Chapter 3 Independent Organizations Without Tax-Exempt 501(c)(3) Status

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1 Chapter 3 Independent Organizations Without Tax-Exempt 501(c)(3) Status Introduction In the U.S., people can get together and pool their resources to do anything they want to do as long as the activity is legal. It s their business, not the government s. For example, in response to a natural disaster, a group of people might come together to organize a fundraiser to send money to the victims. Sometimes, people come together around an issue or an activity, decide they want to stay active, and give themselves a name. What they have done is start an informal association. In the U.S., there are many such associations. An association is basically a group of individuals who come together voluntarily to address a common interest or purpose but not to make a profit. There are many groups with very different purposes among them book clubs, recreational clubs (such as hiking or soccer clubs), historical societies, and cultural preservation groups (such as dance or music groups). In fact, there may be more formal and informal associations in the U.S. than there are formal 501(c)(3) nonprofit organizations. No one knows exactly how many exist but certainly there are hundreds of thousands. An association or organization can choose to incorporate and become a legal entity, or can remain an informal, unincorporated Example Of An Unincorporated Association In a neighborhood of Washington DC, a group of neighbors grew concerned about the negative impact of welfare and immigration reform on the well-being of refugees and immigrants living in the neighborhood. A diverse group, including both immigrants and non-immigrants, came together and created Stand for Our Neighbors. For almost 10 years now, Stand for Our Neighbors has existed as an informal association that has carried out a variety of activities designed to increase awareness and understanding of refugees and immigrants. They have never incorporated. They conduct small fundraisers to pay for the costs of their activities. association (also called a voluntary association or organization). Many of these associations never seek recognition from the Internal Revenue Service (IRS) as a 501(c)(3) tax-exempt organization. 1 Refugee and immigrant communities have a rich history of informal associations. They have created burial societies, hometown associations, soccer leagues, dance and music troupes, and informal business associations. 1 In this chapter, we use the term association to refer to those groups that have not incorporated. We use the term organization to refer to those groups that have incorporated. Federal and state law also uses the term corporation to refer to an organization that incorporates, even if it incorporates as a nonprofit. Mosaica/SEARAC/Project ROSE Page 1

2 This Chapter provides basic information about both unincorporated associations and incorporated organizations. It provides reasons why your group might choose to incorporate but not seek tax-exempt status or to stay informal. Unincorporated Associations What Are Unincorporated Associations? There are two types of unincorporated associations: 1. Unincorporated associations that file or register with their state as an unincorporated nonprofit association, and 2. Unincorporated associations that do not file or register with their state at all. Unincorporated associations that file or register with the state become legal entities although they do not acquire all of the rights of a group that incorporates. In states that have adopted a Uniform Unincorporated Nonprofit Association Act (UUNAA), associations that file or register can get a federal ID number and open a bank account in the association s name. Unincorporated associations that do not file or register with their state are not legal entities they have no existence separate and apart from the people who form them. These types of unincorporated associations often meet in people s homes, in the common rooms of apartment complexes, in libraries, and in churches, mosques, or temples. Often, members of the group donate their own money to help support the common activity. Over time, they might also raise money from members or the community though usually not large amounts and deposit the funds in a bank account set up in one person s name. How Do Unincorporated Associations Operate? More Information What is the Uniform Unincorporated Nonprofit Association Act? Many states have adopted a Uniform Unincorporated Nonprofit Association Act. This Act allows groups defined as two or more members joined together by mutual consent for a common nonprofit purpose to file with their state as an Unincorporated Association and receive some legal rights, described below on pages 2-3. States that have adopted UUNAAs include: Alabama, Arkansas, Colorado, Delaware, District of Columbia, Hawaii, Idaho, North Carolina, Texas, West Virginia, Wisconsin, and Wyoming. Below is a brief comparison of how unincorporated associations typically operate in several key areas. Where there are differences between associations that that do not file or register with their state and those that do, we note those differences. Mosaica/SEARAC/Project ROSE Page 2

