| Frequently Asked Questions |
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| Welcome to our Knowledge Center. You will find answers to many of your questions here. You may also find great tips, statistics, and other resourceful tools relating to your business and charitable purposes added monthly. |
Nonprofit Information
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Q: How do I become tax exempt?
It is a 2-Step process:
1) You must INCORPORATE. Preferably, in your home state.
2) Upon incorporating, you must prepare and file the 20-page IRS Form 1023 and related form with the IRS accompanied by the appropriate filing fees. (The IRS estimates this form should take the first time applicant approximately 12-20 hours to complete )
REQUIREMENTS FOR 501(C)(3)TAX EXEMPT EXEMPT
NOTE: A check for either $400.00 or $850.00 must be made payable to the IRS. If you receive or expect to receive monies from any source totaling in excess of $10,000.00, you will be required to pay the $850.00 filing fee.
a. You must be incorporated as a nonprofit corporation.
b. You must adopt bylaws for your corporation.
c . Your must elect a Board of Directors and elect Officers. We suggest you elect 3 directors who are unrelated by blood or marriage. Also, directors and officers may be the same 3 people.
d. You must obtain an employer identification number
e. Your organization must be organized and operated for a charitable, literary, scientific, religious or educational purpose or in furtherance of amateur athletics.
f. Your organization may not be operated for the private financial benefit of any one person or for the benefit of a small class of persons.
g. You must NOT engage in lobbying for political campaigns or similar political activity. Even if you become tax exempt under Section 501c3 of the Internal Revenue Code, you may still have to comply with your state law to be considered tax exempt under state law. Click here to learn about state tax exempt requirements.
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Q: What is a 501(c)(3) public charity?
A 501(c)(3) public charity is an organization which has (1) been organized under state law, (2) which is operated in furtherance of a 501(c)(3) purpose (i.e. Charitable, religious, educational, scientific, etc), (3) it benefits an unidentified charitable class of people (i.e. Those who suffer from AID’s), (4) its activities are not political in nature and (5) its support, one-third of which, must come from the general public. A 501(c)(3) purpose includes, but is not limited to, educational, religious, scientific, medical and charitable purposes.
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Q: How do I form a 501(c)(3) public charity?
First, at the very minimum, you must form a non profit corporation in your home state. Then, your organization must adopt bylaws and obtain an employer identification number. Upon completing this, you must then prepare and submit an application to the IRS to request for it to approve your organization as exempt under Internal Revenue Code Section 501(c)(3). Generally speaking, the process from start to finish may take anywhere between 3-6 months if you have done things properly and are diligent in your paperwork.
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Q: What is a private foundation?
Firstly, most people forming a private foundation will prefer to form a 501(c)(3) public charity mainly because the benefits are greater. Specifically, the main difference is a person donating money to a 501(c)(3) public charity can donate up to 50% of their adjusted gross income. With a private foundation, a person donating money can only do so up to 30% of their adjusted gross income.
The dividing line between being deemed a 501(c)(3) public charity or a private foundation is based upon the sources of support of the foundation. In other words, if the foundation’s sources of support are from a relatively few number of people then the sources of support will cause the IRS to deem the foundation a private foundation. If the sources of support are large enough, the IRS will deem the foundation to be a 501(c)(3).
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Q: What do you mean by other type of tax exempt organizations?
When we refer to “other types of tax exempt organizations” we are referring to certain organizations, such as business leagues, trade groups, social clubs and firefighter associations who qualify for tax exempt status but who do not qualify to be able to receive donations from donors which would be deemed a “charitable contribution” and a deduction to the individual tax payer as such. There are many types of classifications for an organization which are not exempt under section 501(c)(3) of the Internal Revenue code including, but not limited to, 501(c)(4), 501(c)(5), 501(c)(6) and 501(c)(7). If you believe that your organization may qualify for exemption under any of these codes, please contact us toll free at 1-877-553-1923.
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Q: How long does the process take?
Unless you choose to expedite, it takes approximately 4 weeks to incorporate. Additionally, the IRS takes approximately 3-5 months to be examine and approve a 501(c)(3) application. Keep in mind that each 501(c)(3) application is RANDOMLY ASSIGNED to an IRS agent for examination. Each IRS agent has their own distinct work load and ability to fully review and approve an application. Thus, there is no way to know with exact precision the precise time that it will take to approve an application. As a result of this, we HIGHLY SUGGEST that you immediately incorporate in order to expedite this process. In the interim, as we are finishing your incorporation documents, because of the time lag, you may provide us with any remaining pieces of information that we may need to complete your 501(c)(3) application including, but not limited to, selection of your board members, preparation of your financial budget and further refinement of your activities and programs.
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Q: Is it hard to be approved as a 501(c)(3) public charity, private foundation or other type of tax exempt organization?
Yes, and even more so if you have never done it before. CNPC was formed to help people navigate the maze of confusion in preparing the necessary paperwork. The IRS estimates that a first-time preparor of a 501(c)(3) application may take in excess of 30 hours to complete it.
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Q: Do you provide guarantees?
We can never guarantee anything because we deal with governmental entities who may not share our opinion on a certain matter even if we are right. However, we can guarantee that we will act to the best of our ability and answer your questions in a reasonably timely manner. However, we do offer a money-back guarantee if you purchase our liaison service, you respond quickly to all requests for information and we have not informed you of our belief that your organization will not qualify as a 501(c)(3) or any other tax exempt provision.
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Q: How many Board members do we need to have on our Board?
