Starting a Non Profit 101: Affiliate Formation & Governance
Each new “I Have A Dream” affiliate must take steps to establish themselves as an independent charitable organization
The steps in this process include:
- Determination of tax-exempt status
- Creation of a Board of Directors
- Insuring the affiliate and its participants
Laws regarding these issues vary from state to state and from municipality to municipality and are subject to change, therefore each affiliate must seek competent legal advice in its own locality. To assist affiliates in securing professional services locally, some suggestions for finding legal counsel and auditors are provided below. Some great resources are also available here.
Establishing A Nonprofit: In Depth Learning and Resources
All “I Have A Dream” Programs must be incorporated as nonprofit entities. A new Program may gain this status by associating with an existing “I Have A Dream” Affiliate in the same locale or by forming a new one.
Incorporation occurs at the state level, so Programs must consult local legal counsel for guidance. The basic steps necessary for incorporation are filing the articles of incorporation, drafting bylaws, and holding an initial organizational meeting. Every IHDF Program must be incorporated in accordance with its state’s laws and licensed by the national IHDF Foundation. To complete this process, a new Program may either be associated with an existing Affiliate in its locale, or it may separately establish itself as an incorporated nonprofit entity and sign a licensing agreement with the national “I Have A Dream” Foundation.
New IHDF Programs may be incorporated in two ways. The first and easiest approach is to join an already formed IHDF Program in their vicinity. If this is not possible, the second approach is to create a new nonprofit corporation by following the legally required incorporation procedures of the state where the Program will exist. Since incorporation is a state-driven process, consulting local legal counsel is essential.
- Articles of incorporation The first step to incorporation is to draft and file Articles of Incorporation with the state. The individuals who sign the Articles are the legal founders of the corporation and are called the “incorporators.” Each state sets its own requirements for the number of incorporators required and the conditions they must meet. Typically, at least one of the incorporators must be a U.S. citizen, and all must be either 18 or 21 years old, depending on the state. Each state also sets its own requirements for the content of the Articles of Incorporation. In general, the Articles define the name of the nonprofit corporation and its purposes. Certain provisions may be required to establish the corporation’s fulfillment of IRS requirements for 501(c) (3) organizations. Draft the Articles carefully since any future changes will require state approval.
- Filing and Fees The Articles, along with a filing fee that varies from state to state, should be filed with the appropriate state agency. Approval usually takes less than one month, but it is best not to delay submitting all the required paperwork because the Program will need to supply its approved Articles with its application for tax-exempt status. This process takes four to six months. In addition, minor technical errors can result in the Articles being returned for correction and resubmission. Potentially the most expensive cost associated with incorporation is legal fees.
- Bylaws The next step is drafting bylaws that establish the rules for governing the organization. For example, bylaws typically define how members of the Board of Directors are elected and removed, the number and length of terms of office board members serve, and procedures for amending the bylaws. Bylaws are also required as part of the organization’s application to the IRS for tax-exempt status.
Writing bylaws can be tedious and it is tempting to rush through the process. Unfortunately, the result of haste is often incomplete and boilerplate bylaws that provide little meaningful guidance to the Board of Directors. This may not be a problem for an IHDF Program that is fully funded by a small group of Sponsors who constitute the Board of Directors, but this is not typically the case. Increasingly, Programs are formed by coalitions of individuals and organizations that seek board representation. Also, Programs often include members of the community on their boards, which ensures community interests are represented and brings outside expertise, professional services, and fund-raising power to the organization. Thoughtfully crafted bylaws can establish a common understanding of the mission and purposes of the organization and provide a framework for continuity and the handling of potential conflicts.Because the needs of organizations tend to change over time, the bylaws should be regularly reviewed and amended as needed. The Program’s bylaws should always be kept current with the Program’s current decision making and operating structure. This can help avoid confusion or conflict down the road when board membership changes. The terms of the bylaws themselves should set forth the process for making amendments, which may be done by tl1e board in many jurisdictions. Governmental approval is not required.
- Organizational Meeting To complete the incorporation process, the Program must hold its first official meeting as an organization. The organizational meeting is necessary to: (1) adopt the bylaws, (2) elect directors and officers, (3) establish the fiscal year, (4) adopt a resolution to open bank accounts, and (5) set policy about who can withdraw funds and sign checks. Be sure to take minutes. Many states require organizations to keep an official written record of board and committee meetings. Some states may also require the organization to adopt a corporate seal.