3 Assets and Liabilities. Unincorporated associations that do not file or register cannot hold any assets or liabilities such as property, bank accounts, or loans in the name of the association. Any assets or liabilities must be assumed in the name of one of the association members or leaders. In fact, banks, vendors, landlords typically will not extend credit to or enter into contracts with an association that is not a legal entity. Unincorporated associations that file or register have the right to own or transfer property. They can hold any assets or liabilities such as property, bank accounts, or loans in the name of the association. Legal Liability. Unincorporated associations that do not file or register have no protection against personal liability. The members of an unincorporated association can be held personally liable for the actions and debts of the association. For example, if a dance group orders new costumes and then doesn t have enough money to pay for them, the store may demand the money from the person who ordered the costumes. Another example might be if someone is injured at an association activity. Let s say that at a soccer game sponsored by an informal soccer club, a fan is injured by a soccer player because fans were allowed to be too close to the field. Leaders or members of the club could be sued. Because the Keep in Mind Lawsuits in the U.S. In the US, anyone can sue anyone for any reason. The important question is: will s/he win? If your organization has been negligent, the person suing will be more likely to win. If your organization has taken the appropriate steps to minimize any actions or behavior that might cause harm, the person suing you will be less likely to win Either way, your organization still needs to defend against the costs of a lawsuit! association has no legal structure, a lawsuit would target individual members or leaders. And because it has no legal structure, it cannot purchase insurance, which means that the members or leaders must pay the costs of the lawsuit. Unincorporated associations that file or register have some protection against personal liability. Members of associations that file or register with the state can get protection from personal liability as long as the association does not engage in partisan political activity. This means that the individuals involved cannot be held liable for the actions of the association just because of their involvement. Fundraising. Both kinds of unincorporated associations those that file or register and those that don t can only raise limited amounts of money. They typically only raise money from members in small amounts required to pay for equipment or refreshments, for example. Why? Because as an unincorporated association: Mosaica/SEARAC/Project ROSE Page 3

4 1. You cannot offer tax deductions for donations and contributions. 2. You cannot obtain grants from government or foundations unless you get a fiscal sponsor, as described in Chapter You will have to pay taxes on any significant amounts of money raised usually anything above $25,000 a year. Further, if a lot of money goes in and out of an individual s bank account and if you are an unincorporated association, you ll have to use an individual s bank account that will raise questions with the bank and the Internal Revenue Service (IRS). Helpful Hint Raising Money to Help Back Home Unincorporated associations led by refugee and immigrant communities often hold community fundraisers to raise money to send back home to provide relief to earthquake or hurricane victims, for example, or to build a school. Again, if you are in a state that has adopted a UUNAA, and you file or register as an unincorporated association, then you can open a bank account in the association s name. But you still can t raise more than $25,000 a year, or you will have to pay taxes on the funds you raise. If your association plans to do this and you think you will raise large sums of money, it is much safer to either have a tax-exempt organization sponsor the event or to raise the funds, then give them directly to a tax-exempt entity and send them through such an entity. If you deposit large sums of money in the bank account of one of the association members, that individual may be held liable for taxes on those funds. Written Rules. Unincorporated associations whether they file or register under UUNAA or not are not required to have any formal organizing documents because they are not legally organizations. Many unincorporated associations operate informally, without written rules or defined structure. Others develop written rules that lay out how the associations will operate and a structure for making decisions. These written rules might be called articles of association or a constitution (and may be similar to articles of incorporation for an incorporated nonprofit). If your unincorporated association expects to operate for a long time, it may be wise to develop written rules that define the membership structure and how members will make decisions about the association and its activities. Leadership. Both kinds of unincorporated associations can be loosely organized, with no formal board or decision-making body. Typically, members with more time or interest choose to take on leadership roles, without any formal election. Responsibility for the activities is divided among the members, with the informal leaders providing coordination and making sure key tasks are completed. Associations that choose to Mosaica/SEARAC/Project ROSE Page 4

5 develop written rules and a more formal structure often elect a steering group or committee as the primary decision-making body. Regulatory Requirements (Reporting and Taxes). Unincorporated associations whether they file or register under UUNAA or not are not required to file annual reports with the state agency that regulates charities. Unincorporated associations do have to pay taxes on any significant amounts of money raised usually anything above $25,000 a year. Again, if the association is not incorporated, then it probably deposits funds in the bank account of an individual member. If a lot of money goes in and out of an individual s bank account, that will raise questions with the bank and the Internal Revenue Service (IRS). What Are the Advantages and Disadvantages of Being an Unincorporated Association? In summary, the advantages of being an unincorporated association include the following: You have a great deal of flexibility in determining what to do and how to do it as long as you are engaged in activities that are legal and ethical. You do not have to get approval from or file reports with any government agency. You don t have to pay any fees. You don t have to worry about compliance with regulations governing nonprofit organizations. You don t need a formal structure, written rules, or a formal decisionmaking process. You don t have to spend time on tasks needed to manage a legal entity (See Keep In Mind box). The disadvantages of being an unincorporated association include the following*: Helpful Hint As a Leader, Educate Others in Your Community! You may know groups in your community that operate as unincorporated associations. Some of these groups may in fact be raising significant amounts of money, and not be aware of the laws. As a refugee leader, you may want to educate these groups about the laws. Keep in Mind The Pros and Cons of Written Rules On the one hand, not having written rules gives you greater flexibility. The process of developing, following, and updating written rules takes time and energy. It means you have to pay attention to process. On the other hand, not having written rules can create confusion and conflict within your group. It can also be difficult to handle money without written rules. Banks, vendors, and landlords typically will not extend credit to or enter into contracts with you if you are not a legal entity. Mosaica/SEARAC/Project ROSE Page 5

