Non-Profit Corporations
Best Practice Summary

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There are various types of non-profit organizations as defined by the IRS. A non-profit organization can be a corporation, trust or association.

Charitable vs. Non-Profit

A non-profit corporation is a legal structure created through and subject to the laws of the state of incorporation. State laws provide for formations of nonprofit entities for the benefit of either a member of an organization or for some public purpose (i.e. a hospital or school). Although a nonprofit corporation cannot be designed primarily for profit-making purposes, it is allowed to make a profit. Profits must be used to benefit the purpose the corporation. Charitable organizations are those that are organized as a nonprofit with the specific charitable purpose for specific benefit usually to a specified group or beneficiary. In addition to organizing as a nonprofit trust, association or corporation, a charitable organization is also required to file with the U.S. State Charity Officer in its state of organization.

State corporate laws vary regarding incorporation of nonprofit corporations as well as the documents required for its creation and its management of internal affairs and corporate powers. Generally, a complete incorporation process consists of:

Determining Name Availability

LeapLaw's Corporate Connection provides direct links to secretary of state web sites with online ability to check name availability. For more information regarding name availability and reservations, see LeapLaw's Name Reservation Best Practice Summary.

Trademark, Trade Name and Domain Name Searches

Prior to filing a trademark or service mark application with the US Patent Trademark Office, trademark searches may be performed to help assure that a similar trademark, particularly deceptively similar, is not already registered.

A preliminary trademark search may be done on LeapLaw's Intellectual Property Connection. Ordering a full search form a trademark search company will provide extensive information regarding trademark availability.

The popular "full" trademark search will provide a comprehensive search of the proposed trademark against current federal, state and common law trademarks and domain names. The information is used to determine any potential infringement risks and conflicts concerning proposed marks that will be used or registered in the US A full search costs approximately $300 for a 5-day turn-around. Expedited services are available for a premium fee. Additional information is available at LeapLaw's Trademark Best Practice Summary.

Incorporation Documents

Preparing certificate or articles of organization document for filing containing specific language for non-profits and specific language for trusts suggested by the IRS. Forms can be found at LeapLaw's Corporate Connection.

Management Structure

Nonprofit corporations have no authorized stock and therefore have no owners or stockholders. The challenge of forming a nonprofit corporation lies in the flexibility of the corporation's management structure as defined in the Bylaws of the corporation.

Management may be governed by members, in one or more classes, with or without voting rights. If there are to be members, the manner of election or appointment, the duration of membership and the qualification and rights, including voting rights, of the members of each class must be provided in the charter and/or Bylaws. If there are to be no members, a nonprofit will be managed by directors or trustees. The Bylaws set forth the structure of the business.

Non-profit bylaws should also include provisions defining its non-profit status pursuant to the relevent Internal Revenue Code. LeapLaw provides a sample form for nonprofit Bylaws.

Useful Web Sites
Structuring the Board

Consents

Prepare Incorporator Consents (if applicable under state law)

Prepare organizational vote of management board (which may consist of members, directors and/or trustees as defined in the bylaws of the corporation) for opening bank accounts, etc.

IRS Requirements

Federal Tax Identification Number

The Internal Revenue Service (IRS) issues federal identification numbers (a/k/a employer identification numbers (EIN)) to online, even to a third party. Tax identification numbers are provided immediately but are not confirmed for up to 3 business days. It's the quickest, easiest way to get a EIN. A Form SS-4 (pdf) (Application for an Employer Identification Number) must be completed and signed by an officer of the entity before an online application is completed.

To receive an EIN over the phone, complete the Form SS-4 with the third party designation and phone into the national tele-TIN representative:

(866) 816-2065
Monday through Friday
7:30 a.m. - 5:30 p.m. local time

The form may be faxed to the IRS Service Center (pdf) where the company's tax returns will be filed. A notice is sent directly to the company within 6 weeks. Additional information regarding obtaining a federal identification number may be found at LeapLaw's Federal Identification Number Best Practice Summary.

Exempt Status

Many nonprofit corporations want to qualify as a tax-exempt organization so that contributions are tax deductible. Form 1023 (pdf) is filed with the Internal Revenue Service to qualify for a federal tax exemption under § 501(c)(3) of the Internal Revenue Code, resulting in donors' contributions to the nonprofit entity being tax deductible. Charitable corporations may also register with the domestic state's Charity Office. More information may be found at IRS Information for Tax Exempt Organizations.

Best Practice Tip: The Form 1023 may be filed without the EIN if "applied for" is inserted in the top right hand corner of the form where the EIN is requested.

IRS Form 8718, User Fee for Exempt Organization Determination Letter Request must accompay the filing of the Form 1023, together with the appropriate fee.

