Written 9/14/16
By Curt Harrington

1. If a group of people desire to do good deeds having no liability, simply meeting as friends and doing the deeds may be all that is needed.

2. Finding a host to contribute a place to do the charitable deeds is another way to maintain flexibility and not become enmeshed in finances (which carries its own brand of liability).

3. Operating so as to not charge to the public is yet another public benefit. Any money from the public is sometimes viewed as putting the entity "in business" and in some minds triggers a need for insurance. A good charity does what it does regardless of whether or not profitable and monetary concerns can be small concerns when the nonprofit has little or no overhead.

4. Minimalist "California Only" State Mechanism: A nonprofit charitable corporation can filed in California in conjunction with a minimalist approach for a little over $100 as follows: Secretary of State Incorporation $30; FTB (Franchise Tax Board) Request for Exempt Status $30; Secretary of State Statement of Officers $20 & Atty General's Charitable Registry initial registration $25. Later annual recurring fees average to $10 per year, assuming a very low $0 to $few thousand dollars' annual budget.

5. Why incorporate? One reason is liability insulation. Further the state of California gives small charities a partial liability insulation providing that the nonprofit budget is low enough. See CA Corporations code 5047.5 & 5239. See article: (http://www.patentax.com/library/nonprofit_liability.html )

6. In the U.S. most chambers are "business leagues" that often act like closed private social clubs, charging discriminatory rates to non-members using the "pay to ride or get off" 1950's model. At the time the business league federal statutes were drafted, congress indicated that even business leagues should recognize some form of public benefit purpose. (http://goo.gl/5RQ5ia ) Many chamber members may not even realize that they pay dues for policies that discourage people from doing business with them through discrimination and discriminatory pricing.

7. Its not easy to see or quantify, but I believe that more and more charities are acting in the public interest to promote business, beyond the limits of a closed group of "members" in a "business league". The increased reliance upon and use of the internet has removed many of the bases upon which discrimination has been based. The use of the charity model can be more flexible and effective, and certainly more aligned with public purposes.

8. The considerations in 7. may also lead to a decision for the nonprofit to have members or not. The nonprofit will not have shares and succession may be based upon a formula in the bylaws. Members, on the other hand, have rights in the organization, and then the organization will have corresponding liabilities to members. Organizations with members can be taken over by members. Non-member organizations can provide for a succession of officers, ex-officio, or other replacement officer procedures.

9. Remember that beyond the general of concerns about how revenue enters, leaves, and is consumed in a nonprofit a corporation, other rights and responsibilities unrelated to the charitable purpose apply. A nonprofit can sue and be sued, it can get into trouble with the taxing authorities, it can violate the law, and much more. But in addition, the Attorney General of California is always in a position to look over the nonprofit's shoulder. Its a "benefit" of being in California, you don't have the privacy level as that of a private, for-profit corporation.

10. Non-donation revenue: An entity that charges money for a business service can enable the purchaser to get a 100% write-off where the service provided is a legitimate and necessary business expense.

11. Donation revenue: Restrictions on soliciting donations exist, both in terms of (a) the representations made to donors, (b) the geographical location in which a solicitation can be made, & (c) restrictions on donors intent. There are restrictions on retained funds depending upon whether the nonprofit is in foundation status. Often times the focus on money can cause the core nonprofit purpose to be obscured or effectively forgotten.

12. Federal Exemption Application: Although not strictly mandatory (it is possible to get a charitable deduction even where the charity is does not have a standing federal exemption {see "churches"}. However, most people will not donate unless you can truthfully represent that the organization has a federal exemption granted and can show a 170(c) letter. Federal exemption government fee is $400 or $850 depending on budget (which may be another reason to start small). In addition, it may be easier to obtain a grant of federal exemption with a smaller initial budget and perhaps a track record of some activity.

13. Donation Money Pipe: Money donated by a wage earner is only partially deducted due to social security. Simply considering a 14% social security rate means that wage earner has to earn, say $107 (with an addition $7 from his employer) to get credit for $100 deduction. Even not considering the employer contribution, a worker gets a 92% deduction for $100. Corporations get a full deduction but are limited to 10% of profits. I prefer nonprofits where moving money or goods is minimal, and volunteer activity is emphasized.

