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Click on the IRS Icon below for information and resources from the Internal Revenue Service.

See also the IRS  

"ABCs for Exempt Orgnizations".

Click on the Board Source logo below for resources about Nonprofit Organizational Management.

Volunteers

 

All Board Members are volunteers.  But they must spend the time necessary to fulfill their legal responsibilities to the Organization.  And they should never ask a member to volunteer to provide legal, accounting or professional services other by serving on a committee where their skills may be put to good use. The Board must have independent professional advisors.

 
Paul R. Hales, Esq.
3534 Washington Ave.
St. Louis, MO 63103
 
TEL: 314-534-3534

501 (c)(3) Exempt Nonprofit Organizations

Legal and Corporate Compliance

Fund Raising 

1. Getting Started: Nonprofit Organizations 101

 

Nonprofit Tax Exempt Status

 

The United States Internal Revenue Code, 26 USC Section 501 (c) establishes 28 different categories of organizations that are exempt from taxation.  The most widely used exempt organization is organized for charitable, religious, educational, and scientific purposes under Section 501 (c)(3) of the Code. Corporations which for IRS purposes only includes Limited Liability Companies (LLCs), as well as qualifying Trusts and Unincorporated Associations are eligible for tax exempt status under Section 501 (c)(3).  Nonprofit Corporations, LLCs and Trusts are the focus of this page.  
 

Organizational Structure

 

The Nonprofit Corporation is the most familiar and widely used type of tax exempt organization.  The LLC is a new type of organization widely used to organize for profit businesses and becoming used more often for nonprofit organizations.  Both provide a shield from personal liability for directors, officers, members and employees, when they are properly organized and managed.  Many states including Missouri do not have a specific Nonprofit Limited Liability Company statute.  However, Nonprofit Limited Liability Companies may be formed and operate in Missouri.    
 

Basic Organizational Documents

 

A Missouri Nonprofit Corporation is formed by filing Articles of Incorporation and an LLC is formed by filing Articles of Organization with the Secretary of State.  Trusts are formed by an organizing document that may be called an Indenture, Declaration or Agreement between a Settlor (Grantor) and Trustees.  Corporations are governed according to By-Laws, LLCs are governed according to Operating Agreements and Trusts are governed by their organizing document.  All organizational documents are submitted to the IRS in applying for tax exempt 501(c)(3) recognition.  They must contain specific provisions to qualify for tax exempt status.  A 501(c)(3) organization may be classified by the IRS as either a Public Charity or Private Foundation and their are important distinctions between the two that organizers must understand. 
2. Managing the 501(c)(3) Organization

 

Although it may not seem like it, obtaining 501(c)(3) tax exempt recognition from the IRS is the easy task.  Complying with the legal responsibilities of managing the Nonprofit Organization presents an ongoing and increasingly challenge.  The Organization must keep books and records detailing all activities, both financial and non-financial. Record keeping, policy making and reporting requirements have become more exacting and continue to develop.

3. Legal Responsibilities of the Nonprofit Board

 

For convenience, "Board" will be used to refer to the governing bodies of Nonprofit Corporations, LLCs and Trusts. Board Members have collective and shared fiduciary obligations to the Organization which are defined as the 3 Ds:

 

  1. the Duty of Care - know what is going on;
  2. the Duty of Loyalty - put the best interests of the Organization first:
  3. the Duty of Obedience - comply with law and the Organization's governing documents.

 

The Board should establish specific policies including:
  1. Conflict of Interest;
  2. "Whistle-Blower" Protection;
  3. Document Retention and Destruction; and,
  4. Harassment prevention.
It should also have policies on Financial Management and Fiscal Accountability, Confidentiality and an Employee Handbook setting forth employment policies.  


 

A. Nonprofit Organization Compliance Policies in General

 

Effective Compliance Policies must be easy to understand and implement. 

Keep in mind the 3 Cs:

 

  1. Clarity - understandable and easy to read;
  2. Concise - neither long nor complicated; and,
  3. Coherent - logical and easy to follow. 
  

B. Employee Handbook

 

The Employee Handbook should follow the 3 Cs and state basic information an employee needs concerning the organization and its policies including:
  1. Employment Policies - compliance with employment law, background checks, orientation of new employees, employee reviews and disciplinary procedures (provide for due process but strenuously avoid complexity); background checks and performance reviews are to be performed.
  2. Employee Benefits - explain employee benefits such as insurance, vacations and holidays;
  3. Payroll -  salary and wage administration, time keeping,  sick leave, excused or un-excused absences, deductions, pay advances, and employee reimbursements;
  4. Workplace Guidelines - may include flex time or telecommuting;
  5. Employee Conduct - guidelines for employee behavior and conduct on the job including substance abuse, smoking, harassment, and workplace violence;
  6. Privacy - guidelines concerning protection of privacy of the employee, the Organization, and if appropriate, people and entities served by the Organization; and,
  7. E-Policies - guidelines for the use of the Organization's information technology defining acceptable and prohibited activities and the use of e-mail and the Internet.
 
4. Nonprofit Board Vigilance - The Ongoing Duty of Care 

 

The Duty of Care requires the Board to review its performance regularly.  This means evaluating its own performance as a Board as well as the performance of the Organization's management and to review its organizational documents and policies annually with legal, financial and human resource experts to ensure compliance with the ever-changing requirements for Nonprofit governance.

5. IRS Form 990

 

Most 501(c)(3) Nonprofit Organizations are required to file Form 990, an annual information return with the IRS.  Form 990 requirements have changed recently and the Board must ensure that the Form 990 is prepared accurately and filed timely.
6. Fund Raising
 

A. Planned Giving


 Planned Giving provides benefits for both the Nonprofit Organization and the Donor.  For the organization, it creates long-term, reliable funding to accomplish the organization’s mission, enhances planning and the opportunity to build relationships with the donor community.  For the donor, planned giving permits the donor to accomplish a philanthropic purpose and if structured properly can provide both resources and tax advantages to the donor and the donor’s family.  Commonly used vehicles include Chritable Remainder Trusts and Charitable Gift Annuities.  Any planned gift must be carefully designed with tax and legal advisors to make sure it accomplishes the donor's purpose.
 

B. IRS Documentation


 Section 501(c)(3) organizations are required to keep books and records detailing all activities, both financial and non-financial and must meet certain requirements for documenting charitable contri­butions. The IRS requires two general disclosure rules:

 

  1. The donor must obtain a written acknowledgment from a charity for any single con­tribution of $250 or more before the donor can claim a charitable contribution on his/her federal income tax return; 
  2. A charitable organization must provide a written disclosure to a donor who makes a payment in excess of $75 partly as a contribution and partly for goods and services pro­vided by the organization.
     

Note:

Financial infor­mation, particularly information on its sources of support (contributions, grants, sponsorships, and other sources of revenue) is crucial to determining whether a nonprofit organization is a public charity or a private foundation.