6 Your members do not enjoy limited liability and may be sued individually if the association authorizes or participates in an activity that results in injury or harm to someone, has an unpaid debt, or does something that may cause legal action. Since there is no legal entity to sue, the members get sued as individuals. Without formal organizing documents articles of incorporation, charters, or bylaws members may get confused or argue about what they should be doing and how they should be doing it. *Unless you live in a state that has adopted the UUNAA and you choose to file or register under this. Then you can acquire, hold, or transfer property, sue and be sued, and have limited liability for your members. Why Choose to Be an Unincorporated Association? It may be easier to remain unincorporated if your association: 1. Has come together to meet a shortterm need and has no plans to continue once those needs are met. 2. Plans to provide services or carry out activities on an ongoing basis but does not expect to greatly expand its activities and fundraising or to have paid employees (that is, it will remain an all-volunteer group). 3. Does not plan to raise money from donors that care about taxdeductions for their contributions or want proof of tax-exempt status. Keep in Mind 4. Does not need significant amounts of money to carry out activities and does not plan to handle lots of money (again, $5,000 is a very safe cut-off and you re probably OK up to $25,000). 5. Does not need or want a complicated organizational structure to manage. 6. Is not worried about personal liability. What To Do If You Live In a State With UUNAA? The Bottom Line Do not use an unincorporated association model if you expect to receive and handle more than $25,000 a year. There are too many legal liabilities and risks to managing money without rules, structure, or protections. If you want to raise more than $25,000 and want to be able to raise money from foundations or from people who want tax-exempt status or from the government, then should incorporate (and seek a fiscal sponsor or tax-exempt status). If you don t need a bank account or don t care if it is in an individual s name or at best is noninterest-bearing, don t need limits on liability, and don t need to receive or transfer property if you see no need to be identified as an entity then you don t need to file under a UUNAA. If you want to have a bank account in the organization s name, if you do want to be able to obtain and transfer property as an organization, and you want some protection from liability, then it makes sense to be an unincorporated association but to register under the UUNAA. In addition, Mosaica/SEARAC/Project ROSE Page 6

7 filing or registering as an unincorporated association provides some formal recognition as an association and may make it easier to operate. What To Do If You Live In a State Without UUNAA? If your state doesn t have a UUNAA and/or you are very concerned with liability issues, then you may want incorporate (even if you don t plan to seek tax-exempt status recognition). What Does It Take to Make It Work? Helpful Hint When Should You Worry About Liability? Your group should think carefully about the kinds of activities it carries out and identify any potential liability risks. For groups such as soccer leagues, for example, where people can easily get hurt through the association s activities, it may be wise to choose a model that offers protection from personal liability for the members. Informal associations don t necessarily require a large investment of time and energy in building an infrastructure policies, systems, and procedures. However, if you choose to maintain your group as an informal, unincorporated association, you do need to pay some attention to planning and process. To make the association successful, its members need to: Agree on the mission and scope of the association and activities. Be sure that members, particularly the most active volunteers, share a commitment to the mission of the association, trust each other, and share equitably in getting the work done. Agree on a process for who makes decisions and how they ll make them (even if it s informal and unwritten). Pay attention to ongoing leadership development, since the founding volunteers may need or want to step down. Mosaica/SEARAC/Project ROSE Page 7