14. Money paid to People related to the Nonprofit creates a first problem of PRIVATE INUREMENT. Someone related to a nonprofit that gets a monetary benefit should do so only upon (a) providing data justifying such compensation, & (b) a vote of a board that approves such monetary benefit.

15. Money to Related People creates a second problem of EMPLOYMENT TAX LIABILITY. One of the most commonly recurring problems for nonprofits involves failure to withhold tax for its employees. The same board of individuals that makes PRIVATE INUREMENT possible can have one or more of their bank accounts drained by IRS if he nonprofit gets behind on employment tax payments. Other tax failures can occur through embezzlement of employment tax, non submission of tax returns and other required filings.

16. Real Property Tax Exemption is perhaps one of the more valuable benefits of nonprofit status, but before real property ownership occurs, the full federal and state exempted nonprofit should have a complete, mature and intensively planned budget and stable operating agreement, as well as policies and a positive public reputation.

17. Don't do for-profit business activities: Where a non profit creates goods or services which are related to goods and services that might be provided by a for-profit, the government applies a UBIT (Unrelated Business Income Tax). One common UBIT mechanism is the use of an organization to advertise businesses. This activity, generally anything more than a simple one line appreciation listing on a placard, will draw UBIT TAX. Nonprofits that perform the advertising function draw UBIT as well as potential PRIVATE INUREMENT.

18. Promotion is a One Way Street: Any person or business can rave about any nonprofit. I can write miles of articles about the greatness of the American Heart Society. But if the American Heart Society does anything to promote my business, they get penalized with UBIT and we both might get penalized for private inurement (for which the penalty is high and is beyond the scope here).

19. "Start Tiny" Conclusions: Advantages of starting tiny are: (a) lower startup cost; (b) easier, less rushed process to obtain state exemption and an easier, less rushed and more accurate process to obtain federal exemption after the entity has an established & more complete history of community service; (c) financial advantages of growing both income and expenses simultaneously with less organizational stress an ability to grow naturally; (d) a more reasonable expansion to keep in step with rising insurance and overhead needs commensurate with rising budgets and values; and perhaps most importantly (e) an ability to stop growing and settle in at a lower level of operation that may optimally match with the organizations surrounding conditions.

20. Epilogue: As the nonprofit grows, the individuals running it should be aware of their efficiency. Guide Star publishes the 990 tax returns of federally exempt organizations. Those served by the nonprofit appreciate an organization that is efficient, having an effectively performed core objective and low overhead. Compared to the IRS form 990, California state records have more limited public access, with corporate lookup and Attorney General's Registry being available, but not state tax returns at this time. A charity starting at a lower level startup has more time to avoid more mistakes. The general order of the above paragraphs indicate a generalized path beginning with a minimalist route. Many variations are possible.

However, the significant transitions may include (1) transition from state to federal exemption, (2) the transition from all-volunteer to remunerated participants, and (3) land and/or large asset ownership. Another significant transition is from an earned (money for services) budget to a donative budget. If any part of the donative budget comes from government, it should be remembered that there are legislative, governmental and punitive strictures that follow government money. Experience in states other than California will vary.

http://patentax.com/curt   FOLLOW @PATENTAX ON TWITTER ......

Curt's Other LinkedIn Articles:

Oversimplified Tiny Nonprofit Progression In California

The Incredible Shrinking State Bar Annual Meeting

9th Circuit Rejects "One Day Late Rule" for Late Filed Return Tax Dischargeability

Chambers Of Commerce Should Re-evaluate Their Purpose -- Immediately!

IRS Enrolled Agent Instant Access Database Is Important For Public Protection

IRS Practitioner Verification Database - The Essence of De Minimis

Give My Start-Ups a Break!

The Tax & Patent Crossroad Checklist

Reasons that Marijuana & Bankruptcy Don't Mix

Critical Patent Timing Issues

Copyright (C) 1996-2021 Harrington & Harrington ~ All Rights Reserved