Article

Org 2 - Legal, Incorporation Status

Organizational Structure

Part 2:  Determining incorporation status

 

 At the most basic level, organizations can be divided into not-for-profit charitable organizations (churches, ministries, foundations, member associations and other nonprofits) and for-profit businesses (corporations, partnerships, limited liability companies, or sole proprietorships.) If the organization is part of an existing organization, or is a service sponsored by an existing organization, it may not require separate incorporation.

 

Most AT organizations are operated by churches, charitable organizations, government agencies or educational institutions. Some are started by a group of committed individuals who see a need and want to fill it. Approximately 85 percent of the organizations identified in a recent survey conducted by the Pass It On Center charged no fees to users.1 The remainder charged fees of some type, but were not necessarily for-profit businesses.

  Understanding ‘nonprofit’ organizations

 

It is safe to assume that most assistive technology (AT) reutilization organizations follow a nonprofit model. What makes an organization nonprofit? The nonprofit entity is organized to achieve a purpose, not to make a profit. It is organized and operated for purposes that are beneficial to the public interest and the public is the owner. Some examples of nonprofit purposes are relief of the poor, advancement of education or lessening the burdens of government.

 

 “Nonprofit” status can be misleading. A nonprofit organization is allowed to charge for services and to engage in profit-making activities, but it cannot pass along those profits to the individuals who control it (board, management or employees) in the form of salaries or benefits beyond “reasonable compensation.” It can, however, reinvest those profits in the stated mission of the organization. For example, the Massachusetts Medical Society is the oldest physician-member organization in America. It is the owner and publisher of the New England Journal of Medicine and several healthcare newsletters. These publishing ventures are highly profitable, and the income permits the Society to pursue its mission of advancing medical knowledge and the standards of medical practices and healthcare.

 

A nonprofit organization is considered a public charity because it is the public that benefits from its activities and it is publicly supported – that is by private donations or government funds. This legal status not only has the potential to make the organization exempt from paying taxes, it also makes contributions and donations potential tax deductions for the donors and contributors. However, the granting of a state charter as a nonprofit organization does not guarantee federal tax exemption.

 

To qualify for federal tax exemption, an organization must be incorporated as a nonprofit in the state of operations, and must file for exemption under Section 501(c)(3) of the U.S. Internal Revenue Code. Exempt organizations are accountable to the public to pursue the stated purpose. They are prohibited from engaging in political activities related to individual candidates, but are permitted to lobby for causes, issues or legislation related to the mission of the organization.

 

A nonprofit service organization may develop a strategy that limits activities at the outset, and expands to other activities or other user groups when resources permit. The organizational structure must accommodate the growth. Does the AT organization have a supporting organization to provide a source of needed skills for the organization? These answers will facilitate the choice of appropriate organizational structure.

 

The remainder of this document assumes that the organization will incorporate as a nonprofit entity. If the ATR organization is part of an existing nonprofit organization, the operations may be conducted under the umbrella of the existing organization, but that decision should be made with legal advice. It may be advantageous to create a separate entity. If the establishment and funding come through a government agency, the type of organizational structure may be specified or impacted by rules of the funding source. All operations, whether nonprofit or business, should be established (incorporated) as legal entities consistent with the laws of the state in which they are located.

 

Reviewing incorporation options under state law

 

The organizing group should seek professional advice to ensure that the legal status and organizational structure are chosen appropriately before incorporating. The decisions made at the time of incorporation have implications for the operating structure of the organization and for the tax treatment of donations and contributions.

 

An attorney can help the group determine the best legal structure for the purpose. There are significant potential liability issues. Nonprofits can be sued for some of the same reasons that apply to profit-making businesses:  personal injury, employment discrimination, wrongful termination, or breach of contract, for example.

 

Before an organization can file for federal tax exemption, it must be incorporated as a nonprofit organization at the state level, and must complete the necessary forms to qualify as exempt under the provisions of Sec. 503(c)(3) or 503(c)(4) of the U.S. Internal Revenue Code. This also qualifies donations and/or contributions as possible tax deductions for the contributor. See the Internal Revenue Service Web site for Life Cycle of a Public Charity and (IRS) Publication 557, Tax Exempt Status for Your Organization and Publication 4420, Applying for 501(c)(3) Tax-Exempt Status.2

 

The alternative legal structures for incorporation are explained on a state government web site, usually the office of the Secretary of State, under the heading Corporations. This includes the option for incorporating as a nonprofit entity. The site will list the requirements and the process for incorporating a nonprofit organization. The information, forms, and sometimes suggested language are there. Fees are usually minimal (ranging from $30 to $150 in most states) and the process may be possible through the web site.

