FORMING A NEW NONPROFIT ORGANIZATION:
What to do and think about when you are deciding whether to form a new nonprofit organization.
Setting up a new nonprofit organization requires planning and preparation before, during, and after the nonprofit is formed. Such planning is essential to the nonprofit’s long-term sustainability. This document is intended as a guide to the life cycle of a Wisconsin nonprofit organization. It will provide a broad overview of the before, during, and after steps and requirements regarding forming and maintaining a nonprofit corporation. Every nonprofit organization should seek legal advice before beginning the formation process.
BEFORE SETTING UP A NONPROFIT ORGANIZATION
Be able to describe the following ten questions in detail:1 o What will be the nonprofit’s charitable purposes? See IRS Publication 557: Tax Exempt Status for Your Organization Link: http://www.irs.gov/pub/irs-pdf/p557.pdf o What will be its core activities? o Who are its intended beneficiaries? o Are there existing nonprofits with a similar mission, and, if so, have you discussed your ideas with them? o Can your mission be furthered more effectively and efficiently by an existing nonprofit? o Can you attract sufficient resources to start and operate a new nonprofit? o Have you drafted a business plan (including a three-year projected budget)? o Are you familiar with what it takes to start and run a nonprofit in compliance with the law and best practices? o Have you considered alternatives to forming a new nonprofit, such as fiscal sponsorship? o Whose help will you need to form the nonprofit and get it running? These initial ten questions are just the beginning to forming a new nonprofit. Other things to consider: o Researching: identifying supporters, beneficiaries, environment, and competitors and allies. o Seeking advice from: existing nonprofits, attorneys, accountants, etc.
Emily Chan & Gene Takagi, Alternatives to Forming a Charitable Nonprofit: A Start-Up May Not Be in Your Client’s Best Interests, Business Law Today 15 (vol. 18 no. 6 2009).
OPTIONS FOR TYPES OF NONPROFITS THAT CAN BE FORMED
An unincorporated association is a group of individuals who do not take legal action to create a separate legal entity. This is common for neighborhood associations or small one-time event groups. A non-stock corporation is a corporation that does not issue capital stock. Typically, this type of corporation is a nonprofit because it aims to provide a particular service and is not motivated by financial gain. However, it is still a corporation and subject to state and federal requirements. A fiscal sponsorship is a term used to describe the relationship between an individual or group of individuals who have initiated a charitable project and an existing tax-exempt organization (“the sponsor”) that has agreed to support the 2 project. The most common type of a fiscal sponsorship is when the project is housed within the sponsor’s 3 building, conducted by the sponsor’s employees, and the project has no separate legal existence.
Unincorporated Association – Chapter 184 of WI statutes o Best structure: informal, small organizations with limited exposure to liability and fewer fundraising needs. o Examples Neighborhood associations Small theater groups o Advantages Entity can be tax-exempt and accept tax deductible contributions No required formalities for formation and few required for operation. Most flexible nonprofit structure o Disadvantages Somewhat less liability protection than with corporations No framework of rules to assist is organizing operations Many individuals and donors prefer making grants or contributions to nonprofit organizations with a determination letter from the IRS. This type of organization will not have that letter so the ability to raise funds may be limited. Non stock Corporations – Chapter 181 of WI Statutes o Best structure: default option for nonprofits with day-to-day activities o Advantages Entity can be tax-exempt and accept tax deductible contributions Preferred structure for recipients of foundation grants Clear statutory rules to guide activities and operations o Disadvantages Complex formational and operational requirements Including record keeping and governance requirements Fiscal Sponsorship o What is this? A fiscal sponsorship is a contractual relationship between an organization and an existing nonprofit. The existing nonprofit accepts and manages the funds for the organization The organization must adhere to the existing nonprofit’s tax-exempt purposes
Id. at 17. Id.
The organization essentially becomes a program under an existing nonprofit and receives its ability to accept tax-deductible contributions through this relationship What type of organization does this work for? Typically, this is the best structure for new nonprofits that are still deciding what they would like to do and where their supporting funds will come from. Also, for nonprofits who would rather focus on their direct charitable activities instead of focusing on maintaining an independent nonprofit.
