Starting a Non Profit 101: Affiliate Formation & Governance

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.

IRS form 1023

The application for 501(c) (3) status requires more paperwork than applying for incorporation. The Program must complete and file IRS Form 1023, “Application for Recognition of Exemption Under Section 50l(c)(3) of the Internal Revenue Code.” Form 1023 requires several attachments including a description of the program, a list of the Board of Directors, a list of funding sources, a fund-raising plan, and the Program’s Articles of Incorporation and bylaws. As programs that offer scholarships, IHDF Programs must also complete the Schedule H Form 1023. Refer to boilerplate language in IHDF-National’s information kit and fact sheets to ensure that the filing accurately describes the program. This is especially important when describing the terms of the tuition assistance.

Access to, and more resources on, form 1023 can be found here.

Note: It can take up to 6 months for an application to be processed. The current filing fee is $600. 

Form 2848

Form 2848 should also be filed with Form 1023. This form grants power of attorney to allow a lawyer, accountant, or other legal rep­resentative to deal directly with the IRS on behalf of the IHDF Pro­ ject. If Form 2848 is not filed, the IRS will communicate only directly with the Program.

Form SS-4

Form SS-4 must be filed so that the organization can receive its fed­eral employer identification number (EIN), a unique identification number analogous to an individual’s social security number.

Letter of Determination

Once approved as a 50l(c) (3) organization, the IRS will send a Letter of Determination indicating the Program’s tax-exempt status. Keep this letter in a safe place. Foundations and corporate donors often ask for it as proof of the Program’s tax-exempt status. It is not uncom­mon for the Program to receive a list of questions from the IRS requir­ing further clarification of the Program’s application before a Letter of Determination is issued. Don’t be discouraged and don’t hesitate to call the local IRS contact person to ask about the inquiries. The con­tact person can be very helpful, and these inquiries are a standard part of the application process.

Form 990 & 990PF

The Sponsor, board members, and particularly the Program’s Treasurer and accountant should familiarize themselves with the Form 990 (for public charities) or the Form 990PF (for private founda­tions), which must be filed four and one-half months after the Pro ­ ject’s fiscal year closes. This form serves as the Program’s annual information return to the IRS and requires disclosure of detailed information about the organization’s operations.

Additional, up-to-date guidance from the IRS can be found here.

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.