CHASE LAW NAVIGATOR
NON-PROFIT ISSUES
This section applies to religious, charitable, educational, and other non-profit organizations. In order to maintain IRS 501(c)(3) Tax-Exempt Status there are numerous duties that must be met. These duties can vary depending on the kind of non-profit organization exists but there are also many similarities that must be complied with.
TAX EXEMPT STATUS FOR NON-PROFITS
Can I solicit for donations from the general public?
"Most states, regulate solicitations of charitable contributions.
In addition, certain fundraising activities such as bingo and small games of chance are regulated at the state, local and county levels."
Are there limitations as to how donations can be used for non profit purposes?
"Approximately 40 states have enacted charitable solicitation statutes. Although specifics vary, state statutes usually require organizations to register with the state before they solicit the state's residents for contributions. In most states, certain organizations are specifically excluded or exempt from the registration requirements. Although most states exempt similar types of organizations, specific exemptions vary from state to state.
In Kentucky, KRS 357.657 governs:
1. Prior to any solicitation, every charitable organization required by the Internal Revenue Service to file a federal Form 990 and soliciting contributions in the Commonwealth, or for which contributions are solicited shall file with the Attorney General a copy of its most recent federal Form 990 unless exempted by KRS 367.660.
2. If a charitable organization is newly formed and a Form 990 has not yet been filed with the Internal Revenue Service, a notice of intent to solicit, in a form prescribed pursuant to administrative regulations promulgated by the Attorney General, shall be filed prior to any solicitation. Each chapter, branch, or affiliate of a charitable organization shall file a separate notice of intent or report the necessary information to its parent charitable organization that shall then file a consolidated notice of intent to solicit. If a consolidated notice of intent is filed, information arising out of the activities of each chapter, branch, or affiliate of the charitable organization in this state shall be covered in the notice. A separate notice of intent shall be filed for each chapter, branch, or affiliate upon the request of the Attorney General. The notice shall expire on December 31 of the calendar year in which it was filed.
3. The Form 990 shall be filed with the Attorney General each year in which contributors are solicited in the Commonwealth at the same time the form is filed with the Internal Revenue Service. If a Form 990 is not filed with the Internal Revenue Service, a new notice of intent to solicit shall be filed with the Attorney General."
Are nonprofits required to return donations not used for a stated purpose?
"One of the things that you learn quickly when starting and operating a 501(c)(3) organization is that you have to handle money wisely. A nonprofit is no different than any other business in that you must make ends meet. Otherwise, your charity will cease to exist. And, as many nonprofits soon learn, it doesn’t really matter whether the economy is in recession or is booming…being wise about your organization’s financial resources is essential.
Understanding Restricted and Unrestricted Funds
Understanding that there are two types (or buckets) of funds, restricted and unrestricted, is the first step in getting this right:
Restricted Funds: These are funds that are set aside for a particular purpose. Sometimes it’s temporarily restricted, meaning that the restriction could end due to a specified time limit, or more likely, by the completion of a project, such as the construction of a facility. Funds that are permanently restricted are usually meant to be saved or invested in an endowment fund, the interest earnings of which can be used for a particular activity or general operations.
And, restricted means RESTRICTED! This is not a trivial matter. Donors can take legal action against a nonprofit that it believes is misusing restricted donations. The last thing your charity wants is to be in the cross-hairs of the Attorney General’s office.
Unrestricted Funds: As the name suggests, unrestricted funds don’t have strings attached and may be used by the nonprofit for whatever purpose it deems necessary. This money typically goes toward normal operating costs.
So, how does money get restricted? It is critical to point out that only a donor can restrict funds by designating their contribution to a particular use. For that reason, it is absolutely essential that a nonprofit understand how soliciting donations impacts whether money is restricted or unrestricted."
NONPROFT BOARD OF DIRECTORS
Is a board of directors required for a non profit?
Yes, It is legally required for a nonprofit to have a board of directors, whose duties involve the responsibility of making sure that the nonprofit follows nonprofit law, adheres to its mission, and stays financially stable.
