You Want to Form a Nonprofit Corporation in Vermont?

Transcription

1 You Want to Form a nprofit Corporation in Vermont? what you should know before you do Dr. Jane A. Van Buren Last updated May 2012 onmark nprofit Services janevb@noonmarkservices.com

2 I. So, you think you want to be a nonprofit a). First, ask yourself WHY? Start with a pro and con list. PRO A nonprofit is eligible to compete for government and private foundation grants as well as individual contributions. Property, sales, excise and income tax exemptions are available to some nonprofit corporations. Tax deductions are available for donors (see page 11 for which nonprofits this applies.) nprofits are governed by a (usually) volunteer board of directors CON Payment of profit (i.e., dividends) or private benefits to directors, officers, or members of staff is prohibited. Reasonable salaries and standard employment benefits are allowed. Income from non-related sources must not be substantial or you risk having to pay tax. If and when a 501(c)(3) group dissolves any remaining assets must be distributed to another 501(c)(3) organization. nprofits are governed by a (usually) volunteer board of directors. Look around your community. Who else is doing what you want to do? Could you partner with them? If your organization will be short lived (i.e., formed in response to a one-time event) is there an established nonprofit willing to be a fiscal conduit? (this means willing to accept government and private foundation money on your behalf.) Are you confident in your ability to collect revenue? If you decide to go ahead and become a nonprofit... b). The next question is why incorporate? A corporation is a legal entity that enables a group of people to pool energy, time and money for profit or nonprofit activities. A corporation is treated as a separate person distinct from the people who manage, own or operate it. Many groups decide to accomplish their goals without a formal organizational structure. If you can continue to accomplish your nonprofit purposes and goals informally, you may decide to stay small and uncomplicated. If your group does not make a taxable profit (surplus), does not need tax deductible contributions, does not need to apply for public or private grant money, and has no need to adopt a corporate form for liability protection, then you should consider not incorporating. Jane A. Van Bure n, o n mark nprofit Services page 2

3 It s time to make another list of pros and cons PRO CON Legal Protections: Paperwork: Incorporating provides a valuable form of legal protection from personal liability. The nonprofit corporation may protect its directors, officers and members from personal liability for claims brought against the corporation. Lawsuits against the nonprofit can only reach the corporate assets, not the bank accounts, houses or other property owned by the individuals who manage, work for or participate as members of the corporation. * Preparedness: Preparing the standard paperwork necessary to organize a nonprofit corporation serves as a means of dealing with important organizational issues that otherwise might be ignored. Clarity of purpose and procedure will serve you in good stead when you rise to meet the countless fiscal and program challenges that lie ahead. Tax exemption: As before, if you expect to earn a substantial amount of revenue from services, exhibits or performances, you will want to apply for tax exemption. You must prepare incorporation documents such as Articles of Incorporation, By-laws, and the very lengthy IRS Form 1023 required for exempt status for charitable organizations. An annual tax return, either the Form 990, 990-N or 990-EZ, will be required for organizations. The form you use depends on the amount of your gross assets. Costs and Fees: You may end up paying an attorney or accountant to help you prepare the forms and applications. State of Vermont charges $75.00 to incorporate and the Federal Government charges either $300 or $750 depending on the organizations past or projected earnings. Accountability: You must set up and balance the financial books; deposit and report payroll taxes and file annual informational taxes. The board of directors has a fiduciary responsibility. *Be careful there are some exceptions when the assets of individual board members may be sought, such as payroll tax owed, & gross negligence. Jane A. Van Bure n, o n mark nprofit Services page 3