Note: There are several other options for the formation of a WI nonprofit organization. ** Please contact M-LINC or an attorney for additional information.
HOW TO SET UP A WI 501(C)(3) TAX-EXEMPT CORPORATION
If you have determined that forming a new nonprofit corporation is the best approach for your organization, follow these steps:
STEP 1: Draft ARTICLES OF INCORPORATION
Requirements for Articles of Incorporation in Wisconsin (Chapter 181.0202) o A statement of the corporation’s tax-exempt purposes. This means that the articles MUST include a statement of the corporation’s purpose. This should be drafted broadly so that it encompasses all current, future, and potential activities of the corporation. It MUST fall within the limits of an IRC section 501(c)(3) organization. E.g., charitable, educational, religious, educational, etc. o A Corporate Name must be selected. The name must include one of the following: Corporation, Corp., Incorporated, Inc., Company, Co., Ltd., or Limited Must be distinct from other Wisconsin corporations Confirm name availability with the WI Dept. of Financial Institutions Consider trademark and website availability as well o The mailing address of the initial principal office of the corporation o The street address of the corporation’s initial registered office and the name of its initial registered agent at that office o Name and address of each incorporator o State whether or not the corporation will have members. o State if the corporation is authorized to make distributions (See WI Statute 181.1302(4)) o Important Facts A WI nonprofit must have at least three directors (the Board of Directors) Members are not required Typically, most nonprofit corporations have the following officers: President, vice-president, secretary, and treasurer.
The positions are elected by the board of directors to carry out the dayto-day business of the nonprofit One person may be both a director and an officer o This is typical is small nonprofit corporations.
**Contact M-LINC for model draft Articles of Incorporation and further guidance.
STEP 2: File ARTICLES OF INCORPORATION with the Wisconsin Department of Financial Institutions (“WDFI”).
Source: http://www.wdfi.org/_resources/indexed/site/corporations/form102_f.pdf o Model Articles of Incorporation: Can be obtained by contacting M-LINC. o NOTE: The Department of Financial Institutions provides a model articles of incorporation, however, use with caution because they do not contain information required by the IRS for a 501(c)(3) corporation. o Fee Schedule for the WDFI: http://www.wdfi.org/corporations/fees/us.asp
STEP 3: Draft BYLAWS
Bylaws are the body of internal rules and procedures adopted by the nonprofit’s board of directors, and, if applicable, its members. o Common bylaws rules & procedures: Conflict of interest policy IRS Form 990 advises each nonprofit to have one Elections of directors & officers. Powers of its members, if any. o IMPORTANT The bylaws are NOT filed with the state of Wisconsin NOTE: WI statute chapter 181 does impose certain requirements for nonprofit corporations that should be included in the organization’s bylaws. Such as having a minimum of three directors. (Wis. Stat. §181.0803). Refer to Chapter 181 for further default rules: http://www.legis.state.wi.us/statutes/Stat0181.pdf
**Contact M-LINC for model draft bylaws or further guidance.
STEP 4: Hold an Initial Meeting of the Board of Directors
This meeting is held AFTER the articles of incorporation have been filed with WI’s Department of Financial Institutions. Meeting should cover: o Adoption of bylaws; 4
o Ratification of the actions of the incorporator; o Elections of officers; o Authorization of an officer to open bank accounts on behalf of the nonprofit; o Authorization of the necessary state and federal filings. (See step #5). Any action permitted at the initial meeting of the board of directors may be taken without a meeting if each director signs a document detailing the actions so taken.
