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Creating a Section 501(c)(3) Organization

Creating a Section 501(c)(3) Organization. Elaine Waterhouse Wilson Quarles & Brady, LLP 500 West Madison Street Suite 3700 Chicago, Illinois 60661 (312) 715 5141 ewilson@quarles.com. Before You Start… . Should you create a new organization?

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Creating a Section 501(c)(3) Organization

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  1. Creating a Section 501(c)(3)Organization Elaine Waterhouse Wilson Quarles & Brady, LLP 500 West Madison Street Suite 3700 Chicago, Illinois 60661 (312) 715 5141 ewilson@quarles.com

  2. Before You Start…. • Should you create a new organization? • Is there an existing organization that does this? • Would a donor advised fund work better? • Can you partner with another organization? • Do a (not a) business plan • Not just your charitable activities • Where are you going to operate from? • Who is paying the utilities? • Who is doing the work? Are you paying them? • Where is the money coming from?

  3. State Law Versus Federal Tax Law • First, create an entity under state law • Usually a not-for-profit corporation • Certainty • Limited Liability • Can be a charitable trust • Harder to change • Fewer Trustees • Might also be an unincorporated association

  4. Not-For-Profit Corporations • Articles of Incorporation • Start with Secretary of State's form here in Illinois • Not all states require this • IRS requirements in addendum • Authorize charitable purposes • Prohibit activities not allowed under Section 501(c)(3) • Dissolution clause • Prohibition of inurement, excess lobbying and political activity • Private Foundation Excise tax rules

  5. Other Articles Issues • Members versus non-members • A not-for-profit corporation can have members or can have a self-perpetuating board • Different then "fundraising" memberships – corporate members have powers like a shareholder without financial interests • Name your Directors – How Many? • Functional issues – too large, too small • Statute regarding range • Executive and other committees

  6. Initial Meeting • Pass Bylaws • Generally, all the tax requirements are in the Articles • These are functional • Name Officers • How many do you have? • Pass a conflict of interest policy • Pass a whistleblower and document retention policy (SOX and new 990) • Pass banking resolutions • By unanimous consent or at an actual meeting • Sign Form SS-4 to get an EIN

  7. Register with the AG • Illinois requires all charities to register with the Office of the Attorney General • www.illinoisattorneygeneral. gov/charities/index.html • Form CO-1 and $15.00 filing fee • All forms available at the website • Form AG-990-IL required annually

  8. ALL ORGANIZATIONS • Taxable and Tax-exempt

  9. ALL ORGANIZATIONS • Taxable and Tax-exempt • ALL TAX-EXEMPT ORGANIZATIONS • Pensions/Retirement Plans(Section 401(a)) • All Section 501 (c)(1) through (c)(27) organizations (including such things as unions, clubs, black lung trusts, etc.)

  10. ALL ORGANIZATIONS • Taxable and Tax-exempt • ALL TAX-EXEMPT ORGANIZATIONS • Pensions/Retirement Plans(Section 401(a)) • All Section 501 (c)(1) through (c)(27) organizations (including such things as unions, clubs, black lung trusts, etc.) • ALL SECTION 501(C)(3) ORGANIZATIONS • Operated exclusively for charitable, educational, scientific, religious, etc. purposes • Can be a nonprofit corporation OR a charitable trust • Contributions are generally tax deductible under Section 170 • Private Foundations • All non-public charities and non-supporting organizations • Excise Taxes • Lower Deductability Limitations • Private Foundations • Publicly Supported Organizations under Sections 509(a)(1) and 509(a)(2) • Supporting Organizations under Section 509(a)(3) • Higher Deductability Limitations • No Excise Taxes Private Operating Foundations Section 4942(j)

  11. Section 501(c)(3) Organizations (3) Corporations . . . organized and operated exclusivelyfor religious, charitable, scientific, testing for public safety, literary, or educational purposes, or to foster national or international amateur sports competition (but only if no part of its activities involve the provision of athletic facilities or equipment), or for the prevention of cruelty to children or animals, no part of the net earnings of which inures to the benefit of any private shareholder or individual, no substantial part of the activities of which is carrying on propaganda, or otherwise attempting, to influence legislation (except as otherwise provided in subsection (b)), and which does not participate in, or intervene in (including the publishing or distributing of statements), any political campaign on behalf of (or in opposition to) any candidate for public office.

