To apply for recognition by the IRS of exempt status an organization must use Form 1023 or 1024, the “Application for Recognition of Exemption”. Note that this application must be accompanied by the appropriate user fee. For more information, see the IRS website, especially Publication 557, Tax-Exempt Status for Your Organization. Due to recent changes in filing requirements an applicant must now have an Employer Identification Number (EIN) prior to filing Form 1023. Form 8718 must be completed and attached. This form determines your application fee. Section 501(c)(3)-organizations must make their application (form 1023 or 1024) and the three most recent annual returns (Form 990 or Form 990-EZ) available to the public upon request and without charge (except for a reasonable charge reflecting copying costs).
Articles of Incorporation –
The Articles of Incorporation are the document that creates a corporation when filed with the state. The Articles cover basic matters such as the name of the corporation, its corporate purpose, and its agent for service of process among other matters. For section 501(c)(3) applicants, the organizing document must comply with the organizational exemption test. Therefore, special attention must be given to the language of the organizing document. For example, for a trust to qualify under section 501(c)(3) of the Code, its organizing document must contain certain language. See IRS Publication 557, which contains the suggested language, and consult with an attorney experienced in these matters.
These are the internal operating rules of a corporation, which are usually set out in a document of less than twenty pages. Bylaws govern such matters as holding meetings, voting, quorums, elections, and the powers of directors and officers. The bylaws must include: the name of the organization; the mission or purpose of the organization; the geographic area served by the organization; the members’ responsibilities, dues, quorum, and voting procedures; likewise, the duties, quorum, and voting procedures of the board of directors; the rules of order; and procedures for amending the bylaws.
A document issued by the secretary or state certifying that a corporation validly exists and is in compliance with all legal requirements including the payment of any taxes or fees.
Conflict of Interest Policy –
A written policy that addresses situations in which the interests of its directors, officers and key staff come into conflict, or appear to come into conflict, with the interests of the organization. Conflict of interest policies help to ensure that no person benefits inappropriately, or appears to benefit inappropriately, from any transactions in which the organization is involved. Typically, the conflict of interest policy will prohibit an interested person from approving or voting on a conflicted transaction and requires that the interested person give full disclosure of all material facts to the appropriate decision makers. Adoption of a conflict of interests policy greatly is an important part of obtaining tax exempt status.
For example, a board of director or officer may take advantage of a potentially lucrative investment opportunity for personal gain through unpublished or confidential information he learns through his position as director or officer. Or, an officer or director may personally take advantage of a business opportunity to the disadvantage of the organization. An officer might vote to award a no-bid contract to her own construction company (or her husband’s company) without disclosing their interest in the transaction. Nonprofits should ask that all officers, board members, and staff sign the conflict of interest policy.
An organization composed of one or more persons, formed and authorized by law to act as a single “person” in a legal sense, and legally endowed with various immunities, rights and duties.
Determination Letter –
After reviewing the Application for Recognition of Exemption, the IRS will do one of three things. The IRS may issue a determination letter recognizing an organization’s exempt status. Alternatively, the IRS may request additional information in order to establish whether an organization meets the requirements for exemption. Finally, the Determination Letter may deny the application outright and give the applicant time to appeal the denial decision. The Determination Letter is an important document that the non-profit should keep in its office.
This number is similar to a social security number in that the IRS uses the FEIN to identify a business organization’s income stream for taxation purposes. To apply for a FEIN number, see IRS Application SS-4, “Applying for the Employer ID Number.”
Franchise Tax –
A tax levied on for profit corporations and other legal entities for the privilege of either incorporating or qualifying to do business in a certain state. A franchise tax may be based upon income, assets, outstanding shares, a combination of the above, or the tax may be a flat fee.
The maximum amount a person participating in a business organization may lose or be held liable for in claims against an organization with notable exceptions. For example, stockholders in a corporation can only lose their investment. But directors involved in defrauding the public are nonetheless personally liable for their tortious conduct beyond their investment share. See “Tort”, below.
Limited Liability Company (LLC) –
A relatively new and flexible business organization that offers the advantages of liability protection for all its members while also offering the simplicity of a partnership management structure. Caveat: Arkansas has not recognized LLCs for nonprofit organizations.
Limited Partnership (LP) –
A business organization consisting of two classes of partners: general partners and limited (or silent) partners. The general partners have management control, share the profits of the firm but have joint and several liability for any torts or debts of the partnership. Each general partner has the authority as an agent of the firm to bind all the other partners in agreements with third parties. The general partners pay the limited partners the equivalent of a dividend on their investment as defined in the partnership agreement. The limited partners are akin to shareholders in a corporation in that they are only liable for torts or debts incurred by the firm to the extent of their investment amount. In addition, as with stockholders, limited partners have no management authority.
