Creating a Section 501(c)(3) Organization Elaine Waterhouse Wilson Quarles & Brady, LLP 500 West Madison Street Suite 3700 Chicago, Illinois 60661 (312)

Creating a Section 501(c)(3)

Organization

Elaine Waterhouse WilsonQuarles & Brady, LLP

500 West Madison StreetSuite 3700

Chicago, Illinois 60661(312) 715 5141

[email protected]

Before You Start….

• Should you create a new organization?– Is there an existing organization that

does this?– Would a donor advised fund work

better?– Can you partner with another

organization?

• Do a (not a) business plan– Not just your charitable activities– Where are you going to operate from?– Who is paying the utilities?– Who is doing the work? Are you

paying them?– Where is the money coming from?

State Law Versus Federal Tax Law

• First, create an entity under state law– Usually a not-for-profit

corporation• Certainty

• Limited Liability

– Can be a charitable trust• Harder to change

• Fewer Trustees

– Might also be an unincorporated association

Not-For-Profit Corporations

• Articles of Incorporation– Start with Secretary of State's form here

in Illinois

– Not all states require this

• IRS requirements in addendum– Authorize charitable purposes

– Prohibit activities not allowed under Section 501(c)(3)

– Dissolution clause

– Prohibition of inurement, excess lobbying and political activity

– Private Foundation Excise tax rules

Other Articles Issues

• Members versus non-members– A not-for-profit corporation can have

members or can have a self-perpetuating board

– Different then "fundraising" memberships – corporate members have powers like a shareholder without financial interests

• Name your Directors – How Many?– Functional issues – too large, too small

– Statute regarding range

– Executive and other committees

Initial Meeting

• Pass Bylaws– Generally, all the tax requirements are

in the Articles– These are functional

• Name Officers– How many do you have?

• Pass a conflict of interest policy• Pass a whistleblower and document

retention policy (SOX and new 990)• Pass banking resolutions• By unanimous consent or at an

actual meeting• Sign Form SS-4 to get an EIN

Register with the AG

• Illinois requires all charities to register with the Office of the Attorney General

• www.illinoisattorneygeneral. gov/charities/index.html• Form CO-1 and $15.00 filing

fee• All forms available at the

website• Form AG-990-IL required

annually

http://www.illinoisattorneygeneral/

ALL ORGANIZATIONS• Taxable and Tax-exempt

ALL TAX-EXEMPT ORGANIZATIONS

• Pensions/Retirement Plans(Section 401(a))

• All Section 501 (c)(1) through (c)(27) organizations (including such things as unions, clubs, black lung trusts, etc.)


ALL TAX-EXEMPT ORGANIZATIONS

• Pensions/Retirement Plans(Section 401(a))

• All Section 501 (c)(1) through (c)(27) organizations (including such things as unions, clubs, black lung trusts, etc.)ALL SECTION 501(C)(3)

ORGANIZATIONS• Operated exclusively for charitable,

educational, scientific, religious, etc. purposes

• Can be a nonprofit corporation OR a charitable trust

• Contributions are generally tax deductible under Section 170

• Private Foundations

• All non-public charities and non-supporting organizations

• Excise Taxes• Lower

Deductability Limitations


• Private Foundations

• Publicly Supported Organizations under Sections 509(a)(1) and 509(a)(2)

• Supporting Organizations under Section 509(a)(3)

• Higher Deductability Limitations

• No Excise Taxes

PrivateOperating

Foundations

Section 4942(j)

Section 501(c)(3) Organizations

(3) Corporations . . . 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 (but only if no part of its activities involve the provision of athletic facilities or equipment), or for the prevention of cruelty to children or animals, no part of the net earnings of which inures to the benefit of any private shareholder or individual, no substantial part of the activities of which is carrying on propaganda, or otherwise attempting, to influence legislation (except as otherwise provided in subsection (b)), and which does not participate in, or intervene in (including the publishing or distributing of statements), any political campaign on behalf of (or in opposition to) any candidate for public office.









Section 501(c)(3) Requirements

1. Organized and operated exclusively

2. An exempt purpose3 No private inurement4. No substantial amount

of lobbying5. No political activities

Organized and Operated

Exclusively• Organized-Documents must

contain all requirements• Operated-Charity must

actually function in accordance with those requirements

• Authorize charitable activities• Prohibit more than an

insubstantial amount of non-charitable activities

– Investments, unrelated trade or business activities

– Lobbying

• Prohibit all political activities and private inurement

• Payment of assets to charity upon dissolution

Exempt Purposes under Section 501(c)

(3)• Religious

– Churches– Related religious organizations

• Charitable (including prevention of cruelty to animals and children)– Relief of the poor and distressed or

underprivileged– Advancement of religion, education

or science– Erection or maintenance of public

works– Lessening the burdens of government– Promotion of social welfare through

lessening of neighborhood tensions, fighting prejudice and discrimination, defending human and civil rights or combating community deterioration and juvenile delinquency.