8 Incorporated Organizations without Tax-Exempt Status What Are Incorporated Organizations? When your association or organization incorporates, it becomes a legal entity. It gains a legal existence separate and apart from the people who formed it. Incorporated organizations have both specific rights and responsibilities that unincorporated associations don t have. When an association or organization not established for a business purpose incorporates, it incorporates as a nonprofit corporation a corporation formed to carry out a charitable, educational, religious, literary, or scientific purpose. So even if you do not have federal tax-exempt status from the IRS, you can still be a nonprofit organization. Keep in Mind Nonprofits and Tax-Exemption Incorporating as a nonprofit organization at the state level does not automatically grant the organization exemption from federal income tax. You must go through a separate process of applying for taxexempt status at the federal level, from the Internal Revenue Service (IRS). See Chapter 5. Tax-exemption at the federal level allows an organization to be exempt from paying taxes on its income and also allows donors to claim a tax deduction for their contribution. Further, getting tax-exempt status at the federal level, does not automatically exempt you from state sales, income, or property taxes. You need to file an additional application at the state level for that! However, generally, when people talk about a nonprofit organization, they generally mean a nonprofit with federal tax-exempt status. Incorporation is usually the first step to obtaining tax-exempt status from the IRS. However: 1. You can apply to the IRS for tax-exempt status without first incorporating, although that is not the norm. 2. As an incorporated association, you do not have to seek tax-exempt status from the IRS. How Do Incorporated Organizations Operate? What Are the Requirements? Below is a brief description of how incorporated organizations typically operate, including important requirements. Leadership and Governance. Once an organization incorporates, it is required to have a more formal structure for operating. In most states, to incorporate, a group or association needs three people who are willing to serve as the incorporators. It also needs an Helpful Hint What is the Board of Directors? The Board of Directors is legally responsible and accountable for all aspects of nonprofit organization operations. Board members must ensure that the organization operates for the public good and for the benefit of the community. Chapter 6 provides in depth information about the legal responsibilities of the Board. The Board is the key entity for an incorporated nonprofit, rather than members. Most incorporated nonprofits do not have members. Mosaica/SEARAC/Project ROSE Page 8

9 initial Board of Directors. Again, in most states, you must have a minimum of three founding Board members. The incorporators and initial Board members can be the same people. Assets and Liabilities. Incorporated organizations maintain assets and liabilities such as property, bank accounts, or loans in the name of the organization. Banks, vendors, and landlords typically will extend credit to or enter into contracts with incorporated associations because they recognized as legal entities. Legal Liability. Once an organization incorporates, then the organization rather than individual members is usually held liable for the actions and debts of the organization. For example, if a dance group that is incorporated orders new costumes and then doesn t have enough money to pay for them, the store may sue the organization. If an incorporated soccer club is sued for the costs of medical treatment by an injured fan, then it is the corporation that is sued (and should purchase general liability insurance to cover those kinds of costs!). However, even if your association incorporates, individual Board members are not fully protected from personal liability. Individual Board members can get sued as individuals but most states provide a good deal of protection ( indemnification ) to nonprofit Board members. There is no such protection if you are unincorporated, except through UUNAA. You still want Directors and Officers Insurance to cover the costs of the litigation. See Chapter 6 for in-depth discussion of Boards and liability issues. Fundraising. Like unincorporated associations, incorporated organizations without taxexempt status typically raise money from members and can only raise limited amounts of funding. Because donations are not tax-deductible, incorporated organizations usually raise relatively small amounts of money from the community and cannot obtain grants from government or foundations. They cannot seek or distribute funds beyond small amounts required for equipment or refreshments (usually, members provide the funds from their own pockets). Regulatory Requirements (Reporting and Taxes). Incorporated organizations have some reporting requirements. Once an organization or association incorporates, it then must file an annual report with the state agency that regulates charities. Associations or organizations that are incorporated as nonprofit organizations but do not have taxexempt status from the IRS can raise limited amounts of money Keep in Mind Remember that, unlike unincorporated associations, incorporated organizations can: Take or hold property in the name of the association Enter into contracts and agreements But they cannot: Offer tax deductions for contributions Receive funds from foundations or government entities Unless they find a tax-exempt fiscal sponsor or seek and obtain their own tax-exempt status. See Chapters 4 and 5. Mosaica/SEARAC/Project ROSE Page 9