Limited Liability Partnership (LLP) –
A business organization registered through the state that confers limited liability on the general partners. The advantage is obvious: the general partner retains the management control and shares in the profits of the firm, as in a limited partnership, but in addition enjoys the same immunity as the limited partners for joint and several liability for any torts or debts of the partnership. See the definition for Limited Liability and Limited Partnership above.
A nonprofit organization, also called a “non-profit,” is an organization incorporated under state laws and approved by both the state’s Secretary of State and its taxing authority as operating for educational, charitable, social, religious, civic or humanitarian purposes. There are many types of non-profits, working toward various educational, scientific, religious, and literary goals, such as humane societies, The Red Cross, literacy outreach groups, churches, etc.
As with all organizations, a non-profit must generate revenues to fund its operations. Non-profits, however, differ from other business organizations because the primary sources of funding for non-profits are donations from public or private donors. Thus, non-profits generally must rely on a steady stream of donations to continue to serve the public good.
Because of the important role non-profits play in serving the public good, the IRS Code is designed to give nonprofits a “tax break” – i.e., the501(c)(3)designation. This designation allows non-profits to enjoy a special tax status to help them raise funds. Note that the mere fact that a corporation is organized under a not-for-profit corporation law does NOT mean that contributions to it are necessarily tax deductible.
Generally, the organizing document of an organization are its Articles of Incorporation. The Articles of Incorporation create the corporation when filed in the state of incorporation. Articles cover foundational matters such as the name of the corporation, the shares it is authorized to issue, its corporate purpose, and its agent for service of process.
Note that for section 501(c)(3) applicants, the organizing document must comply with the organizational test for exemption. Special attention must be paid to the language of the organizing document. For example, for a trust to qualify under section 501(c)(3) of the Code, its organizing document must contain certain language, see IRS Publication 557, which contains the suggested language.
For donors to be assured of tax deductibility the charity must file an “Application for Recognition of Exemption” with the Internal Revenue Service and be approved pursuant to Internal Revenue Code Sec. 501(c)(3).
The 501(c)(3) status encourages donors to continue to give for two reasons. First, the IRS also allows donors to deduct contributions to non-profits from their income tax. Second, by law, a nonprofit is required to utilize all revenues available after normal operating expenses to serve the public interest. Thus, there is an added incentive for donors to give with the understanding that the non-profit reinvests all surplus capital back into its charitable goal for the public good.
Organizational Test –
A charity’s articles of organization must limit the organization’s purposes to one or more of the exempt purposes set forth in section 501(c)(3) and must not expressly empower it to engage, other than as an insubstantial part of its activities, in activities that are not in furtherance of one or more of those purposes.
Location for the head office of a business where the books and records are kept and/or management works. In most states, including Arkansas, corporations must report their principal place of business to the Secretary of State.
The Registered Office is the official address of a corporation. Typically, this address is the same as that of the registered agent.
In Arkansas, the Articles of Incorporation establish the name and purpose of the nonprofit organization that, where appropriate, confer tax exemption.
Federal law recognizes an organization as qualifying under Section 501(c)(3) tax exemption if the organization’s purpose meets the following criteria: The organization is “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 or for the prevention of cruelty to children or animals.”
Furthermore, no individual can personally benefit from the income or activities of the organization. The organization may engage in business activities that are not substantially related to the exempt purpose of the organization, but the unrelated business activities, such as lobbying, cannot comprise a “substantial part” of the organization’s activity and are subject to other restrictions. Nonprofits cannot support or endorse political candidates.
Remember that the articles of incorporation establish the name and purpose of the nonprofit organization – but are just the first step. The goals, objectives, and records must provide evidence that the organization is carrying out its stated purpose such that an auditor would conclude “you are what you say you are.”
A tort is a term for one of many civil wrongs, other than breach of contract, for which a court of law will afford a remedy in the form of damages. For a court to find a tort, the court must find three elements: 1) a duty, 2) a breach of that duty and 3) harm resulting from that breach of duty.
Trust (Charitable Trust) –
A trust a business arrangement in which property (real estate or personal property) is given by one person (the settlor) to be held by another (the trustee) for the purpose of benefiting a specific class of persons or the general public (the charitable purpose). A charitable trust may take the form of a trust, corporation, or unincorporated association, IRC 507,
An unincorporated association is a contractual relationship between the individual members of the organization, all of whom have agreed or “contracted” to come together for a particular purpose. In some states, an unincorporated association has no legal identity of its own and in legal terms is only a collection of individuals.
Arkansas, however, has adopted the Uniform Unincorporated Nonprofit Associated Act (UUNAA), which allows unincorporated nonprofit associations to receive, hold and transfer real and personal property in the name of the association. The Act also provides limited liability of members such associations from contract and tort liability of the association, while permitting the association to incur liabilities in its own name. The following states have also adopted the UUNAA: Alabama, Colorado, Delaware, District of Columbia, Hawaii, Idaho, Texas, West Virginia, Wisconsin, Wyoming.