  12. Section 501(c)(3) Organizations (3) Corporations . . . organized and operated exclusively for religious, charitable, scientific, testing for public safety, literary, or educational purposes, or to foster national or international amateur sports competition (but only if no part of its activities involve the provision of athletic facilities or equipment), or for the prevention of cruelty to children or animals, no part of the net earnings of which inures to the benefit of any private shareholder or individual, no substantial part of the activities of which is carrying on propaganda, or otherwise attempting, to influence legislation (except as otherwise provided in subsection (b)), and which does not participate in, or intervene in (including the publishing or distributing of statements), any political campaign on behalf of (or in opposition to) any candidate for public office.

  13. Section 501(c)(3) Organizations (3) Corporations . . . organized and operated exclusively for religious, charitable, scientific, testing for public safety, literary, or educational purposes, or to foster national or international amateur sports competition (but only if no part of its activities involve the provision of athletic facilities or equipment), or for the prevention of cruelty to children or animals, no part of the net earnings of which inures to the benefit of any private shareholder or individual, no substantial part of the activities of which is carrying on propaganda, or otherwise attempting, to influence legislation (except as otherwise provided in subsection (b)), and which does not participate in, or intervene in (including the publishing or distributing of statements), any political campaign on behalf of (or in opposition to) any candidate for public office.

  14. Section 501(c)(3) Organizations (3) Corporations . . . organized and operated exclusively for religious, charitable, scientific, testing for public safety, literary, or educational purposes, or to foster national or international amateur sports competition (but only if no part of its activities involve the provision of athletic facilities or equipment), or for the prevention of cruelty to children or animals, no part of the net earnings of which inures to the benefit of any private shareholder or individual, no substantial part of the activities of which is carrying on propaganda, or otherwise attempting, to influence legislation (except as otherwise provided in subsection (b)), and which does not participate in, or intervene in (including the publishing or distributing of statements), any political campaign on behalf of (or in opposition to) any candidate for public office.

  15. Section 501(c)(3) Organizations (3) Corporations . . . organized and operated exclusively for religious, charitable, scientific, testing for public safety, literary, or educational purposes, or to foster national or international amateur sports competition (but only if no part of its activities involve the provision of athletic facilities or equipment), or for the prevention of cruelty to children or animals, no part of the net earnings of which inures to the benefit of any private shareholder or individual, no substantial part of the activities of which is carrying on propaganda, or otherwise attempting, to influence legislation (except as otherwise provided in subsection (b)), and which does not participate in, or intervene in (including the publishing or distributing of statements), any political campaign on behalf of (or in opposition to) any candidate for public office.

  16. Section 501(c)(3) Requirements 1. Organized and operated exclusively 2. An exempt purpose 3 No private inurement 4. No substantial amount of lobbying 5. No political activities

  17. Organized and Operated Exclusively • Organized-Documents must contain all requirements • Operated-Charity must actually function in accordance with those requirements • Authorize charitable activities • Prohibit more than an insubstantial amount of non-charitable activities • Investments, unrelated trade or business activities • Lobbying • Prohibit all political activities and private inurement • Payment of assets to charity upon dissolution

  18. Exempt Purposes under Section 501(c)(3) • Religious • Churches • Related religious organizations • Charitable (including prevention of cruelty to animals and children) • Relief of the poor and distressed or underprivileged • Advancement of religion, education or science • Erection or maintenance of public works • Lessening the burdens of government • Promotion of social welfare through lessening of neighborhood tensions, fighting prejudice and discrimination, defending human and civil rights or combating community deterioration and juvenile delinquency.