10 without having to pay taxes on that income. According to the IRS, nonprofit corporations whose gross revenues are normally under $5,000 a year are considered tax-exempt under section 501(c)(3) exempt and do not have to apply for formal tax-exempt status. See Chapter 5 for further discussion of filing for formal tax-exempt status. Written Rules. To incorporate, an organization must prepare both Articles of Incorporation and Bylaws. Articles of Incorporation are the legal document that defines your organization s basic purposes and structure. Bylaws are the written rules that guide how an organization will operate and make decisions. There are some standard items that bylaws typically include, but each state also has its own requirements. See Tools You Can Use on page 21. What Are the Advantages and Disadvantages? The advantages of incorporating your organization or association include the following: 1. You gain institutional recognition. Incorporating gives your group a more formal structure and formal recognition because it says that there is an entity that is legally responsible and more likely to meet its obligations. As a legal entity, banks, vendors, landlords typically will extend credit to or enter into contracts with you. If an entity is incorporated, it is more likely to continue even if the founders leave. 2. You gain public recognition and credibility. The general public perceives most nonprofit corporations as responsible, permanent and active. It will be more willing to support an organization s programs. Media are more willing to publicize events by incorporated organizations. 3. You clarify the mission and structure of the association or organization. Without formal organizing documents Articles of Incorporation and Bylaws members may find themselves facing confusion or conflict over what they should be doing and how they should be doing it. The process of incorporating requires the individual or group starting the organization to think carefully through the mission, purpose, and structure of the organization. 4. You create broader accountability. When an association or organization incorporates, then, legally, the activities must be driven by the bigger mission and purpose of the nonprofit corporation and not the personal interests of a few individuals. Informal, unincorporated associations are more susceptible to being controlled by one or two individuals. 5. You limit the liability of individual founders, members, and directors. Your members enjoy limited legal liability and will not be held legally liable if they authorize or participate in any activity that results in injury or harm to someone, an unpaid debt, or some other potential cause for a legal suit. Mosaica/SEARAC/Project ROSE Page 10

11 6. You take the first step toward applying for 501(c)(3) tax-exempt status. If your association or organization plans to apply for tax-exemption from the IRS, you should incorporate. 7. You do not have to pay taxes on the organization or association s income, as long as the income does not exceed $5,000 per year. 8. You register and protect the organization s legal name, in the incorporation process. The disadvantages of being an incorporated association include the following: 1. You lose some flexibility in determining what to do and how to do it. Once you are incorporated, you must follow your articles of incorporation and bylaws. 2. You must comply with more regulations. The process of incorporation essentially means you must get approval from a government agency. Once you are incorporated, you must comply with some government regulations and file reports with a government agency. 3. You must pay a filing fee. You must an initial fee when you incorporate, then an annual fee when you file your annual report. (See page 13 below.) 4. You must spend time on tasks needed to manage a legal entity. For example, you must monitor compliance with your own articles of incorporation and bylaws, and keep minutes of your Board meetings. 5. You lose some individual control. Once incorporated, major decisions need to be made by a Board of Directors. Many Keep in Mind A Few Words about Accountability Points 1-5 on pages are listed as disadvantages because they require additional time, resources, and effort by the members of the association. However, these things also make your organization more accountable. Being accountable means you have to answer to someone for your actions. Your group may want increased accountability or it may need it to ensure proper management of funds raised. organizations are founded by one charismatic individual and, in an organization s early stages, it may be important for that individual s passion and vision to drive the organization. However, over time, it s important to expand that base of ownership and bring in new energy, ideas, and skills. Mosaica/SEARAC/Project ROSE Page 11

12 Why Choose This Model Why Incorporate? Note: The reasons for incorporating are very similar to the reasons for seeking tax-exempt status. Again, this is because, typically, incorporation is the first step to becoming tax-exempt. However, as other chapters will describe, you can be incorporated and not have your own taxexempt status but use a fiscal sponsor, or you can incorporate and seek tax-exempt status. Your association or organization should consider incorporating if: Your group or association has come together to address an ongoing or long-term need and hopes to exist for many years. You want the name and the organization to continue beyond the founders involvement with the organization. You will need to raise significant amounts of money more than $25,000 a year to carry out the kinds of activities you plan to undertake. You may want to hire paid staff in the future. You plan to apply for federal tax-exempt status because you want to raise funds from government, individuals, or others who want or require tax-exempt status so they can receive a tax deduction. You want the written rules and formal structure that you will be required to define in the Articles of Incorporation and Bylaws. How Do You Incorporate? This section reviews requirements related to incorporating a nonprofit organization. By incorporating, your group whether an informal association or group of individuals who have come together to engage in activities that benefit the community becomes a legal entity. For informal groups or associations, there are many advantages to incorporating as a nonprofit organization. As noted above, Helpful Hint Your Options as You Grow Let s say your association is not incorporated and is informal. Now you want to raise more money to expand your activities. You can: Become a project of another organization Find a fiscal sponsor Incorporate and seek tax-exempt status See Chapters 4 and 5. Helpful Hint Where Do You Go to Incorporate? To find out where and how to incorporate a nonprofit organization in your state, visit the homepage of your state government. Look for a link related to Starting a Business in the state. Under starting a business, there should be a link to starting a nonprofit or charitable organization. In most states, you incorporate through the Office of the Secretary of State. organizations usually incorporate before applying to become a 501(c)(3) tax-exempt nonprofit organization. However, organizations can choose to incorporate but not seek 501(c)(3) taxexempt status. Mosaica/SEARAC/Project ROSE Page 12

