incorporated organization may go on forever. If the members
change, the incorporated body continues to exist and will do so until the
organization is dissolved according to the requirements set out in the Companies
Act.
(4) Ownership of Property
An incorporated organization can own property in its own name. If
the members of the organization change, the legal title to the property stays
with the incorporated body.
(5) Government Aid
Some government agencies have programs to assist "Not-For-Profit"
organizations. They often require, however, that the organizations they fund be
incorporated.
Why don't all organizations
incorporate?
An incorporated "Not-For-Profit" organization has a
duty to operate according to rules set out in the Corporations Code of the
relevant state or jurisdiction. This Includes keeping records, having annual
meetings and so on. Some "Not-For-Profits" may decide they do not want or need
to be incorporated.
What are the obligations of incorporated
organizations?
The obligations and duties of an incorporated body
include:
(a) keep a record which lists all
the members of the organization;
(b) file appropriate notice with the Secretary of
State of any change in the (i) directors; or the (ii) address of the head
office.
(c) hold a general meeting of members at least once a
year, where the directors must present to the members a full statement of the
affairs and financial position of the organization. This process is governed by
the Corporations Code. The Corporations Code allows the organization to
establish the time and place of the meeting in its own by-laws.
(d) file an annual return with the state Franchise Tax
Board. Should the organization fail to file its annual return for several
consecutive years (depending upon the state) its corporate status may be
lost.
What rights accompany
incorporation?
The Corporations Code of the states gives incorporated
organizations the legal right to do most of the things that a natural person can
do. There are, however, some restrictions, so you should find out the particular
details of those rights. Your lawyer can explain your organization's corporate
status to you.
Who is responsible for the day to day
operation of the incorporated "Not-For-Profit" organization?
The Corporations Code (depending upon the state)
provides that a board comprised of at least one (1) director must manage the
affairs of the organization. The directors are the mind and will of the
organization. They have the right to make by-laws or rules about its operation.
These by-laws are normally approved by the members. By-laws should not conflict
with anything in the Corporations Code and may deal with the
following:
(a) membership
rules;
(b) corporate seal;
(c) location of principal or head office;
(d) functions, duties, appointment and removal of
officers;
(e) time, place, quorum, and
procedures for calling of meetings;
(f)
record keeping arrangements;
(g) voting
procedures;
(h) name of bank;
(i) borrowing powers;
(j) audit of financial records, if applicable;
(k) fiscal year end;
(I) confidentiality clause;
(m) amendment of by-laws.
Should my group
incorporate?
Your group will have to consider the advantages and
disadvantages, look at its goals and decide what best suits its purpose. You may
want to talk to other "Not-For Profit" organizations and ask them about their
reasons for incorporating.
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INCORPORATING A "NOT
-FOR-PROFIT"
How does a "Not-For-Profit" organization
incorporate?
The procedure is set out in the relevant Corporations
Code of the particular state. For most of the states, you can get a copy of the
Corporations Code off of the internet. To incorporate in most states, you need
at least one individual who is eighteen years of age or older. This individual
is called the incorporator and usually becomes a director of the organization.
This individual must file the following documents with the Secretary of State of
the state to be incorporated in.
.
Articles of Incorporation
. Statement by
Domestic Stock Corporation
What information must be included in the
Articles of Incorporation?
The Articles of Incorporation generally provides the
following information:
(i) Name of the
Organization
Before you prepare an
application and complete the documents for incorporation, the proposed name of
your organization should be checked for availability by the Secretary of State.
It must not be objectionable on public policy grounds and it cannot be the same
as or similar to the name of any other incorporated or unincorporated business
or organization in the same state.
Usually
the last word of the name will be the word "Incorporated" or the abbreviation
"Inc.". Or, you can place the word "Limited" or "Ltd." or Co., Ltd. at the end
of the name.
(ii) Purposes or Objectives
You must state what the organization intends to do. The purposes
and objectives must fall within the scope of activities permitted by the state
Corporations Code.
(iii) Initial Agent for Service of Process
You must provide the name and address in the state of
the individual who will act as the agent for service of process for the
corporation.
(iv) Not-For-Profit Statement
You must state that the organization shall not carry on any
business or trade for the profit of its members. Upon dissolving (ending) the
corporation, surplus funds are normally given to other non-profit organizations.
You should therefore state your particular distribution plans.
What is the next step?
The Articles of Incorporation must be filed with the
Secretary of State to begin the incorporating process.
Are there any costs to file an application?
Yes. There is a filing fee charged by the Secretary of
State. Each state has a different fee amount.
When does the incorporation become
effective?
When the Articles of Incorporation are filed and is
stamped with a registered number by the Secretary of State, the incorporation is
complete.
Do I need a lawyer to
incorporate?