4 2. So, now you want to be an incorporated nonprofit a). The first question is what type? Public Benefit v. Mutual Benefit: A public benefit corporation is the kind of nonprofit most people think of the food shelf, animal shelter, private colleges and places of worship. Typically, it is public benefit nonprofit corporations that obtain 501(c)(3) tax-exempt status from the IRS (more about the tax codes on page 11). In furtherance of its charitable mission if a public benefit corporation dissolves, all of its property must go to another public benefit nonprofit corporation. The Vermont Attorney General has the authority to take a public benefit nonprofit corporation to court to ensure that it is being operated in the public interest. In contrast, a mutual benefit nonprofit corporation is formed solely for the benefit of its members. An example of a mutual benefit nonprofit corporation is a golf club. Individuals pay to join the club, memberships may be bought and sold, and any property owned by the club is distributed to its members if the club dissolves. The club can decide as written in its corporate bylaws, how many members to have, and who can be a member. Generally, while it is a nonprofit corporation, a mutual benefit corporation is not a charity. Because it is not a charity, a mutual benefit nonprofit corporation cannot obtain 501(c)(3) status. If there is a dispute as to how a mutual benefit nonprofit corporation is being operated, it is up to the members to resolve the dispute since the corporation exists to solely serve the needs of the membership and not the general public. b.) What Tax Code? The IRS has established many different tax codes for exempt organizations. Once you decide between public and mutual benefit you will have to choose a tax code under which to apply for IRS exemption (see page 11 for a list of possibilities.) The most common for nonprofit organizations are: 501(c)(3): The Federal IRC 501(c)(3) exempts from payment of federal income taxes groups organized and operated exclusively for charitable, religious, scientific, literary, and educational purposes. The Articles of Incorporation must limit the corporate activities to allowable 501(c)(3) purposes. Jane A. Van Bure n, o n mark nprofit Services page 4

5 What are 501(c)(3) Tax-Exempt Purposes? a). Benefit to the Public provide services beneficial to the public interest. b). Charitable Class benefit an indefinite class of individuals, not particular persons. Examples: These purposes are defined in the IRS regulations as valid 501(c)(3) charitable activities: Relief of the poor, distressed or underprivileged Advancement of religion Advancement of education or science Erection or maintenance of public buildings, monuments or works Lessening the burdens of government Lessening neighborhood tensions Elimination of prejudice and discrimination Promotion and development of the arts Defense of human and civil rights secured by law Providing facilities and services to senior citizens Maintaining a charitable hospital Providing a community fund to support family relief and service agencies in the community Providing loans for charitable or educational purposes Maintaining a public interest law firm. 501(c)(4): This section of the Internal Revenue Code provides a corporate income tax exemption for nonprofit social welfare groups and civic leagues. The clear advantage to this type of corporation is that they may engage in substantial legislative activities and may endorse or oppose candidates for public office (endorsements are strictly forbidden for 501(c)(3) organizations, however legislative activities are not.) The disadvantages are that they are not eligible to receive tax-deductible contributions from donors or public or private grants, nor are they eligible for property tax exemption. For more information about lobbying and nonprofit law visit the Center for Lobbying in the Public Interest: 3. So, you ve made up your mind, what next? nprofit organizations are regulated by a variety of government agencies, including two primary offices with annual or biennial filing Jane A. Van Bure n, o n mark nprofit Services page 5

6 requirements: the Internal Revenue Service, and the Vermont Secretary of State. The following steps describe the process of forming a nonprofit organization in the order it needs to happen. Contact onmark nprofit Services via at janevb@noonmarkservices.com or by phone, for help with your process. 1. RESERVATION OF A NAME: It is often worthwhile to temporarily reserve the name using the Application to Reserve a Name so that it is not accidentally or purposefully obtained by a competitor or unwitting third party. Obtain the Application to Reserve a Name form online here or visit the Vermont Secretary of State office at 81 River Street, Montpelier, VT Phone: (802) EMPLOYER'S TAX IDENTIFICATION NUMBER (EIN): Partnerships and corporations, with or without employees, must obtain an employer identification number. You may obtain an EIN immediately by completing the Form SS-4 on-line at This EIN is your permanent number and can be used immediately for most of your business needs, including opening a bank account, applying for business licenses, and filing a tax return by mail. However, no matter how you apply (phone, fax, mail, or online), it will take up to two weeks before your EIN becomes part of the IRS' permanent records. You must wait until this occurs before you can file an electronic return, make an electronic payment, or pass an IRS Taxpayer Identification Number matching program. 3. WRITE AND FILE ARTICLES OF INCORPORATION: Articles are difficult to amend and should be written in general terms. Sample Articles, and the blank form are available in the corporation section at the VT Secretary of State s web site, or by contacting the Secretary s office directly at The fee to file the articles is $ On the articles you will be asked the following questions: a) Name Registered Agent this person accepts services of process of lawsuit papers on behalf of the corporation. Any Vermont resident or any legally registered corporation in Vermont may be designated as the registered agent. The agent does not need to be a board member. A registered agent may resign at any time by giving written notice to the Corporations Division at the VT Secretary of State. Jane A. Van Bure n, o n mark nprofit Services page 6

