A trust is a legal construct in which one person (the trustee) holds legal title to property previously owned (by the settlor) for the benefit of another (the beneficiary).
A non-profit can exist as a trust, when the trustee is under the obligation to use or hold the property for a charitable purpose.
A non-profit can also be named as the beneficiary to a trust, when the settlor makes a Planned Gift.
An unincorporated association is the least formal structure available to a non-profit organization. Generally, an unincorporated association is not involved in doing any business, but rather is united under a local community interest. For example, a volunteer organization that collects arts and crafts supplies for local elementary schools facing budget cuts and either receives the donations directly from the retailer or makes purchases with the proceeds from an annual spaghetti feed fundraising event, would probably remain an unincorporated association rather than choose to go through the process of incorporating.
An unincorporated association is exposed to more personal legal liability for the organizers, but is likely a low liability risk to begin with. An unincorporated association can purchase an insurance policy to address some of these concerns. An unincorporated association must register their name with their state’s Secretary of State office. For a registration in California, click here.
A non-profit can lose its 501(c)(3) Tax-Exempt Organization status if it generates too much unrelated business income from the exempt function of the organization. If your business idea addresses a social need but you plan on retaining a profit from your business, you can consider structuring your business as a Social Enterprise rather than a non-profit. California recently introduced two “hybrid” corporate forms for social enterprises: the Flexible-Purpose Corporation and the Benefit Corporation.
In the process of incorporating, it must be stated in the Articles of Incorporation which type of corporation is being formed. The options differ from one another primarily in stated purpose, permitted asset distribution, and level of regulation.
A public benefit corporation structure can be chosen for either a charitable or a public purpose, but may not distribute assets to members or directors of the organization, and are subject to the most extensive regulation. A public benefit corporation may be eligible for a federal tax exemption as a 501(c)(3) Tax-Exempt Organization.
A Fundraising strategy includes inviting donors to arrange for planned gifts. A planned gift is a very formal method of making a donation, and can either involve the Non-Profit being included in the donor’s will or setting up a Trust with the option of paying out during the donor’s lifetime. A planned gift usually involves less liquid assets such as stock, insurance, property or other financial assets. Due to the level of formality and the typical value of the donation, a planned gift is usually crafted with the assistance of a tax specialist and/or attorney.
A nonprofit organization is an organization that does not operate for financial gain purpose, but uses its funds to achieve its goals. Its surplus funds cannot be redistribute to its owners and shareholders. Examples of non-profit organizations include charities, trade unions, trade associations and public arts organizations
Many types of groups can seek nonprofit status. The following ones may be eligible: childcare centers, shelters for the homeless, community health care clinics and hospitals, museums, churches, synagogues, mosques, and other places of worship, schools, performing arts groups, and conservation groups.
Non-profit groups can gain tax exemptions when they obtain corporate status. Nonprofit corporations usually get their tax exemptions from Section 501(c)(3) of the Internal Revenue Code. It not only enables a nonprofit to be free from paying taxes, but also allows people and organizations that donate to the nonprofit can take a tax deduction for their contributions.
The two major types of nonprofit organization are membership and board-only. A membership organization elects the board and has regular meetings and power to amend the bylaws. A board-only organization typically has a self-selected board, and a membership whose powers are limited to those delegated to it by the board. A board-only organization’s bylaws may even state the organization does not have any membership, although the organization’s literature may refer to its donors as members.
As a result of some accounting scandals in the early 2000’s, both the federal and state legislatures acted to increase the oversight of corporate accounting practices. California’s Nonprofit Integrity Act of 2004 requires that all nonprofits with annual revenues $2 million or more must have an audit prepared by an “independent” CPA. In addition, the audit must be overseen by an audit committee, whose members must not constitute more than half of a nonprofit’s finance committee. The nonprofit must also make the audit available to the public and the attorney general.
A non-profit that has qualified as a 501(c)(3) Tax-Exempt Organization is prohibited from any lobbying efforts that go beyond those that are insubstantial. However, to be permitted to do any lobbying at all, the 501(c)(3) organization must submit a 501(h) election, available as Form 5768 from the IRS. A 501(c)(3) organization risks losing its tax-exempt status if it becomes involved with political activity beyond what is permitted by the 501(h) election. A non-profit seeking to influence legislation more actively should consider gaining tax-exempt status as a 501(c)(4) Action Organization.
Drafting a governance policy is an important step in ensuring that your Non-Profit is up-to-date on the important features of a comprehensive governance policy. When the IRS reviews an application for a 501(c)(3) Tax-Exempt Organization, it will look for the following established policies:
1. bylaws that govern the non-profit, including how the Board of Directors is elected
2. a conflict of interest policy
3. a compensation policy
4. an investments policy
5. a fundraising policy
6. documentation of governance decisions
7. document retention and destruction
8. a whistleblower claims policy
The governance policy is most importantly applied to the Board as it relates to their fiduciary duty to the non-profit.
An extensive discussion on the contents of an effective governance policy are discussed in an IRS publication.]
An exemption certificate is a document that entitles a seller to avoid being liable for the sales tax on an item sold if the purchaser can verify that the property will be used for an exempt purpose. An agent or employee of a 501(c)(3) Tax-Exempt Organization can make tax-free purchases for their organization if they timely provide the seller with the proper exemption certificate.