What are the rules surrounding the board of directors for my non profit?
"There are many rules for Board of Directors of nonprofit organizations laid out in the attorney general's handbook. Here are some of them (directly from the handbook):
FIDUCIARY RESPONSIBILITIES OF BOARD MEMBERS AND SENIOR MANAGEMENT
1.DUTY OF CARE
Board Members, senior management and members of committees must perform their duties in a manner they reasonably believe to be in the best interests of the corporation using the same degree of care, skill, caution and diligence that a person of ordinary prudence would use under similar circumstances. Decision-makers are required to make reasonable inquiries when analyzing contracts, investments, business dealings, and other matters.
An individual who is acting in conformance with this standard will:
• attend and participate in board meetings on a regular basis;
• attend and participate in committee meetings when the individual is a member of the committee;
• diligently read, review, and inquire about material that affects the corporation;
• keep abreast of the affairs and finances of the corporation; and• use independent judgment when analyzing matters that affect the corporation.
Decision-makers may rely on information provided by their employees, committees, attorneys, public accountants and qualified professionals as long as the decision-maker reasonably believes that the information provided is reliable. Decision-makers must use their own independent judgment when evaluating information. Individuals who fail to meet the prescribed standard may be personally liable to the corporation if their actions cause financial harm.Board members, trustees and senior management have a fiduciary responsibility when handling finances and investments. That simply means, they must exercise the degree of care, caution and diligence that prudent persons would exercise in handling their own personal investments and finances. Individuals who have or claim to have special knowledge or skills in the area of investment will be held to a higher standard. Fiduciaries who carelessly or negligently invest funds may be personally liable for any losses sustained.
2.DUTY OF LOYALTY
Board members and senior management must always perform their duties in good faith with the best interests of the organization in mind. This means that they must not seek to derive private gain from business transactions that involve the nonprofit corporation or advance their own interests at the expense of the corporation. Acts of self-dealing constitute a breach of fiduciary duty which may result in personal liability to the nonprofit organization. Board members, trustees, and senior management should avoid conflicts of interest and even the appearance of impropriety. Individuals who take advantage of corporate opportunities to make profits for themselves at the expense of the corporation may be liable for the profits they received at the organization’s expense."
Can I maintain control of the non profit I create?
Every nonprofit corporation must have a president, a secretary and a treasurer. Although it is not necessary to use the above titles, every nonprofit corporation must have an individual who fulfills each of those roles and the same individual may fill multiple roles. In order to avoid the appearance of impropriety, it is best not to give one individual too much control over the corporation. Instead, power should be distributed among different officers or board members. A corporation may have as many officers with as many different titles as it deems necessary.
NONPROFIT REGISTRATION
What are the steps required for starting (incorporating) my nonprofit organization?
"Incorporate a Nonprofit
This process is very similar to creating a regular corporation except that you have to take the extra steps of applying for tax-exempt status with the IRS and their state tax division. These are the steps to take to incorporate your nonprofit:
- Choose a business name - Make sure to check the state-by-state information on the various laws that apply to naming a nonprofit in your state.
- Appoint a Board of Directors - Draft your bylaws with guidance from your Board of Directors. These are the operating rules for your nonprofit.
- Decide on a legal structure - Choose whether your organization will be a trust, corporation, or association.
- File your incorporation paperwork - You must next file formal paperwork, or articles of incorporation, and pay a small filing fee to your state. Look up your state office through the National Association of State Charity Officials (NASCO).
- Apply for tax-exempt status - A nonprofit organization may be eligible for exemption from federal income tax. The IRS provides guidance and instructions on applying for tax-exempt status. Learn more about federal tax exemption requirements in IRS Publication 557 - Tax-Exempt Status for Your Organization or by calling the IRS Tax Exempt and Government Entities Hotline at 1-877-829-5500.
- Obtain necessary licenses and permits - Does your nonprofit have all the licenses and permits needed to comply with federal, state, and local rules?"
What government entity sets the rules for non profit businesses?
"The federal government delegates most of the responsibility for regulation and oversight of nonprofit organizations to the state governments.
