So You’re Starting a NonProfit. Here are some FAQs.
Do you have a mission or vision to positively impact others’ lives? Do you see a need that you believe needs to be met by an organization rather than just on an individual basis? Then you may be thinking of starting a not-for-profit organization (“nonprofit”) to help you make these visions a reality. At the White Law Office, Co., we are committed to helping nonprofits succeed. This blog answers some frequently asked questions related to starting a nonprofit 501(c)(3) organization in Ohio. Stayed tuned to the White Papers for further resources for your nonprofit organization.
- Is every “nonprofit” tax-exempt?
No. It is a commonly misunderstood fact that you are not automatically tax-exempt just because you form a nonprofit corporation under State law! A nonprofit is a type of corporation, formed at the state level by filing Articles of Organization with the Ohio Secretary of State. “Tax-exempt” means a nonprofit corporation has been granted federal tax-exempt status from the IRS. Nonprofit does not mean tax-exempt.
- What exactly IS a 501(c)(3) corporation?
501(c)(3) refers to a specific section of the Internal Revenue Code governing tax-exempt status. It is one of the 29 types of 501(c) nonprofit organizations. A 501(c)(3) organization is a corporation, trust, or unincorporated association that 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” that has been granted exemption from federal income tax under Section 501(c)(3) of the Internal Revenue Code. 501(c)(3) organizations may also be eligible for exemption from state and local taxes.
The organization must not be organized or operated for the benefit of private interests, and no part of a section 501(c)(3) organization’s net earnings may inure to the benefit of any private shareholder or individual. If the organization engages in an excess benefit transaction with a person having substantial influence over the organization, an excise tax may be imposed on the person and any organization managers agreeing to the transaction.
The primary difference between organizations under 501(c)(3) rather than other sections of 501(c) is that donors to 501(c)(3) organizations may take a tax deduction for their donations (“charitable contribution”), while donations to other types of 501(c) organizations are generally not deductible.
- If my organization is “nonprofit”, can it still make a profit?
Absolutely! Nonprofit does not mean that an organization must always spend more than it makes in a given year, and in fact that would risk the longevity of the organization. Instead, any profits must be used by the nonprofit to further its purposes and mission. Unlike a for-profit corporation, where excess profits can be divided by and among members or shareholders, any profits must go back to the organization’s purposes. As mentioned in question (1), a 501(c)(3) organization must be formed for one of the purposes described therein; primarily charitable, educational scientific, or religious.
- What are members of a nonprofit and what are their responsibilities?
Every nonprofit will have members, but some may choose to operate only with the Board of Directors. You can think of Members of a nonprofit as similar to shareholders of a for-profit corporation, in that they assist in governing; however, unlike shareholders, Members of a nonprofit do not have a financial interest in the nonprofit.
Many nonprofits decided not to adopt a membership structure, for efficiency, and leave the decision-making up to the Directors. If a nonprofit does operate with a membership structure, the members participate in major corporate decisions, such as the right to elect directors, amend articles and by-laws, and vote on whether to dissolve, sell, or merge a nonprofit. Without Members, the Directors make these decisions.
However, nonprofits can have nonvoting members, such as members of a nonprofit park or zoo who receive discounted admission tickets but do not have the right to vote on decisions.
- Can a nonprofit organization pay its employees?
Yes, a nonprofit organization can pay employees, as well as its officers. Paid positions are often necessary to keep an organization up and running. However, compensation to employees must be “reasonable” in comparison to the compensation of those in similar positions in similar organizations.
- Can Board Members for a nonprofit be paid?
It is not recommended that board members, often known as Directors or Trustees, be compensated for their services as a board member. They can be compensated for other services to the organization, as long as a good conflicts of interest policy is in place and the arrangement is fair to the organization. This is because paying a board member can lead to undue influence. One of the issues the IRS will look at in granting or sustaining tax-exempt status is whether an individual is improperly benefiting from a transaction.
- Are some organizations automatically tax-exempt?
Yes. Places of worship and organizations whose annual gross receipts are not normally more than $5,000 are automatically tax-exempt. However, it is still advisable to obtain a “determination letter” from the IRS to ensure tax-exempt status.
- Does my organization need to have 501(c)(3) status to begin fundraising?
No, however, if you are going to be soliciting funds, you should register with the Ohio Attorney General Charitable Division within six months of formation (see question 12).
In the interim before you receive 501(c)(3) status, contributions made directly to your organization are not tax deductible for the donor. However, they could eventually be made tax deductible. If your application for tax exemption is approved by the IRS within 27 months from the month it was formed (by filing with the State), tax exemption will be retroactive to the date of formation. This means donors may be able to take deductions for donations contributed during that period before tax-exempt status was officially granted. Solicitations and receipts for all contributions made during this period should say that tax exemption is pending, and the donation may be tax deductible if tax-exempt status is received.