- Tax-Exempt Status After incorporating, Programs must apply to the Internal Revenue Service to obtain tax-exempt status.Programs may be established as private operating foundations or public charities. The chief determinant is the Program’s sources of funding. After incorporating, the Program must apply to the IRS to obtain exemption from federal income tax under Section 501(c) (3) of the Internal Revenue Code. Designation as a 501 (c) (3) organization is also necessary for the Program to qualify as an organization to which contributors can make tax-deductible donations.
There are many advantages to incorporating as a nonprofit corporation. The most important are:
- Exemption from federal, state, and local taxes Most, sometimes all, of a nonprofit corporation’s income and assets are not subject to federal, state, and local taxation. Usually, if a nonprofit corporation is granted tax-exempt status by the Internal Revenue Service (IRS), the nonprofit may receive tax exemptions from state and local governments as well. The process for obtaining tax-exempt status from the IRS is outlined later in this section.
- The tax deductibility of donors’ gifts and contributions Donors may deduct gifts and contributions to Section 50l(c)(3) tax exempt nonprofits from their federal (and possibly state and local) income taxes. From the fund-raising perspective, this is the most important feature of incorporating as a nonprofit. The organization, which should qualify for tax-exempt status as a charitable organization under Section 501 (c) (3) of the Internal Revenue Code, needs to provide donors with proof of their gifts and contributions for their tax records. The organization should acknowledge all gifts of cash, stocks, or property with a receipt indicating the organization‘s 501 (c) (3) status, the date the gift was received, and a description of the property contributed. The acknowledgement should also include a statement that no goods or services were received in exchange for the contribution. If goods or services were received in exchange for the contribution, this is called a quid pro quo contribution. Provide the donor with a good-faith estimate of the value of the goods or services received. This is very important information because the donor may deduct only the difference between the value of his or her contribution and the value of the goods or services received. For example, a local IHDF Program holds a fundraising dinner and tickets cost $100 each, but attendees receive a chicken dinner valued at $40. The donors can deduct only $60 for each ticket as a charitable contribution.
- The limited liability afforded to directors of nonprofit corporationsThe directors and officers of a nonprofit corporation are not normally personally liable for the debts of a nonprofit corporation. In essence, creditors may reach only the assets of the corporation but not the assets of the people behind the corporation. However, this rule may not hold in cases such as fraud, self-dealing, or commingling of personal and corporate assets, where those protected by limited liability have abused the corporate form. One important exception to the rule of limited liability is the directors and officers may be held personally liable if the corporation does not pay the employer’s share of payroll taxes, commonly known as FICA.
There are basic differences between public charities and private foundations. When a new IHDF Program applies for its 50l(c)(3) status, the incorporators must also decide whether to seek private foundation or public charity status. This is a decision that requires consideration of many legal, financial, and tax issues. The information here will describe the basic distinction between the two, but all new Program organizers should also discuss their decision with their local legal counsel.
The biggest distinction between these two types of organizations is their funding sources. Private foundations are typically organizations that have one primary funding source such as an individual, a family, or a corporation. Most are grant-making institutions, but some are private operating foundations. Private operating foundations provide direct charitable services. A good example of this category would be an IHDF Program funded solely by an individual Sponsor.
Public charities, on the other hand, are “public” in the sense that their financial support comes from a broader base of funders. In order to achieve public charity status, however, the organization must satisfy one of the IRS “public support tests” to demonstrate that its funding comes from many different sources or that other facts and circumstances warrant it being granted public charity status.
Local IHDF Affiliates and individual IHDF Programs can be either private operating foundations or public charities, depending on the diversity of their funding sources. Applicants for 501 (c) (3) status will be designated as private foundations unless they indicate in the application that they are applying for public charity status. Private foundations are subject to more oversight and regulation from the IRS than public charities. However, private foundations do not have to be concerned with conducting sufficient fundraising to meet the public support test on an ongoing basis. Public charities, on the other hand, are subject to less regulation and may apply for and receive grants from private foundations for which private operating foundations may not be eligible. If a Program decides to seek public charity status, it must consult legal counsel for assistance.