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.
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.
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.
An EIN is a nine-digit number assigned by the IRS to identify a business entity. EINs are assigned to both for-profit and Non-Profit entities. EINs are used in the tax filing process as well. A new EIN may be necessary when your business goes through a significant structural change. The IRS has additional information about obtaining an EIN here.
A Fundraising strategy is to ask local businesses, banks or institutions for corporate sponsorship. Gaining a corporate sponsor can provide a significant boost to a Non-Profit revenue stream. Be aware that most corporate sponsors request recognition in return, a “Quid Pro Quo” Contribution. However, you are only allowed to “acknowledge” your sponsor, and not provide them with advertising. Providing them with advertising can count as Unrelated Business Income (UBI) and be subject to tax or losing your 501(c)(3) Tax-Exempt Organization status. If you do provide recognition with a commercial value (advertising) than the donor can only deduct the difference in value between the donation and the item of commercial value provided the item exceeds $75 in value.