IRS filings should be sent to:

Internal Revenue Service
P.O. Box 192
Covenington, KY 41012-0192

If sending via express delivery:

Internal Revenue Service
201 West Rivercenter Blvd.
Attn: Extracting Stop 312
Covenington, KY 41012-0192

Following Up on Your Application

Non-profit entities have a specialized unit and phone number to check up on the status of the 1023 filing. The Status Inquiry unit may be reached at 877-829-5500; Fax No. (513) 263-3756. Hours of availability are from 8:00 am to 6:30 pm.

Record Keeping

A nonprofit minute book should contain the following documents:

• Certificate or articles of incorporation together with any and all amendments.
• Bylaws together with any amendments and/or restatements.
• Incorporator minutes and consents (if applicable under domestic state law).
• Directors, trustee and/or member minutes or consents.
• IRS filings such as the IRS Forms SS-4 (federal identification number application) and 1023 (tax exempt status).
• Date stamped copies of all annual reports filed with the secretary of state or charity office that have been filed (optional).

A summary sheet may be inserted in the front of the minute book. The summary sheet should list certain information referenced below. The trick is to be sure that the information on the summary sheet is always kept accurate. Whenever new votes or any amendments are filed in the minute book, care should be taken to note any changes that affect the information contained on the summary. The summary sheet would contain:

Exact Name of Corporation.
The certificate of incorporation states the exact corporate name. Be sure to note any amendments amending the name.

State and Date of Incorporation.
The state of incorporation is the state where the certificate of incorporation or articles of organization are filed. The date of incorporation is stamped on the certified copy following incorporation.

Purpose of Business.
Some states require that the specific purpose of business to be stated on the incorporation document. If not, it may be found on the IRS filings, such as the IRS Form SS-4 Application for Federal Identification Number.

Principal Business Address.
The business address may be found on the incorporation document. If not, it may be found on IRS filings or bank account information.

Name and Address of Resident Agent.
The resident agent is the individual or company appointed by the board of directors to accept service of process on behalf of the company. The resident agent is referenced on the certificate of incorporation. Typically the same resident agent will be used in all states especially to qualify for group discounts offered by most resident agents.

Members or Trustees.
Nonprofit organizations do not authorize stock and do not have stockholders. Non profits are generally operated by members and/or trustees. The members and/or trustees act similarly to directors in a for-profit corporations. Duties and responsibilities of the members or Board of Trustees will be provided in the bylaws. Generally this body will have annual meetings and special meetings as required and will be responsible for appointing directors.

Board of Directors.
The list of current directors will be found in the member votes. The directors are elected at each annual meeting of members and may be changed by a vote at a special meeting any time following the annual meeting. To assure a current list of directors begin with the last annual vote of the members and check all future votes for changes in directors that may have been made at any special meetings.

Officers.
The name of officers and the offices held will be found in the directors' vote and are appointed at each annual meeting of the directors. To assure a current list of officers, begin with the last annual vote of directors and check all future votes for changes in officers that may have been made at any special meeting.

IRS Filings.
Copies of the Forms SS-4 and 1023 filed with the IRS should be maintained in a particular section of the minute book for easy reference.

Fiscal Year End.
Fiscal year end is adopted by a vote of the board of directors, trustees or members (or by the Incorporator in the initial charter of the corporation, pursuant to the laws of the state of incorporation). The fiscal year end can be found, typically on the SS-4 filed with the IRS and/or on the last or second to last page of the bylaws of the corporation.

Date of Annual Meeting.
The date of the annual meeting is fixed the board of directors, trustees or members in an organizational or initial vote. It is also typically noted on the first or second page of the bylaws.

Annual Reports.
Although state laws vary, nonprofit corporations are typically required to file annual reports with the secretary of state of the domestic state. An annual report is also typically required by the US Charity Office if the corporation is also a charitable corporation.

IRS Form 990 or IRS Form 990EZ is filed with the IRS. Form 990's may be requested from the IRS in order to monitor any nonprofit and are generally available online as well.

Fundraising

State laws govern raffles, bazaars, beano, bingo and other fundraising activities. Generally, such activities are limited to non-profit charitable organizations such as a society, club, church, fraternal or fraternal benefit society, educational or charitable organization; civic or service club or organization, and other such organizations organized and operated exclusively for pleasure, recreation and other nonprofit purposes.

Fundraising and gaming laws vary per state and may carry significant penalties for violations. Determining requirements applicable to each state may begin at the Attorney General's office.

Such fundraising activities may have many limitations (e.g. Massachusetts law limits the maximum cash prize associated with a bazaar at $25.00 each, although merchandise prizes have no restriction.)

If an organization qualifies an one that may legally organize a fundraiser, local ordinance need to be checked. In Massachusetts, for instance, a permit must be obtained from the local town clerk.

In addition, a return must be filed with the Massachusetts lottery commission and a 5% tax paid on all proceeds.

Additional Resources

IRS FAQs
Top 10 Reasons for Delay in Processing Tax Exempt Application
International Center for Not-for-Profit Law
Guidestar National Database for Nonprofit Organizations

LeapLaw's
Related Best Practice Summaries

Charter
Federal Identification Number
Incorporation
Name Reservations