  19. Exempt Purposes under Section 501(c)(3) • Scientific and Testing for Public Safety • “Conduct research in the public interest” • Make research results public • Research performed for the government • Research directed toward benefiting the public • Curing disease • Educating students • Publications • Aiding a geographic area by attracting and retaining industry

  20. Exempt Purposes under Section 501(c)(3) • Literary and Educational • Schools–organizations devoted to the instruction or training of the individual for the purpose of improving or developing his capabilities • Other Educational Organizations–organizations devoted to educating the public on subjects useful to the individual and beneficial to the community. • Amateur Athletics • Section 501(j)–Qualified Amateur Sports Organizations

  21. Private Inurement and Private Benefit • Private Inurement-“no part of the net earnings of which inures to the benefit of any private shareholder or individual” • Statutory in nature–no de minimis exception (but see Section 4958) • Diversion of exempt assets away from the activities of the organization • Assets must inure to the benefit of an “insider” • Private Benefit-the organization must operate for the benefit of the general public and not to provide private benefits to a limited group of individuals • Judically created from the operational test • Allows incidental benefits • Can be conferred on any individual, not just “insiders” **All private inurement is a private benefit, but not all private benefit constitutes private inurement**

  22. Lobbying and Political Activities • Political Activities • Generally, involvement in political campaigns • Absolutely prohibited • Lobbying • Generally, influencing the content of legislation by contact with legislative officials or executive officials responsible for drafting legislation for introduction • Subject to the “no substantial part” rule or a Section 501(h) election

  23. ALL SECTION 501(C)(3) ORGANIZATIONS • Operated exclusively for charitable, educational, scientific, religious, etc. purposes • Can be a nonprofit corporation OR a charitable trust • Contributions are generally tax deductible under Section 170 • Public • Charities • Publicly Supported Organizations under Sections 509(a)(1) and 509(a)(2) • Supporting Organizations under Section 509(a)(3) • Higher Deductability Limitations • No Excise Taxes • Private Foundations • All non-public charities and non-supporting organizations • Excise Taxes • Lower Deductability Limitations

  24. Public Charities • Section 509(a)(1)-Organizations described in Section 170(b)(1)(A) other than subsections (vii) and (viii) • Section 170(b)(1)(A)(i)–Churches • Section 170(b)(1)(A)(ii)–Schools • Section 170(b)(1)(A)(iii)–Hospitals and Medical Research Organizations • Section 170(b)(1)(A)(iv)--State University Endowments • Section 170(b)(1)(A)(v)–Governmental Units • Section 170(b)(1)(A)(iv)–Publically Supported Charities • One-third of the charity’s total support is from the general public • No one contributor’s donation can count toward public support more than 2% of total support

  25. Public Charities • Section 509(a)(2)–Service Provider Charities • One-third of the charity’s total support is from the general public and from fees for services rendered • No more than one-third of the charity’s total support is from investment income and UBTI • Section 509(a)(3)-Supporting Organizations • Relationship Test–must have a specified relationship with one or more named public charities • Organizational and Operational Test–the supporting organization must be organized and operated exclusively for the benefit of its supported public charity only • Disqualified Person Test–cannot be controlled by disqualified persons

  26. Federal Filing Requirements • Application for Tax Exempt Status • Form 1023 for Section 501(c)(3) organizations (www.irs.gov) • Generally, no due date, but filing within 27 months of date of creation will give you exempt status retroactive to the date of creation for Section 501(c)(3) organizations • Filing exceptions for churches and small organizations • What happens next? • The "we got your letter" letter • Divides into three hoppers • Easy • Need more, but administrative • Needs agent review

  27. IRS Filings • Annual Information Return • Form 990 for most exempt organizations – NEW FORM • Form 990-PF for private foundations • Generally due 5 months and 15 days after the close of the fiscal year (May 15) • Exceptions for churches and small organizations • Form 990-EZ • Form 990-N – "e-postcard"

  28. State Tax Exemptions • State Income Taxes • Generally, organizations exempt from federal income tax under Section 501(a) are also exempt from Indiana income tax • However, check your state – some states require an additional filing – the exemption is not necessarily automatic! • Sales and Use Taxes • http://www.revenue.state.il.us/NonProfits/index.htm • Property Taxes • Real and personal property tax exemptions are usually not based on the organization’s charitable purpose, but on the actual use of the property.

  29. Other Issues • Gaming • Charitable gaming is highly regulated • This includes raffles and door prizes • http://www.revenue.state.il.us/CharityGaming/index.htm • Charitable Solicitation • If you are using professional fundraisers, there are additional registration and reporting requirements

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