The I.R.S., however, regulates arguably the most important benefit of nonprofit status - being tax exempt. So, it's best to look both at the federal IRS codes on nonprofits, as well as at the state attorney general and department of justice regulations for guidance."
https://www.irs.gov/pub/irs-pdf/p557.pdf
Kentucky
https://ag.ky.gov/Priorities/Protecting-Kentuckians/charity/Pages/default.aspx"
What Are the Different Types of 501(c)(3) Organizations?
The IRS designates eight categories of organizations that may be allowed to operate as 501(c)(3) entities. Most organizations are eligible to become one of the three main categories, including public charities, private foundations and private operating foundations.
DONATION SOLICITATIONS
Can I solicit for donations from the general public?
"Most states, regulate solicitations of charitable contributions.
In addition, certain fundraising activities such as bingo and small games of chance are regulated at the state, local and county levels."
Are there limitations as to how donations can be used for non profit purposes?
"Approximately 40 states have enacted charitable solicitation statutes. Although specifics vary, state statutes usually require organizations to register with the state before they solicit the state's residents for contributions. In most states, certain organizations are specifically excluded or exempt from the registration requirements. Although most states exempt similar types of organizations, specific exemptions vary from state to state.
In Kentucky, KRS 357.657 governs:
1. Prior to any solicitation, every charitable organization required by the Internal Revenue Service to file a federal Form 990 and soliciting contributions in the Commonwealth, or for which contributions are solicited shall file with the Attorney General a copy of its most recent federal Form 990 unless exempted by KRS 367.660.
2. If a charitable organization is newly formed and a Form 990 has not yet been filed with the Internal Revenue Service, a notice of intent to solicit, in a form prescribed pursuant to administrative regulations promulgated by the Attorney General, shall be filed prior to any solicitation. Each chapter, branch, or affiliate of a charitable organization shall file a separate notice of intent or report the necessary information to its parent charitable organization that shall then file a consolidated notice of intent to solicit. If a consolidated notice of intent is filed, information arising out of the activities of each chapter, branch, or affiliate of the charitable organization in this state shall be covered in the notice. A separate notice of intent shall be filed for each chapter, branch, or affiliate upon the request of the Attorney General. The notice shall expire on December 31 of the calendar year in which it was filed.
3. The Form 990 shall be filed with the Attorney General each year in which contributors are solicited in the Commonwealth at the same time the form is filed with the Internal Revenue Service. If a Form 990 is not filed with the Internal Revenue Service, a new notice of intent to solicit shall be filed with the Attorney General."
Are nonprofits required to return donations not used for a stated purpose?
"One of the things that you learn quickly when starting and operating a 501(c)(3) organization is that you have to handle money wisely. A nonprofit is no different than any other business in that you must make ends meet. Otherwise, your charity will cease to exist. And, as many nonprofits soon learn, it doesn’t really matter whether the economy is in recession or is booming…being wise about your organization’s financial resources is essential.
Understanding Restricted and Unrestricted Funds
Understanding that there are two types (or buckets) of funds, restricted and unrestricted, is the first step in getting this right:
Restricted Funds: These are funds that are set aside for a particular purpose. Sometimes it’s temporarily restricted, meaning that the restriction could end due to a specified time limit, or more likely, by the completion of a project, such as the construction of a facility. Funds that are permanently restricted are usually meant to be saved or invested in an endowment fund, the interest earnings of which can be used for a particular activity or general operations.
And, restricted means RESTRICTED! This is not a trivial matter. Donors can take legal action against a nonprofit that it believes is misusing restricted donations. The last thing your charity wants is to be in the cross-hairs of the Attorney General’s office.
Unrestricted Funds: As the name suggests, unrestricted funds don’t have strings attached and may be used by the nonprofit for whatever purpose it deems necessary. This money typically goes toward normal operating costs.
So, how does money get restricted? It is critical to point out that only a donor can restrict funds by designating their contribution to a particular use. For that reason, it is absolutely essential that a nonprofit understand how soliciting donations impacts whether money is restricted or unrestricted."