What is a nonprofit corporation?Forming an organization to serve an unmet needBenefits and limitations of a nonprofit corporation

2

A corporation in which no part of its income is distributed to a member, director or officer of the corporation

A nonprofit must qualify for federal Tax-Exemption under section 501(c)(3) of the Internal Revenue Code

It must be organized and operated exclusively for one or more of the following purposes: religious, charitable, scientific, testing for public safety, literary, educational, or prevention of cruelty to children or animals

3

What is the primary purpose of the nonprofit?Does the community have an unmet need?What target audience will be served?What are competing organizations already providing? Is there a strong commitment from organizers and

participants to build the nonprofit? Is there an adequate source of funds to support the

organization?

4

Benefits:oMembers and directors are shielded from personal liabilityoOrganization can be eligible to receive government or

community development loans and grants

Limitations:oNonprofit cannot be organized for the purpose of financial

profit for its members or directorsoNonprofits are absolutely precluded from engaging in partisan

political campaign activities and their lobbying is heavily regulated

5

Charitable purposes are broadly defined as services that are beneficial to the public’s interest

The organization must serve an open class of people and not limit its activities to specific individuals

Examples: Providing food for homeless, relief of the poor, distressed, or underprivileged, advancement of education, formation or maintenance of public buildings, promoting the development of arts

6

Educational purposes include instruction of the public on subjects useful to individuals for the benefit of the community and for self-development

Examples: Publishing public interest educational materials that do not conflict with certain rules and regulations with the Internal Revenue Service; conducting public discussion groups, forums, panels, lectures, or workshops; serving educational institutions, such as a college bookstore, alumni association, or athletic organizations

7

Publishing groups can obtain nonprofit status if they do not target their activities to commercial markets and sell the publications

Examples: Publishing material on environmental preservation, highway safety, or drug and alcohol abuse information

8

Characterized by community based leadership and its work primarily in the development of affordable housing, job training, and small business assistance

There are four independent bases for federal tax-exemption for a nonprofit community development organization:o Relieving the poor and distressedo Combating community deteriorationo Eliminating discriminationo Lessening the burdens of government

9

For-profit Corporation: Profits are controlled and distributed to shareholders

Unincorporated Association: Lacks the strict organizational, reporting, and registration requirements imposed on nonprofit corporations

Fiscal Sponsorship: Occurs when a group partners with an existing organization to conduct a certain activity or program

10

Step 1: Check availability of name with the Texas Secretary of State in Austin at www.sos.state.tx.us/corp/forms_boc.shtml

11

Step 2: Prepare Certificate of Formation in the document filed with the Secretary of State to form the nonprofit corporation. Certificate of formation must include:o Purpose Clause - Defines the charitable purpose of the

corporationo IRS Language - Special clauses relating to the dissolution of the

nonprofit, “inurement”, and a general statement that the corporation will follow nonprofit requirements

o Initial Directors – Names the directors constituting the initial board, with a minimum of 3 directors

12

Step 2: Prepare Certificate of Formation in the document filed with the Secretary of State to form the nonprofit corporation o Incorporator – The person who signs the certificate of

formation o Registered Agent and Address – The agent is the incorporator

or the officer of the corporation. The registered office generally cannot be a post office box

oMembers - The nonprofit corporation needs to be governed by voting members, board of directors, or a combination of the two

13

Step 3: File the certificate with the Secretary of Stateo The incorporator needs to submit the completed Certificate

of Formation in duplicate together with a $25 filing fee. This is mailed to P.O. Box 13697, Austin, TX 78711-3697.

o The incorporator needs to order a “certified copy” of the certificate of formation to submit with the federal tax-exemption paperwork

14

Step 4: Prepare BylawsoMeetingso LeadershipoProvisions for MembershipoQuorumoControlsoCommitteeso Fiscal YearoBylaw Amendments

15

16

Step 6: Apply for a federal employer identification numbero In order to be tax-exempt, an organization must obtain a

Federal Employer Identification Number and is needed whether or not the organization has members

o The organization should complete an IRS form SS-4, available on the IRS website at www.irg.gov and place the completed form in the organization’s minute book

oWhen the information is completed the EIN is obtainable easily online at https://sa2.www4.irs.gov/modiein/individual/index.jsp

17

Step 7: Prepare federal tax-exemption applicationo Must file a Form 1023 with the IRS at www.irs.gov. The site contains

step by step directions of what a Form 1023 entitleso The following must be included in the Form 1023:

Certified copy of the certificate of formation Copy of bylaws Financial statements including: Revenue and Expense Statement for

current year, and three preceding fiscal years; proposed budgets for the next two fiscal years with anticipated financial support

Narrative description of past, present and future planned activities with an emphasis on broad public benefit of the organization’s activities

Annual accounting period (fiscal year) Employer Identification Number (EIN) Statement as to whether the organization is claiming status as a

private foundation or public charity

18

Step 8: Apply for sales, franchise and hotel tax-exemption from Texas comptroller◦ To apply for state exemption based on the federal exempt

status, complete Form AP-204 located at www.window.state.tx.us/taxinfo/exempt/index.html

◦ Include a copy of the exemption determination letter issued by the IRS, including any addenda

◦ The organization name on the IRS letter must match the organization’s legal name as listed in the certificate of formation

19

Step 9: Apply for property tax-exemptions from the local tax appraisal district◦To receive the exemption, an organization should

submit Form 50-299 at www.window.state.tx.us/taxinfo/taxforms/02-form06.html

◦Also include a copy of the comptroller determination to their local appraisal district

20

A nonprofit corporation must: oHold an annual meetingoPrepare alphabetical list of names of all voting membersoRefrain from making a loan to a director. o Maintain current and accurate financial recordsoPrepare annual reports in accordance with accounting

standards

21

A nonprofit corporation must also: oKeep records, books and annual reports at its principle

office for three years for public inspectionoKeep current registered agent on recordo Submit IRS Form 990 every tax yearo Submit Secretary of State Form 802-General Information

22

The Board of DirectorsPrivate Watchdog Groups (National Charities

Information Bureau and the American Institute of Philanthropy)

The State (The Attorney General’s Office) IRS Individual Donors and Members

23

A lawyer is not required, but may help you by avoiding unnecessary mistakes which might jeopardize your ability to incorporate or gain tax-exempt status

Lawyer will also advise on certain corporate responsibilities

Lawyer may also be able to recommend an accountant to comply with ongoing federal and state tax, bookkeeping, and reporting obligations

24

25

The University of Texas Pan Americano 1201 W University Dr, ITT 1.404Ro Edinburg TX, 78539

(956) 292-7566 sbnrc@utpa.edu Hours of Operation: oMon – Frio 8 am to 5 pm

http://ce.utpa.edu/sbnrc Join us on Facebook

26