Generally, the initial Directors should be the founders and/ or persons who are going to be overseeing the operation of the entity. In most states, ONE (1) PERSON may serve as the sole Director for incorporation purposes. However, in furtherance of submitting a 501(c)(3) application or other type of tax exempt application, the IRS may require (almost always requires) three (3) distinct individuals to serve on the Board of Directors. Also, keep in mind that you may change your Board from time to time pursuant to your corporations bylaws and/or applicable law. Also, keep in mind that your Board may be compensated, per applicable law, in a reasonable amount. Generally, though, the IRS prefers Directors who are volunteers. In the event that initially you only have one (1) Director, do not worry as the selection of the additional Directors needed may take place at a later time.
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Q: Can the officers of the non profit corporation be the same as the board of directors?
Yes. Corporate Officers run the day to day operations of the corporation and are elected by the Board of Directors. Generally one person may serve as all of the officers of a corporation; however, if you are forming a Nonprofit corporation we suggest that you have three distinct persons acting as officers of your corporation. You may have the same individuals who serve on your board of directors who also serve in the capacity as an officer of your corporation. For example, you may have John Doe serve as a director/president and Jane Smith may serve as Director/Treasurer.
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Q: What are the titles of officers?
Basic titles include: President, Secretary and Treasurer. The aforementioned titles comprise the minimal amount of officers that is generally acceptable to serve in a fiduciary capacity on behalf of your corporation.
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Q: How many officers do we need?
Three (3), unrelated by blood or marriage. Keep in mind that officers may be compensated pursuant to applicable law. However, in no event may compensation constitute an unreasonable amount. For example, if an organization receives in total $100,000.00 in its first year, and an officer receives a salary in excess of $50,000.00, this would more than likely be deemed by the IRS as an unreasonable salary. Also, keep in mind that a non profit corporation must report its payroll just as any other organization would be required to.
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Q: Can the officers be the same people?
Most likely, no. However, if an organization has directors who are unrelated by blood or marriage in the amount of at least three (3), then the IRS has on occasion approved an organization as 501(c)(3) even though it has only one (1) individual serving as all the officers of a corporation.
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Q: Do we need to prepare a mission statement?
No. However, you may find it helpful for your internal operations.
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Q: Do we need to prepare a budget for our operations?
Absolutely. This is necessary and required to be reviewed in advance by the IRS. In applying to the IRS for 501(c)(3) exemption, each organization must submit a budget which includes a statement of its revenue and expenses, and a balance sheet which details the organizations first three (3) years of operation. Because many of you are newly created organizations, you will not know with exact certitude your expected gross receipts and expenses. However, you are not required to know in advance these items of income and expense. Rather, the IRS requires that you make GOOD FAITH estimates of your anticipated income and expenses. In making these estimations, you must be thoughtful, practical and reasonable.
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Q: What is a Donor-Advised Fund?
The term "donor-advised fund" is not defined in any statutes; however, the donor-advised fund (DAF) is an increasingly popular vehicle of charitable giving that has had a particularly substantial impact on philanthropy over the past several years. The Chronicle of Philanthropy reported that the 88 organizations that provided figures for both 2003 and 2004 to The Chronicle collectively held over 80,000 DAFs. These organizations collectively held $13 billion in assets and distributed $2.6 billion to charities.
A donor-advised fund is generally understood to be a fund maintained by a public charity (the "sponsoring organization"), subject to an agreement under which the donor has the right to make recommendations about distributions and/or investments. The donor-advised fund is owned, controlled and administered by the public charity, which has a fiduciary obligation to ensure that the donor-advised assets are used exclusively for charitable purposes.
Donor Benefits:
- An immediate income tax deduction
- Avoidance of capital gains taxes if the gift is appreciated property
- Reduction of the gross estate by the amount of the excluded asset
Advantages Over Setting Up a Private Foundation:
- Donations to a donor-advised fund qualify for the more favorable charitable deduction treatment of a gift to a public charity than donations to a private foundation
- Donor-advised funds are not subject to the self-dealing, payout and taxable expenditure rules applicable to private foundations
- Sponsoring organization generally takes care of all the administrative work
- Typically, low contribution minimums
- Ease and relatively low cost in establishment
- Privacy, if donor desires
- Ability to receive donations from private foundations, CRTs, CLTs
Disadvantages Over Setting Up a Private Foundation:
- Lack of control over distributions (grant-making)
- Lack of control over investments
- Less visibility and prestige than family-named private foundation
- Lack of flexibility (e.g., grant-making areas)
- No ability to hire staff (such as the donor and his or her family members)
Where to Find Donor-Advised Funds:
- Community foundations (e.g., The San Francisco Foundation, Peninsula Community Foundation,East Bay Community Foundation)
- Nonprofit organizations (e.g., where donor wants to establish endowment-type fund such as a donor-advised scholarship fund)
- Commercial sponsors (e.g., Vanguard, Fidelity, Schwab)
- Independent sponsors (e.g., American Endowment Foundation, National Philanthropic Trust,MyCFO Foundation)
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Q: What is your feeling about the level of detail that should be contained in the bylaws?
Bylaws should be very comprehensive; boards are governed by fiduciary duties and so these obligations should be clearly maintained in the bylaws.
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Q: How frequently should they need to be changed if done properly?
Every two years you should review for internal consistencies, and, consistencies with any changes in law.
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Q: Do you have a checklist that we could use to select provisions we might otherwise have neglected to include?
That absolutely is part of our process; we bring to the process close to 20 years of experience in understanding the governance isses of a nonprofit organization, as part of this, we have a very well developed body of knowledge which is part of our checklist.
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Q: How easy would it be to opt out of an association with significant voting power via the bylaws revision? To dissolve the association entirely?
You can opt out of a "membership" structure, but, typically, that requires a vote by members, this is very procedural oriented and you don't want to make any mistakes. Dissolving is more work but can be done.
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