7 b) Directors Names and Addresses List of initial directors you can list up to five, but no less than three. c) Membership If you are a membership organization you must list three members. d) Purpose use language, which will qualify the organization as charitable, tax-exempt. The Vermont form on-line makes some suggestions, and even provides model language for you to click on and attach. The IRS wants to see very specific language and will reject your application for tax exemption unless it is included. e) Dissolution this has to do with the distribution of assets upon dissolution. Again, the on-line form provides the language you should use. f) Start & End Dates unless you specify a certain date, the start date is the date your articles are approved by the State. The End Date should be listed as perpetual, unless you have a specific dissolution date in mind. Even if you complete the form on-line you must print it, sign it and mail it, with your check for $75.00 to the Secretary of State s Office, 81 River Street, Drawer 09, Montpelier, VT If there are no questions or concerns you will receive a certificate of incorporation in 2-3 weeks. The Articles do not have to be notarized and the name of the organization must include the word Inc. Every 2 years, the Secretary s Office will send you a biennial registration form, for which there is a nominal fee, (if you had no paid staff during the year the fee is waived.) If the annual registration form is not filed for any reason, there is a higher reinstatement fee. If you make changes to your articles, you can file an amendment and pay a small fee. 4. WRITE BYLAWS: The By-laws are fairly easy to amend and do not have to be perfect in order to file for 501(c)(3) status. Sample By-Laws are available on Secretary of State s web site, At a minimum, the following items should be addressed in the By-laws: Membership - its composition (if you have members), how/when membership meetings occur, what notice is required for meetings, criteria/process for calling special meetings, quorum, voting (proxy, cumulative) Jane A. Van Bure n, o n mark nprofit Services page 7

8 Board of Directors - number, election process, meetings, length of term (cannot be more than 10 years), number of terms allowed, vacancies, removals, quorum, officers, standing committees Fiscal Management - fiscal year, committee/officer responsible Amendments - how to amend Bylaws 5. OBTAIN TAX EXEMPT STATUS FROM THE INTERNAL REVENUE SERVICE (IRS): Once you are incorporated in the state of Vermont and have an EIN number you may file a Form 1023 to request tax-exempt status, Form 1023 can be found here: Form 1023 is the Application for Recognition of Exemption under 501(c)(3) of the Internal Revenue Code. You will also need to complete Form 8718 (User Fee for Exempt Organization Determination Letter Request) found here: and it s helpful to read Publication 557 (Tax-Exempt Status for Your Organization) found here: Organizations should file these forms within 15 months of incorporation. Form 1023 requires a filing fee of $ if the organizational budget is likely to average more than $10,000 per year over four years, or $ if less. To file these forms, the organization must be able to provide the following information: Description of exempt purpose and actual programs, who the organization is serving and why, demographics of the constituency, examples of trainings/workshops, etc. Financial - where will the organization's funds originate, private vs. public support; fee for service information (market rate or subsidized); lobbying information; statement of revenue and expenses for three prior or two projected years, plus best guess for current year; balance sheet. The average processing of Form 1023 is 100 days. Applicants are frequently asked for additional information, and may be sent a list of questions. Jane A. Van Bure n, o n mark nprofit Services page 8