Although a lawyer is not required, most organizations
seek professional legal advice. A lawyer will help your group to explore options
and decide If Incorporation is best for it. A lawyer has the expertise to handle
the paperwork involved, to check the organization's choice of name and so
on.
Where can I get more information about
incorporation?
You can ask your legal advisor specific questions
about incorporating your "Not-For-Profit" organization. You can get information
about the provisions of the relevant Corporations Code from the Secretary of
State's web page on the internet. You can also ask this law firm for this
information.
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"NOT -FOR PROFIT" ORGANIZATIONS AND
TAXES
Do "Not-For-Profits" have to pay income
tax?
The classic "Not-For-Profit" organization is
registered under Internal Revenue Code, Section 501(c) (3). This tax code
provision gives certain types of organizations, including churches, charities,
research and scholastic organizations as well as others complete tax exempt
status thereby relieving the organization from paying income taxes. The
Not-For-Profit organization can thereby accumulate a fairly large amount of
funds which are not taxable, provided the funds are used to accomplish the
purposes for which the tax exempt organization was established. Should you wish
a copy of this Internal Revenue Code section, please feel free to ask us. Please
note, however, Not-For-Profit organizations which are exempt from paying income
tax may still be subject to tax on income generated from a non tax exempt
business activity that it conducts. For instance, if a charity were to operate a
restaurant that has nothing to do with the purpose of the charity, the income
generated from the restaurant would be taxable.
How can I set up an organization that
will not be taxed just like a Not-For-Profit Organization?
If you would like to establish an organization that
operates for a purpose other than as a church, charity, research or education
institution or other tax exempt activity, and your purpose is to save or avoid
paying taxes, then we recommend you establish an offshore company or corporation
in a tax haven country. This subject is covered in the section dealing with
Establishing an Offshore Corporation in this web site.
Can all "Not-For-Profit" organizations
issue official donation receipts?
No. Only those "Not-For-Profit" organizations
registered with the Internal Revenue Service as performing activities covered
under Internal Revenue Code section 501(c) (3) can issue official donation
receipts when they receive contributions. These donation receipts are then used
by the donor to reduce his own taxable income. Therefore, in these types of
organizations, the donor of the money can write the donation off of his taxable
income and the donation is not taxed as income to the organization. This is the
complete Not-For-Profit" organization. Other "Not-For-Profit" organizations
registered under other sections of the Internal Revenue Code can treat donations
they receive as non taxable to them but the donor cannot write the donation off
of his taxable income.
How does a non-profit organization know
if it has tax-exempt status under the Internal Revenue Code?
The Internal Revenue Service can advise you of your
organization's tax status by determining whether your organization is organized
and operated solely for religious, social welfare, civic improvement, pleasure,
recreation or for any other purpose except making a profit. No part of the
income of the organization, whether current or accumulated, can be payable to,
or made available for the personal benefit of any of its members, shareholders,
etc. The Internal Revenue Service cannot determine your status in advance but
only after they review the objects and activities of your organization for that
particular taxation year. They must check to see that your organization operated
in accordance with the non-profit purposes for which it was created. They will
look at things such as your organization's governing documents, statement of
activities, name(s) in which property or assets are registered, names of
directing officers and a financial statement for the organization's fiscal
period.
Does a non-profit organization with an
income tax exemption have to file a tax return?
A non-profit organization which is income tax-exempt
may be required to file with the Internal Revenue Service a special annual
income tax return and annual information return designed only for Not-For-Profit
organizations.
How does an organization qualify as a
charity under the Internal Revenue Code?
To qualify an organization as a charity, it must be
created for charitable purposes and operate by devoting its resources to
charitable activities only. It must also make sure that no part of its income
goes to the personal benefit of any of its members. To be registered as a
charity, an organization generally must promote one or more of the
following.
(1) relief of
poverty;
(2) advancement of
religion;
(3) advancement of education;
and
(4) certain other purposes that
benefit the community in the way the courts have determined to be charitable.
Also, the organization cannot operate for profit or for the private interest of
its members.
How will my organization know if its
objects and activities are considered charitable?
Organizations must apply to the Internal Revenue
Service and the state Franchise Tax Board for "tax exempt" charity status. You
will be required to submit an Application for Recognition for Exemption
(Publication 1023) and supporting documentation. You can get the necessary forms
from the IRS as well as this law office.
How would a Not-For-Profit group know
what course of action is best for it?
In all circumstances you should make yourself aware of
the benefits, obligations and rights that arise from incorporation in the
context of your organization. Find out what is required by the relevant
Corporations Code. Incorporation under a given state Corporations Code may not
ensure, for example, that your organization's objectives fall within the
Internal Revenue Service's guidelines for charities or non-profit organizations.
Look into any requirements for tax purposes before you incorporate. Your local
Internal Revenue Service Office can tell you about any income tax implications.
It may be wise to have a lawyer explain the various rules for tax exemptions to
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