 

Completing prerequisites for incorporation

 

There are significant steps to be taken toward the organization of an entity before the paperwork can be filed. The remainder of this document offers more specific guidance in how to complete these tasks. The procedures may vary slightly by state, but most will have similar requirements. Three key steps are prerequisite to filing in most states. The organizing group must deal with the following significant tasks or activities prior to filing with the state for nonprofit incorporation status.

 

The purpose of the organization must be defined. What does the organization propose to do, for whom, and what activities will the organization engage in to accomplish the mission? Two different objectives come into play at this point: (1) language that will suffice for legal filings – state incorporation and federal tax exemption, and (2) a mission statement to focus the activities of the organization.

 

A statement of purpose may be brief for state incorporation. However, but the Internal Revenue Service requires that the article of incorporation contain language designed to meet the federal legal requirements. The IRS suggests:

 

Said corporation is organized exclusively for charitable, religious, educational, and scientific purposes, including, for such purposes, the making of distributions to organizations that qualify as exempt organizations under section 501(c)(3) of the Internal Revenue Code, or the corresponding section of any future federal tax code.3

 

This is an all-encompassing statement, and AT organizations may choose to omit the purposes that do not apply.

 

The incorporation process in some states allows for both a nonspecific statement that meets the legal requirements of Section 501 (c)(3) of the Internal Revenue Code, and a statement of specific purpose that indicates what the organization will do. An example of the latter might be:

 

The specific purpose for which this corporation is organized is to assist members of the public in the acquisition of previously-used assistive technology.

 

The mission statement serves a different purpose. The Board and management also should draft a mission statement. The language of the mission statement may be similar to that of the specific purpose, but the objective is not identical. The specific purpose language may serve as a starting point. See How to Write a Mission Statement for guidance and examples.

 

Bylaws must be drafted. These are the most basic of internal rules and procedures. They spell out how the organization will be governed: officers, how many members on the board of directors, how directors are chosen, terms of office and how many directors constitute a quorum for transacting business. Examples are sometimes offered on the state web site. These can be amended later: They are not cast in stone at filing time. They will be adopted (or amended then adopted) at the initial meeting of the board of directors. See Drafting Corporate Bylaws for guidance and examples.

 

A board of directors must be elected. Some states require that only one to be named when filing; some require at least three. A decision was made concerning the exact number of directors when the bylaws were written. Names and addresses must be provided. The remainder of this document offers guidance in choosing a structure for both governance and management and is intended to provide guidance in choosing the type of board needed and appropriate directors.

 

 

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1Pass It On Center. Classification of Assistive Technology (AT) Reutilization Programs as of August 17, 2007.

2 Life Cycle of an Exempt Organization. Internal Revenue Service, U.S. Department of the Treasury. Retrieved April 8, 2008, from http://www.irs.gov/charities/article/0,,id=169727,00.html

3Sample Organizing Documents – Draft A – Charter. Internal Revenue Service, U.S. Department of the Treasury. Retrieved April 11, 2008, from

http://www.irs.gov/charities/charitable/article/0,,id=123028,00.html

 

 

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DISCLAIMER

This work is supported under a five-year cooperative agreement # H235V060016 awarded by the U.S. Department of Education, Office of Special Education and Rehabilitative Services, and is administered by the Pass It On Center of the Georgia Department of Labor – Tools for Life.  However, the contents of this publication do not necessarily represent the policy or opinions of the Department of Education, or the Georgia Department of Labor, and you should not assume endorsements of this document by the Federal government or the Georgia Department of Labor.

 

 

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Other Information

Title: Org 2 - Legal, Incorporation Status
Module: Organization
Author: Trish Redmon
Audience: Administrator
Sub Title:
Procedure:
Organization Source: Pass It on Center
Last Reviewed: 01-25-2009 9:07 AM