**Contact M-LINC for model meeting minutes, other model forms, and general guidance.
STEP 5: Complete Necessary Wisconsin and Federal Filings
Obtain employer identification number (“EIN”) via IRS Form SS-4 o Link to Form: http://www.irs.gov/pub/irs-pdf/fss4.pdf o Link to Instructions: http://www.irs.gov/pub/irs-pdf/iss4.pdf File IRS Form 1023 to obtain tax-exempt status o Link to Form: http://www.irs.gov/pub/irs-pdf/f1023.pdf o Link to Instructions: http://www.irs.gov/pub/irs-pdf/i1023.pdf o Note: Form 1023 can be difficult for organizations to complete, especially newly formed organizations. Often the responses will be the “best guess” of what will be expected. For example, Part IV on page 2 asks for a narrative of past, present, and future activities of the organization. Most new organizations will have to create a narrative that constitutes a “best guess” of its planned activities that will encompass its charitable purposes. Similarly, Part IX, the financial data, can present an obstacle for new organizations. Again, a “best guess” of the revenues and expenses of the organization is expected. This data is often discussed in a complete business plan. File IRS Form 8718 to determine the user fee to be paid to obtain tax-exempt status o Link to Form: http://www.irs.gov/pub/irs-pdf/f8718.pdf Power of Attorney & Tax Information Authorization Forms o Attach Form 2848 to Form 1023, Power of Attorney and Declaration of Representative, if someone other than your principal officer or director will represent you on matters about the application o Attach Form 8821 to Form 1023, Tax Information Authorization, if you want the IRS to be able to provide information about your application to an employee other than a principal officer or director. File Wisconsin Form S-103 to obtain exemption from Wisconsin sales tax for purchases by the nonprofit. o Link to Form & Instructions: http://www.revenue.wi.gov/forms/sales/s-103.pdf File Wisconsin Form 296 to register to solicit funds in Wisconsin or Wisconsin Form 1954 if the organization is exempt from the registration requirement o Also, the nonprofit must register in any other state it plans to solicit funds. o Link to WI Form: http://drl.wi.gov/dept/forms/fm296.pdf Other forms may need to be filed depending on the organization o Link to other Forms: http://drl.wi.gov/prof/char/form.htm WI has several other requirements for nonprofit corporations such as o Licenses for raffles etc. **Contact M-LINC for further information and general guidance. 5
**See IRS website for the IRS life cycle of a 501(c)(3) public charity. Link: http://www.irs.gov/charities/charitable/article/0,,id=122670,00.html This “life cycle” addresses various other issues. For example “how to jeopardize your exempt status.” **See IRS Publication 4220 for the IRS overview of applying for tax-exempt status. Link: http://www.irs.gov/pub/irs-pdf/p4220.pdf
ONGOING REQUIREMENTS FOR A WI NONPROFIT CORPORATION Step 1: File IRS Form 990 Annually
Form 990 – for the largest organizations classified as public charities Form 990-PF – for organizations classified as private foundations Form 990-EZ – for mid-sized organizations classified as public charities Form 990-N – for the smallest organizations classified as public charities o SOURCE: http://www.irs.gov/charities/article/0,,id=184445,00.html
2007 Tax Year (Filed in 2008 or 2009) Gross receipts normally ≤ $25,000 Gross receipts > $25,000 and < $100,000, and Total assets < $250,000 Gross receipts ≥ $100,000, or Total assets ≥ $250,000 2008 Tax Year (Filed in 2009 or 2010) Gross receipts normally ≤ $25,000 Gross receipts > $25,000 and < $ 1 million, and Total assets < $2.5 million Gross receipts ≥ $1 million, or Total assets ≥ $2.5 million 2009 Tax Year (Filed in 2010 or 2011) Gross receipts normally ≤ $25,000 Gross receipts > $25,000 and < $500,000, and Total assets < $1.25 million Gross receipts ≥ $500,000, or Total assets ≥ $1.25 million 2010 Tax Year and later (Filed in 2011 and later) Gross receipts normally ≤$50,000 Gross receipts > $50,000 and < $200,000, and Total assets < $500,000 Gross receipts ≥ $200,000, or Total assets ≥ $500,000 Form to File 990-N 990-EZ or 990 990 Form to File 990-N 990-EZ or 990 990 Form to File 990-N 990-EZ or 990 990 Form to File 990-N 990-EZ or 990 990
Step 2: File a Wisconsin Annual Report