(3)

• Scientific and Testing for Public Safety– “Conduct research in the public

interest”– Make research results public– Research performed for the

government– Research directed toward

benefiting the public• Curing disease• Educating students• Publications• Aiding a geographic area by

attracting and retaining industry


(3)

• Literary and Educational– Schools–organizations devoted

to the instruction or training of the individual for the purpose of improving or developing his capabilities

– Other Educational Organizations–organizations devoted to educating the public on subjects useful to the individual and beneficial to the community.

• Amateur Athletics– Section 501(j)–Qualified

Amateur Sports Organizations

Private Inurement and Private Benefit

• Private Inurement-“no part of the net earnings of which inures to the benefit of any private shareholder or individual”– Statutory in nature–no de minimis exception

(but see Section 4958)– Diversion of exempt assets away from the

activities of the organization– Assets must inure to the benefit of an

“insider”

• Private Benefit-the organization must operate for the benefit of the general public and not to provide private benefits to a limited group of individuals– Judically created from the operational test– Allows incidental benefits– Can be conferred on any individual, not just

“insiders”

**All private inurement is a private benefit, but not all private benefit

constitutes private inurement**

Lobbying and Political

Activities

• Political Activities– Generally, involvement in

political campaigns– Absolutely prohibited

• Lobbying– Generally, influencing the

content of legislation by contact with legislative officials or executive officials responsible for drafting legislation for introduction

– Subject to the “no substantial part” rule or a Section 501(h) election

ALL SECTION 501(C)(3) ORGANIZATIONS

• Operated exclusively for charitable, educational, scientific, religious, etc. purposes

• Can be a nonprofit corporation OR a charitable trust

• Contributions are generally tax deductible under Section 170

Private Foundations

•All non-public charities and non-supporting organizations

•Excise Taxes•Lower Deductability Limitations

PublicCharities

•Publicly Supported Organizations under Sections 509(a)(1) and 509(a)(2)

•Supporting Organizations under Section 509(a)(3)

•Higher Deductability Limitations

•No Excise Taxes

Public Charities

• Section 509(a)(1)-Organizations described in Section 170(b)(1)(A) other than subsections (vii) and (viii)– Section 170(b)(1)(A)(i)–Churches– Section 170(b)(1)(A)(ii)–Schools– Section 170(b)(1)(A)(iii)–Hospitals and

Medical Research Organizations– Section 170(b)(1)(A)(iv)--State

University Endowments– Section 170(b)(1)(A)(v)–Governmental

Units

• Section 170(b)(1)(A)(iv)–Publically Supported Charities

•One-third of the charity’s total support is from the general public

•No one contributor’s donation can count toward public support more than 2% of total support

Public Charities

• Section 509(a)(2)–Service Provider Charities– One-third of the charity’s total support

is from the general public and from fees for services rendered

– No more than one-third of the charity’s total support is from investment income and UBTI

• Section 509(a)(3)-Supporting Organizations– Relationship Test–must have a

specified relationship with one or more named public charities

– Organizational and Operational Test–the supporting organization must be organized and operated exclusively for the benefit of its supported public charity only

– Disqualified Person Test–cannot be controlled by disqualified persons

Federal Filing Requirements

• Application for Tax Exempt Status– Form 1023 for Section 501(c)(3)

organizations (www.irs.gov)– Generally, no due date, but filing

within 27 months of date of creation will give you exempt status retroactive to the date of creation for Section 501(c)(3) organizations

– Filing exceptions for churches and small organizations

• What happens next?– The "we got your letter" letter– Divides into three hoppers

• Easy• Need more, but administrative• Needs agent review

IRS Filings

• Annual Information Return– Form 990 for most exempt

organizations – NEW FORM– Form 990-PF for private

foundations– Generally due 5 months and 15

days after the close of the fiscal year (May 15)

– Exceptions for churches and small organizations

• Form 990-EZ• Form 990-N – "e-postcard"

State Tax Exemptions

• State Income Taxes– Generally, organizations exempt from

federal income tax under Section 501(a) are also exempt from Indiana income tax

– However, check your state – some states require an additional filing – the exemption is not necessarily automatic!

• Sales and Use Taxes– http://

www.revenue.state.il.us/NonProfits/index.htm

• Property Taxes– Real and personal property tax

exemptions are usually not based on the organization’s charitable purpose, but on the actual use of the property.

http://www.revenue.state.il.us/NonProfits/index.htm



Other Issues

• Gaming– Charitable gaming is highly

regulated– This includes raffles and door

prizes– http://www.revenue.state.il.us/

CharityGaming/index.htm

• Charitable Solicitation– If you are using professional

fundraisers, there are additional registration and reporting requirements