You also may want to consider fiscal sponsorship, where an entity that is already tax-exempt receives contributions on your behalf for the benefit of your new nonprofit. See below.
- What is fiscal sponsorship?
Fiscal sponsorship is an arrangement between a 501(c)(3) public charity (the “Sponsor”) and a project, in this case a nonprofit corporation, (the “Project”). In a fiscal sponsorship, the Sponsor receives and expends funds to benefit the Project.
Donors are able to make tax- deductible contributions to the Sponsor for the benefit of the Project. However, it is important to note that the Sponsor must still have discretion and control over how the funds are used. Further, the mission of the Project must fit within the Sponsor’s mission. Churches often serve as fiscal sponsors.
Sponsors often provide assistance to the Project, such as general administration, accounting, management, human resources, or fundraising, for which they may request an administrative fee. Terms should be set out in a written fiscal sponsorship agreement.
- How long does it take to incorporate and get tax exemption?
For our office, it generally takes no more than a couple of weeks to incorporate an entity, if you already have a name chosen that is not already claimed by another entity. Receiving tax exemption from the IRS can take several months, varying in part on whether your organization qualifies to use the Form 1023-EZ and whether the IRS has additional questions after receiving the completed Form 1023.
- If my organization is exempt under 501(c)(3), is it automatically exempt from state and local taxes?
Sales to entities who have been granted tax-exempt status under 501(c)(3) are automatically exempt from sales tax in Ohio. The vendor should complete an exemption certificate, however. The organization must generally apply for other exemptions with the appropriate taxing authority at the state or local level.
- Does my organization need to register with the State Attorney General to solicit funds?
Yes, although some organizations will be exempt from registration, every organization needs to at least either file a yearly registration form or file an exemption from registration. This takes place on the Ohio Attorney General – Charitable Division’s website. You must have a federal Employee Identification Number (EIN) to register with the Ohio Attorney General. You should register, or apply for exemption of registration, within six months of formation.
- What are by-laws?
By-laws are the policies, procedures and rules of governance for the board and members, if there are any. These contain methods of holding meetings, appointing board members and officers, and generally a conflicts of interest policy and other important standards. Depending on the type of nonprofit, they may also have other provisions – such as churches, which often contain statements of faith and methods of selecting the pastor, among other things. Bylaws should be simple enough to understand and should be updated as needed to reflect the needs and practices of the organization.
- How many board members are required for my nonprofit? Can I use my family members as Board Members?
Under Ohio law, you need to have at least 3 Board members but you could have as many as you would like. We do not recommend more than ten or twelve. For tax-exemption purposes, no more than 49% should be related by blood or marriage, which would include grandparents, spouses, or siblings relationships. Business partners are also considered related parties; if two or more individuals own at least 35% of a business, the IRS considers them related through business dealings. Such relationship should be carefully evaluated when considering the makeup of your Board.
- What records must a tax-exempt organization keep?
According to the IRS, an exempt organization must be able to document the sources of receipts and expenditures reported on its annual return and on any tax returns it must file. Records must support income, expenses, and credits reported on exempt organization annual returns and tax returns. For example, an organization needs to keep records of revenues derived from, and expenses attributable to, an unrelated trade or business for Form 990-T. For more information, see IRS Publication 4221-PC.
- Do we have to file a tax return?
Yes, every 501(c)(3) has to file some form of the Form 990 tax return each year.
According to the IRS, small tax-exempt organizations, which have annual gross receipts up to $50,000, generally have to file an annual electronic notice, Form 990-N.
If your gross receipts are less than $200,000 and your total assets are less than $50,000, you may file Form 990-EZ or 990. Organizations with greater receipts and assets must file Form 990.
The return is due on the 15th day of the 5th month after the end of the organization’s fiscal year. The due date may be extended for six months, without showing cause, by filing Form 8868 before the due date. An organization will only be allowed an extension of 6 months for a return for a tax year.
- What reports do we have to file on a regular basis with the State?
There are two filings with the state: an annual report filed with the Ohio Attorney General Charitable Division, and a Statement of Continuing Existence filed with the Ohio Secretary of State every five years. If we are your statutory agent, we would keep on top of the Statements of Continuing Existence filings for you. We recommend that you have a few individuals, such as board members, a CPA, or another professional, who have access to your Charitable Division account to keep on top of these reports. There are a few narrow exemptions from annual reporting requirements, mainly for places of worship.
- What kind of insurance should a nonprofit have?
That depends on the organization’s activities and budget. We recommend consulting with an insurance agent. At the least, general liability insurance will cover claims from bodily injury and property damage stemming from accidents associated with the Organization.
Directors and Officers insurance is also advisable. This offers protection to board members and officers for their activities and decisions made on behalf of the Organization.
This information is provided for the public as general information and does not intend to be, nor should it be construed to be, legal advice, nor does it result in an attorney-client relationship between the White Law Office, Co. and any recipient of this information.