All Wisconsin nonprofits must file an annual report with the Wisconsin Department of Regulation and Licensing. The report will be mailed by the state to the organization’s registered agent If the nonprofit receives more than $5,000 in a year o Generally, file Wisconsin Form 308 If the nonprofit receives $5,000 or less in a year OR the nonprofit is solely operating in one community and raising less than $50,000 o File Wisconsin Form 1943 – an affidavit in lieu of the annual financial report These forms MUST be filed with the WI Department of Regulations and Licensing within six months of the end of the organization’s fiscal year (July 1st for calendar year organizations) o Note: There are additional financial review requirements for organizations receiving contributions of over $200,000 and $400,000 Link for more information o http://drl.wi.gov/dept/forms/fm285.pdf
**Contact M-LINC for further information
Step 3: File IRS Form 990-T and Wisconsin Form 4-T – Annually if Taxable Income
File these forms when the nonprofit has unrelated business taxable income of $1,000 or more More information about IRS Form 990-T: o http://www.irs.gov/charities/article/0,,id=158822,00.html IRS Form 990-T: o http://www.irs.gov/pub/irs-pdf/f990t.pdf More information about WI Form 4-T: o http://www.revenue.wi.gov/forms/2007/07ic-102.pdf WI Form 4-T: o http://www.revenue.wi.gov/forms/2008/08ic-002.pdf
Step 4: Keep Minutes at All Board of Directors Meetings
Model meeting minute forms can be obtained by contacting M-LINC.
Step 5: Annual Re-registration to Solicit Funds in Wisconsin (and other states where funds are solicited)
See WI Form 296 – Must be completed by August 1st of each year. o The fee to register to solicit in WI is $30 (as of August 2009). o Link to WI Form: http://drl.wi.gov/dept/forms/fm296.pdf
Contact M-LINC for guidance on registering to solicit funds in other states.
Step 6: Disclosure Obligations
The nonprofit will be subject to various federal disclosure obligations For example, o The nonprofit must make its annual IRS filing (IRS Form 990) for the last three years and its application for tax-exempt status (IRS Form 1023) available for public inspection without charge at its principal office during regular business hours. The nonprofit must provide a copy of such documents without charge (other than reasonable fees for reproduction and postage costs) to any individual who makes a document request Other obligations can be found at o Link: http://www.irs.gov/charities/nonprofits/article/0,,id=156610,00.html o Link to required public disclosures: http://www.irs.gov/charities/article/0,,id=135008,00.html
Step 7: Substantiation of Gifts
Upon receipt of any gift with a value of $250 or more, the nonprofit must provide the donor with a receipt indicating (i) the property received (if not cash), (ii) the date it was received, and (iii) whether the donor received any goods or services in return (not including certain de minimus gifts – which generally means gifts under $75). o For example, if someone donates $300 and receives a bumper sticker in return, it is not necessary to report the bumper sticker as something they received in return for their donation. If a donor makes a gift of more than $75 and receives goods or services in return, the nonprofit must prepare a receipt indicating the property donated and the fair market value (not cost) of the goods or services received. In addition, due to more stringent documentation requirements recently imposed on charitable tax deduction claims, some donors may ask for statements to substantiate smaller donations. Many nonprofits prepare statements for all donors regardless of the value of the item or amount donated to assist their donors in claiming a charitable income tax deduction. This, of course, can be quite time consuming. See IRS Publication 1771 for more information: http://www.irs.gov/pub/irs-pdf/p1771.pdf
Step 8: Other On-going Requirements
The nonprofit must maintain complete and accurate books and records. Such books and records must contain information necessary to prepare the nonprofit’s tax returns and other annual reports If the nonprofit has employees, it must file employment tax returns, withhold taxes, pay FICA tax, pay state and federal unemployment taxes, and obtain worker’s compensation insurance. If the nonprofit sells taxable items, it may need to obtain a Wisconsin seller’s permit and collect sales tax. The nonprofit must file sales tax returns if sales tax is due. Occasional exemptions apply. o Application for WI seller’s permit : http://www.dor.state.wi.us/forms/sales/btr-101.pdf o More information: http://www.dor.state.wi.us/faqs/pcs/seller.html#s2 **Contact M-LINC for more information 8