13 The Process of Incorporation. An organization incorporates at the state level, typically through the Office of the Secretary of State, or a department of consumer or regulatory, or a department of taxation. In most states, you must submit your Articles of Incorporation (see box on next page) along with a filing fee. States also typically require the individual who will be the organization s registered agent 2 and sometimes the founding Board members to sign the Articles and have these signatures notarized. The Articles of Incorporation. This is the legal document that sets out your organization s basic purposes and structure. In most states, it must include: The name and purpose of the corporation. The name and contact information for the registered agent. The address of the registered office. The names and street addresses of the incorporators and/or founding Board members (Note: Most states require a minimum of three founding Board members). A statement as to whether or not the corporation will have members (see page 15). A statement regarding how assets will be distributed if the organization is dissolved. (Note: When a nonprofit dissolves, the assets must go to another nonprofit.) You should keep the original document in a safe place and make sure all Board members are familiar with the Articles of Incorporation. See Tools You Can Use on page 21. Annual Filings for Incorporated Organizations. In most states, to remain a corporation in good standing, you need to file an annual or biannual report with the same agency that handles incorporation Keep in Mind Don t Forget to File Your Annual Report If you fail to file an annual report, your organization s incorporation could be revoked. If this happens, you can usually get reinstated by paying a fee. (e.g., the Secretary of State, Department of Consumer and Regulatory Affairs). The annual report is typically a 1-2 page form that asks for updated contact information and your income and expenses, and requires a filing fee. Many states offer the option of filing a one-year report or a twoyear report, and also now allow organizations to file online. Fees generally range from $25-$100, depending on the state and whether you file a one-year or two-year report. Change of Registered Agent, Registered Agent Contact Information, or Registered Office. Any time you change any of the contact information for the corporation either the individual registered agent, that person s mailing address, or the registered location for the corporation you must let the state agency know in writing to 2 A Registered Agent acts as the representative for the corporation within the state where it is incorporated. This means that the registered agent is the person who receives all official notices such as forms to be completed to meet reporting requirements. Mosaica/SEARAC/Project ROSE Page 13

14 ensure that you continue to receive any correspondence related to your incorporation. Most states have a change of registered agent or change of registered address form you can download from the Internet and mail in. Amendments to the Articles of Incorporation. If your organization makes any amendments to its articles of incorporation for example, if you change the name of the organization, or decide to become a membership organization you must file these amendments with the state agency, which must approve them. Again, the website of the agency that oversees incorporation for your state will provide information about how to do this. An Additional Step - Registration as a Charitable Organization Almost all states have laws that require charitable organizations that solicit contributions from the public via the mail, special events, telemarketing, or in person to register with the state. The state agency that handles charitable registration varies by state. In many states, it is the State Attorney General s Office. In some, it s the same state agency that handles incorporation. The purpose of charitable registration is consumer protection to protect the public from fraud. Many states exempt organizations that raise less than a certain amount of individual contributions usually within the range of $5,000 - $25,000, depending on the state as long as the solicitations for individual contributions are carried out by volunteers (not paid staff or contractors). The increasing use of online giving has created some confusion over whether or not charitable organizations must register in multiple states. The National Association of State Charity Officials (NASCO) has developed internet fundraising guidelines to help states develop their own regulations. If your organization plans to engage in significant online fundraising, you should check the requirements for the states in which you plan to fundraise. Visit the website of the National Association of State Charity Officials at Click on the link to US Charity Offices for links to the agencies that handle charitable registration in each state. Mosaica/SEARAC/Project ROSE Page 14

15 Incorporating as a Membership Organization What is a Membership Organization? Community organizations use the tem member in many different ways. Sometimes, people talk about community members. Sometimes, a member might be a member of the Board of Directors or of a specific Board committee, such as a fundraising committee. Sometimes, community organizations call people who make a financial contribution to the organization a member or a contributing member. In the United States, a membership organization is a very specific kind of legal structure. When you incorporate in your state, you must indicate in the Articles of Incorporation whether or not the corporation will have members. It is important to understand the requirements of being a membership organization so that you can make an informed decision about whether or not your ethnic community-based organization (ECBO) should be a membership organization. Deciding whether to be a membership organization has legal implications. The legal rights of members of nonprofit organizations vary by state, but usually include the right to nominate or elect some or all members of the Board of Directors, the right to set organizational directions, to approve bylaws changes, and to set policy priorities (for advocacy organizations). If you initially decide not to have members, but you later decide you do want to have members, you can submit revised Articles of Incorporation to the appropriate office in your state. Why Have Members? Members can play many important roles within your ECBO. They can: Serve as volunteers and Board members. Members can serve as a source of volunteers for program activities, office support, and every other kind of activity carried out by your organization. Members are already committed to your mission and are a good source of candidates for the Board. Members who serve as active volunteers can greatly extend the organization's service capacity, often spending many hours a week on specific projects or critical functions, from tutoring and referral services to public relations and special events fundraising. Serve as Ambassadors. Members can "spread the word" about the organization to others, providing name recognition, visibility, and credibility with your community, the general public, the press, and decision makers. Be a source of income. Membership dues can be a significant source of ongoing revenues for an organization with a large membership base. Revenues from membership dues can also be an important source of general support for your organization. Mosaica/SEARAC/Project ROSE Page 15

