Forming a Nonprofit: The Process Essentials

1. Forming a Nonprofit: The Process Essentials • Becky Seidel, bseidel@leafferlaw.com • Colorado Bar Association, Young Lawyers Division • April 23, 2012

2. Agenda • Is a Nonprofit the Right Fit? • What Are the Formation Requirements? • What Are the Exemption Requirements? • What Are the Ongoing Requirements?

3. Is A Nonprofit the Right Fit?

4. Is a Nonprofit the Right Fit? • Some Background on 501(c)(3) Organizations: • What most people mean when they talk about charities and nonprofits • Exempt from federal income tax • Organized and operated exclusively for charitable purposes • Eligible for tax-deductible contributions • Highly regulated in terms of lobbying, political activity, transactions with “insiders” • No ownership allowed!

5. Is a Nonprofit the Right Fit? • Other Potential Alternatives: • 501(c)(4) social welfare organization • Exempt from tax • Less regulation in terms of lobbying and political activity • Still regulated in terms of transactions with insiders and ownership • Can’t accept tax-deductible contributions • For-profit organization (LLC or newer hybrid entity) • May not owe tax if no profits • Can have private ownership/share in upside • Less regulated • Can’t accept tax-deductible contributions

6. Is a Nonprofit the Right Fit? • Startup Scenario Client (or friend) approaches you with an idea for an organization. He wants to operate a restaurant that will provide job training skills for individuals who have been chronically homeless or suffered addiction to drugs or alcohol. The restaurant will operate in a busy location near the Pearl Street Mall during regular lunch/dinner hours, and will serve a menu of classic diner fare. The restaurant has the potential to make a good deal of money while also helping out the community in an important way. He asks you to help form a nonprofit, 501(c)(3) organization.

7. Is a Nonprofit the Right Fit? • Threshold questions: • Will you (or anyone) want an ownership interest in organization? • Can’t have ownership/stake in nonprofit (501(c)(3) or (c)(4)) • Can’t change your mind and change status later • Certain organizations that won’t make much profit won’t owe tax anyway • Will you rely on donations or grants? • Only 501(c)(3) organizations can accept tax-deductible contributions • Many organizations only grant to 501(c)(3) • Will you want to pursue lobbying/political activity? • 501(c)(3) organizations can only conduct insubstantial lobbying • 501(c)(3) organizations cannot participate in any political campaign activity

8. Is a Nonprofit the Right Fit? • Startup Scenario • No one wants ownership stake • Private donations and grants are a big part of the budget plan for operating the restaurant • Lobbying and political activity are not a concern • Regulation of transactions with insiders are not a problem The Plan: Move ahead as a nonprofit, 501(c)(3) organization!

9. What Are the Formation Requirements?

10. What Are the Formation Requirements? • Form as a Colorado Nonprofit Corporation • Prepare and file articles of incorporation with secretary of state • Prepare and adopt bylaws • Prepare organizational action • Set up corporate minute book

11. What Are the Formation Requirements? • Articles of incorporation • File online with Colorado Secretary of State ($50 filing fee) • Articles establish framework for operation and should address key issues like • Exempt purpose • Distributions of assets upon dissolution • Whether organization will have members • Limited liability for directors • Current process has filer fill out online form for certain information (agent, principal address, etc.) and file attachment with other required elements

12. What Are the Formation Requirements? • Bylaws • No filing requirement with Secretary of State • Bylaws establish management rules for the organization on issues like • Director selection, terms and removal/resignation • Notice and time of meetings • Officer duties • Committee structure • Indemnification of officers, directors and members • Availability of records

13. What Are the Formation Requirements? • Bylaws (continued) • Remember that articles will trump bylaws • Avoid duplication of issues in the articles and bylaws, where only bylaws typically end up getting updated • Keep just the essentials in the articles • Bylaws can be updated without Secretary of State filing

14. What Are the Formation Requirements? • Organizational Action • Adopt bylaws • Adopt policies • Elect initial directors and officers • Authorize bank accounts • Authorize filing for recognition of tax exemption with IRS • Establish fiscal year

15. What Are the Formation Requirements? • Corporate minute book • Minutes of director and member meetings • Copies of all versions of corporate documents • Articles of incorporation • Bylaws • Corporate policies • Copies of annual reports with Secretary of State

16. What Are the Exemption Requirements?

17. What Are the Exemption Requirements? • Obtain Entity Identification Number (EIN) • Complete Form SS-4 • Don’t file with IRS, but retain in your records • Information about the organization and a responsible party (e.g., president, CEO) • Apply on IRS online system (free) • Number generated right away, and official letter follows

18. What Are the Exemption Requirements? • File Form 1023 Package with IRS for Exempt Status • Form 1023 application and attachment • Fully developed description and disclosure of planned activities • Budgets • Leadership (directors, officers, key employees) • Compensation • Relationships • Fundraising plans • Plans to lobby, engage in gaming activities, foreign grants • Form 1023 Checklist • Form 2848 (power of attorney)

19. What Are the Exemption Requirements? • File Form 1023 Package with IRS for Exempt Status (cont) • Certified copy of articles of incorporation (showing evidence of filing with Secretary of State) • Copy of bylaws (can have secretary certify) • Copy of conflict of interest policy • Biographies of officers, directors and highly compensated employees and independent contractors

20. What Are the Exemption Requirements? • File Form 1023 Package with IRS for Exempt Status (cont) • Other miscellaneous items as needed • Copies of contracts for outside services (fundraising, management) • Copies of grant agreements and applications • Brochures, program literature, website print-outs • Filing fee! • $850 for organizations with annual gross receipts expected to be over $10,000 • $400 for organizations with annual gross receipts expected to be $10,000 or less Note: Some organizations need not file Form 1023

21. What Are the Exemption Requirements? • State Exemption Requirements • No filing with State Department of Revenue for income tax exemption • File for property tax exemption with Department of Local Affairs • File for state sales tax exemption • Application with Department of Revenue to avoid paying sales tax on items organizations purchase for use in their charitable activities • Many organizations will have to pay sales tax on items they sell in the course of their charitable activities, unless they meet small organization exception • File for local sales tax exemption • Application with city office to avoid paying sales tax on items organizations purchase for use in their charitable activities

22. What Are the Ongoing Requirements?

23. What Are the Ongoing Requirements? • Register and renew annually for fundraising • Charitable organization filing with Secretary of State under Colorado Charitable Solicitations Act • $10 filing fee • Registration requires information on • Organization’s purpose • Officers and directors • Revenue and expenses • Use of paid solicitors and professional fundraisers • Paid solicitors and professional fundraisers must register too

24. What Are the Ongoing Requirements? • Annual corporate and tax compliance • Periodic report with Secretary of State • Information return with IRS • 990: file if either gross receipts of at least $200,000 or total assets of at least $500,000 at year’s end • 990-EZ: can file shorter form if both gross receipts of less than $200,000 and total assets of less than $500,000 at year’s end • 990-N: gross receipts of $50,000 or less • 990-PF: all private foundations

25. What Are the Ongoing Requirements? • Annual corporate and tax compliance • Tax return • 990-T: federal return for unrelated trade or business income • State return for unrelated trade or business income • State and/or local sales tax returns (may need to file quarterly) • Donation substantiation and disclosure • Written substantiation for gifts of $250 or more • Quid pro quo disclosure for payments over $75

26. Conclusion

27. Becky Seidel, Esq. 303.781.6899 becky.seidel@leafferlaw.com 1899 Wynkoop Street | Suite 275 | Denver, CO 80202LeafferLaw.com