9 4. So, now I m a 501(c)(3) what s next? Here is the list of things that either need action or are for you to think about. Sales Tax Exemption: Call the VT Department of Taxes at , to open a Vermont Sales and Use Tax Account. Once the tax department receives verification (your letter from the IRS) they will issue a Certificate of Authority and a business tax account number. You are now able to make purchases for your organization without paying state sales tax. Federal Form 990: A Return of Organization Exempt From Income Tax must be filed by 501(c)(3) organizations (except purely religious organizations) annually with the IRS. Form 990 can be found here: Occupational Safety and Health Administration: Contact this agency to determine if there are regulations which apply to your business: Accident Prevention Division of the Worker's Compensation Board, Vermont Department of Labor 5 Green Mountain Drive, PO Box 4888, Montpelier, VT Phone: (802) Fundraising: Paid (non-staff) fundraisers and solicitors are required to register with the Office of the Vermont Attorney General, using the Paid Fundraiser Forms found here: The reason for this is made clear in a report by Sorrell, William, H. (2006) Where Have All the Dollars Gone? In which he states, "Of the total contributions made to in-state charities, 71.4 percent went to the fundraisers and 28.6 percent to the charities. Property tax exemption: Many nonprofit organizations are exempt from property taxes. See Vermont State Statute for nprofit Corporations: or contact the Vermont Department of Taxes, (802) , with questions. Postage: You may be aware that special nonprofit rates are available for some Periodicals and Standard Mail mailers, but you Jane A. Van Bure n, o n mark nprofit Services page 9

10 may not know who is eligible for those rates. nprofit postage rates are lower than regular rates, but not everyone can qualify. You must determine if your business or organization is eligible for nonprofit postage rates. See the U.S. Postal Service web page for nonprofit mailing rates. Insurance concerns: Consult an insurance agent about various forms of insurance: liability, fire, automobile, employee health and life, fidelity (insuring your business against employee theft), burglary and vandalism, directors & officers, business interruption, key-person insurance, and worker's compensation cost. Hiring employees: For information on the regulation of wages and hours, Vermont Occupational Safety and Health Act rules, Vermont Workers Compensation Program, and State Labor Relations Act Provisions, contact Vermont Department of Labor, or at 5 Green Mountain Drive, PO Box 4888, Montpelier, VT Phone: (802) As a rule of thumb, nonprofits are treated in the same way as for-profit entities in regards to treatment of employees. The Department of Taxes at will provide you with information on payroll taxes and filing. Unemployment liability: For information on Unemployment Claimant (UC) compensation contact the Vermont Department of Labor, 5 Green Mountain Drive, PO Box 4888, Montpelier, VT Phone: (802) All employers must report all gross wages paid to their employees during a calendar quarter. To obtain an unemployment tax account number, contact the Vermont Department of Labor. If your organization has had four or more employees for twenty weeks or more, it must establish liability by filing Form C-1. After 20 weeks with four or more employees, a payment selection is made. If your organization is not liable, you can still elect coverage voluntarily. Jane A. Van Bure n, o n mark nprofit Services page 10

11 More capacity building considerations with which onmark nprofit Services can help. Recruiting Board Members: How will the organization's constituency be represented? How often and how long will the board meet? Where? Who will prepare the agenda, minutes and notices? Do you need a nominating committee? What about other board committees? Fundraising Plan: What amount of funds is needed and where will they come from? What is the role of board or staff in fundraising? How much will come from foundation and corporate support, government contracts, membership dues, and earned income? Accounting System: How will funds be tracked and reported? What statements will be given to the board? Staffing: What are the organization's personnel policies, payroll procedures, etc.? Community awareness: What is the plan for publicity, brochures and outreach? How will other charitable organizations be informed of your organization's work? What should be in the annual report? Who should be on a mailing list? Evaluation: How will the results of the organization's work be assessed? How will this be reported to the board? Do you need a system for board evaluation of the executive director? What about board self-evaluation of their own activities? Legal needs: Check to see if any other government agency regulates the activity of the organization (e.g. child care, health care, food service, etc.). Jane A. Van Bure n, o n mark nprofit Services page 11