16 Advocate for your organization and its issues. An organization with a significant number of members can claim the right to represent and speak for them, and its constituent base brings credibility to its advocacy. Members are typically the core group for letter-writing campaigns, telephone "trees" to mobilize supporters, demonstrations, or other advocacy requiring the direct involvement of large numbers of people. Provide a mechanism for accountability. Perhaps most important for ECBOs, membership provides a mechanism for accountability to your community. Having a formal, legal membership structure in which members have a say in the organization s overall directions and choose at least some portion of the Board provides a way for the community to hold the organization accountable. If members do not feel that the organization has been meeting its mission, it can elect new Board members. Keep in Mind One of the Risks of Being a Membership Organization If the organization is structured so that members elect the Board, and if individuals can easily join the organization without expressing support for its mission or work, members have the power to take over an organization. A new group of members might, for example, come to the annual membership meeting and vote in a totally new Board of Directors and change the direction of the organization. What Are the Key Decisions Membership Organizations Need to Make? Once you decide that your organization will be a legal membership organization, you will need to make some other key decisions. These include: How will you define membership - Who is a member? What categories of membership will you have? Which members will be voting members? What principles or values do you want to make sure all of your members share? (for example, a commitment to improving the lives of refugees or to empowering refugees) What will be the requirements of membership? What will be the fee or dues structure? Will you have different levels of membership, such as Full Members and Associate members? What will be the rights and benefits of membership? What voting rights will members have? How will you manage membership? Once you agree on the basic structure of membership, you will need to briefly describe this structure in the organization s bylaws. Below, are additional questions to consider as you define the membership structure. Mosaica/SEARAC/Project ROSE Page 16

17 Who Are the Members? Once you decide that you will be a legal membership organization, you must define who can be a member and set the criteria for membership. For example, you could define membership to include any or all of the following groups: All people from the specific ethnic group(s) you represent who live within a specific geographic region (such as your city, county, or state). Anyone who is affected by the issues you address or who benefits from or receives services from your organization. (For example, some membership organizations focus their membership on their program participants or anyone who is eligible for services.) Anyone within a specific geographic region who believes in your mission and supports your work. Anyone who pays dues and provides basic contact information. In setting the criteria for membership, you should consider the following: Dues. Will all members of the ethnic group(s) you target be members or only those who pay dues? Can anyone who pays dues be a member, even if they are not part of your ethnic group? (Note: You can also make sure you set dues low in order not to exclude people of Keep in Mind limited means.) When Setting Membership Criteria Levels of Membership. Will you have one level of membership or different levels? For example, will all members have full voting rights or only some (such as only paying members or only members who are part of the ethnic group)? Many organizations have tiers of membership, such as full members, associate members, supporting members, or honorary members. For example, an African ECBO gives honorary membership to all Africans living in the city. However, only those who pay dues have voting rights. This ECBO also allows non-africans who believe in their mission to pay dues and become members, but non- Africans do not have voting rights. The organization can establish criteria for membership, but they must be applied fairly and equitably. You cannot set the criteria and then decide on a case-by-case basis who should be a member. When you set your criteria for membership, be careful not to violate civil rights laws. If you limit membership to a specific ethnic group, you would violate civil rights laws and likely not be able to get government funding. You might also have problems with your 501(c)(3) status. Criteria could include refugee or immigrant status from a particular region or country, but it should also include broader criteria such as a work or family connection to the county or interest in learning more, as well as believe and adherence to the values and mission of the organization. It is all right to focus on a particular ethnic group if you allow others who support your mission to join as well. Mosaica/SEARAC/Project ROSE Page 17

18 What Will Be the Requirements of Membership? You will need to consider and specify the requirements for becoming a member and for being a member in good standing. These might include: Paying dues Agreement with a core set of values, beliefs, or principles Volunteering a certain number of hours per month or attending a certain number of organization-sponsored events per year Participating in leadership training What Will Be the Rights and Benefits of Membership? As noted above, you will need to consider and specify the rights and benefits of membership. With regard to voting rights, you will need to decide: What role will members play in nominating/electing the Board? How many seats on the Board will they nominate or elect directly? What other decisions will members vote on? Which members will have voting rights? How else will members be invited to provide input or be consulted? How will this work? You will also need to consider other benefits, such as free or reduced cost fees for services or entrance fees for events. Additional benefits are described below. What Should Members Expect? Just as organizations expect certain benefits from their members, members expect benefits from their involvement with an organization. If they feel appreciated and involved, they are likely to stay involved. If not, members may become inactive and end their membership. Here are some things members may expect: Information that keeps them interested and involved, such as regular newsletters ( or hard copies) or informal updates on activities, advocacy issues, and accomplishments. Members need to feel that they know more than the general public about what the organization is doing, and that they get information sooner. Opportunities for personal or professional growth. Active members such as program volunteers expect initial and ongoing training and opportunities to enhance specific skills, such as public speaking. An effective system to mobilize them for action. (the modern equivalent of telephone trees ) or other approaches should give members as much notice as Mosaica/SEARAC/Project ROSE Page 18

19 possible when advocacy or other member involvement is needed. Expectations need to be clarified when people join. Evidence of appreciation. Active members are like other volunteers or donors they want to feel appreciated. This requires providing public recognition for members at events, writing thank you notes, and providing other recognition. Special benefits not available to others. Some organizations offer members benefits such as free or reduced cost fees for services or entrance fees for events. Some organizations provide other member benefits designed to increase the number of members. A Latino organization in Virginia negotiated 20% discounts on all purchases from local business owners for their members. Regular renewal requests. Even active members are unlikely to renew their membership on time unless they receive a renewal notice, preferably with a return envelope, and perhaps a reminder as well. Consider following up with a phone call asking members to renew their membership A voice in organizational decision making. For a legal membership organization, members typically have the legal right to meet at least annually to elect some or all members of the governing board of the organization and to set certain policies. If you want active members who can make informed decisions, you will need to make conscious efforts such as or mail surveys to solicit their opinions. Members also need action and feedback showing that their views are being considered. What Are the Benefits and Challenges of Being a Membership Organization? The benefits include the following: Constituency membership provides a defined group of people to whom you are accountable Credibility with community, policy makers, donors Power and influence because you speak on behalf of a documented constituency Link to community source of regular input Dues can provide useful, flexible income Advocates identified group that can mobilize quickly Support a core group of people who care about the organization and its values Volunteers a source of all types of volunteers Grassroots lobbying communications to members are not considered lobbying, which increases resources legally available for grassroots advocacy Mosaica/SEARAC/Project ROSE Page 19

20 The challenges include the following: Legal requirements in most states, members must have some authority such as electing some or all Board members, setting policies, which you must meet Benefits to members finding ways to make membership valuable and valued Resources staff time and other costs to keep membership lists updated, provide member services (costs often greater than dues income) Unclear expectations about goals of membership: constituency? donors? advocates? Inconsistent purposes if focus is on members as donors, do they become the constituency rather than the community? Continuity elected leadership sometimes changes frequently, which affects institutional memory and directions Hostile membership danger that a group may be able to use membership to take over and transform the organization, totally changing its values and directions What Are Alternatives to Membership? It s important to ensure that your ECBO gets community input and has some mechanisms for accountability to the community. However, you may not want the complexity, legal requirements, or expenses of being a membership organization. Here are a few alternative structures you can use: Project or Organizing Committees. Often, organizations bring together community residents for specific projects or advocacy campaigns. Individuals may formally join these committees or advocacy groups, sometimes paying dues. They participate actively in a particular project or set of activities, and may provide structured input to help shape or guide these activities. The individuals are decision makers within the project even though the nonprofit is not a membership organization. Community Advisory Groups. Many organizations establish advisory bodies to provide community input without a formal membership structure. Advisory group members must be program participants or residents of the target community. Sometimes these advisory groups become formally represented in decision making. For example, the advisory group may be asked to elect one or two members to represent them on the organization s Board of Directors. This requires a bylaws change, but does not create a membership organization. Board of Advisors. Sometimes organizations establish advisory bodies of experts or donors who lend their name to the organization and provide advice. They have a formal link to the organization, and may make contributions to it. They receive information, and may meet regularly to offer advice and support. Like consumer advisory groups, they may be asked to elect a representative who serves on the Board of Directors. Mosaica/SEARAC/Project ROSE Page 20