12 Tax-Exempt Organization Reference Chart Derived from IRS Publication 557: Tax-Exempt Status for Your Organization (Rev Mar. 2005) te: This table may not include every type of organization that qualifies for some form of federal tax-exemption. It should not be considered legal advice or otherwise used to determine matters of law, and is provided for educational purposes only. Please use official IRS materials to insure your information is completely up-to-date and accurate. Section of IRS Tax Code Description of organization General nature of activities Application Form Annual return required to be filed Deductible Contributions allowable? 501(c)(1) Corporations Organized Under Act of Congress (including Federal Credit Unions) Instrumentalities of the United States Form ne Yes, if made for exclusively public purposes 501(c)(2) Title Holding Corporation For Exempt Organization Holding title to property of an exempt organization 501(c)(3) Religious, Educational, Charitable, Scientific, Literary, Testing for Public Safety, to Foster National or International Amateur Sports Competition, or Prevention of Cruelty to Children or Animals Organizations Activities of nature implied by description of class of organization ,, or 990- PF Yes, generally All 501(c)(3) organizations are further categorized as one of five types under IRC 509(a): Sub-class Section Description Private foundations All 501(c)(3) organizations that don't qualify as public charities. Some private foundations are additionally sub-classified as private operating foundations or private non-operating foundations, which receive some of the advantages of public charities. Public charities 509(a)(1) Publicly-supported charities. 509(a)(2) 509(a)(3) 509(a)(4) Exempt purpose activitysupported charities. Supporting organizations for 509(a)(1) or 509(a)(2) charities. Public safety charities. 501(c)(4) Civic Leagues, Social Welfare Organizations, and Promotion of community welfare;, generally Jane A. Van Bure n, o n mark nprofit Services page 12

13 Local Associations of Employees charitable, educational or recreational 501(c)(5) Labor, Agricultural, and Horticultural Organizations Educational or instructive, the purpose being to improve conditions of work, and to improve products and efficiency 2 501(c)(6) Business Leagues, Chambers of Commerce, Real Estate Boards, Etc. Improvement of business conditions of one or more lines of business 501(c)(7) Social and Recreation Clubs Pleasure, recreation, social activities 501(c)(8) Fraternal Beneficiary Societies and Associations Lodge providing for payment of life, sickness, accident, or other benefits to members Yes, if for certain Sec. 501(c)(3) purposes 501(c)(9) Voluntary Employees Beneficiary Associations Providing for payment of life, sickness, accident or other benefits to members 501(c)(10) Domestic Fraternal Societies and Associations Lodge devoting its net earnings to charitable, fraternal, and other specified purposes. life, sickness, or accident benefits to members Yes, if for certain Sec. 501(c)(3) purposes 501(c)(11) Teachers Retirement Fund Associations Teachers association for payment of retirement benefits Form or 501(c)(12) Benevolent Life Insurance Associations, Mutual Ditch or Irrigation Companies, Mutual Activities of a mutually beneficial nature similar to those implied by the Jane A. Van Bure n, o n mark nprofit Service s ; ja nevb@ noo n m ark service.com; n mark service s.com page 12

14 or Cooperative Telephone Companies, Etc. description of class of organization 501(c)(13) Cemetery Companies Burials and incidental activities Yes, generally 501(c)(14) State Chartered Credit Unions, Mutual Reserve Funds Loans to members Form or 501(c)(15) Mutual Insurance Companies or Associations Providing insurance to members substantially at cost 501(c)(16) Cooperative Organizations to Finance Crop Operations Financing crop operations in conjunction with activities of a marketing or purchasing association Form or 501(c)(17) Supplemental Unemployment Benefit Trusts Provides for payment of supplemental unemployment compensation benefits 501(c)(18) Employee Funded Pension Trust (created before June 25, 1959) Payment of benefits under a pension plan funded by employees Form 990 or 501(c)(19) Post or Organization of Past or Present Members of the Armed Forces Activities implied by nature of organization, generally 501(c)(22) Withdrawal Liability Payment Fund To provide funds to meet the liability of employers withdrawing from a multiemployer pension fund Form 990 or Jane A. Van Bure n, o n mark nprofit Service s ; ja nevb@ noo n m ark service.com; n mark service s.com page 13