Gagliardi & Burke_Nonprofit Organization_Spring 2013
· Overview–
· Nonprofits organization MAY and often do earn a profit.
· The nonprofit form of organization extends well beyond the charitable, religious, and educational organizations, and include labor unions, fraternal lodges, social clubs, college fraternities.
· A nonprofit organization is an organization that is barred from distributing its net earnings (or pure profits), if any, to individuals who exercise control over it, such as members officers, directors, or trustees.
o Nonprofits are NOT barred from earning a profit.
· Rather a nonprofit does not refer to “profit”, rather an “excess of revenues over expenses.”
· AND It is ONLY limited on the distribution of the profits (revenues).
· Distribution of profits that is prohibited.
· Net earnings, must be retained and devoted in their entirety to financing further production of the services that the organization was formed to provide.
· This is considered the “non-distributional constraint.”
o Tax-exempt status under Section 501(c)(3) is a big deal because donations to these organizations are deductible for federal income, estate, and gift tax purposes.
o Most nonprofits of any significance are incorporated, and the non-distribution constraint is imposed
o (ONLY the distribution of the profits that is prohibited).
o A nonprofit corporation is distinguished from a for-profit (or business) corporation primarily by the absence of stock or other indicia of ownership that give their owner a simultaneous share in both profits and control.
oA nonprofit organization is an organization that is barred from distributing its net earnings, if any, to individuals who exercise control over it, such as members, officers, directors, or trustees.
o Some nonprofits organizations are formed as charitable trusts without being incorporated, (although the operation of nonprofits is uncommon in the US).
o Here the control lies with the trustees.
o The non-distribution constraint is imposed by the law of trusts, which prohibits trustees from taking from the trust anything beyond reasonable compensation for services rendered.
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· Categories of Organizations–
o There are four basic categories of organizations that comprise of the tax exempt sector:
Nonprofit organizations,
§ Broadest of the four categories and includes all the terms.
Tax exempt organizations,
Charitable organizations, and
Private foundations
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· Legal Framework–Organization and Governance–
o Nonprofit organizations are generally divided into three category considerations:
· Organization and governance,
· Other regulatory law,
· Taxation.
o Organization and Governance–
· These are primarily matters of State law.
· Many states have enacted distinct nonprofits corporation statutes that address the mechanics of forming a nonprofit corporation, operational issues, fiduciary obligations and liabilities of officials/directors, etc.
· Choice of the Legal Form of a Nonprofit Organization—
o BOTH Tax and Non-Tax considerations must be considered.
o Tax considerations include:
· Appropriate type of federal tax exemption,
· The organization's classification as a public charity or private foundation,
· The forms of organization permitted under the IRC,
· And consequences of each type.
o Non-tax considerations include:
· The speed with which one needs to establish the organization,
· Concerns with limited liability,
· Sophistication and goals of the organizers,
· Financial resources, and
· The type and scale of activities to be conducted.
o Other factors of consideration:
· Capacity to own property and contract,
· Capacity to sue and be sued,
· Liabilities to third parties,
· The permanence of the organization and ease of dissolution, and
· Governance requirements.
o To obtain exempt status under Section 501(c)(3), the most desirable exempt status because the organization is eligible to receive tax-deductible contributions, a nonprofit entity must be a corporation, trust, or unincorporated association.
o Most exempt organizations are corporations and a few are unincorporated associations.
o It is NOT possible to operate an exempt organization as an individual, or as a partnership, but a limited liability company with two or more members that are charities or governmental entities can qualify for Section 501(c)(3) tax exemption (if other conditions are met).
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· Unincorporated Associations–
o Many smaller nonprofits are unincorporated associations, or a form that involves nothing more than 2 or more persons organized for a common purpose.
· Examples–
§ Labor unions and political organizations.
o Advantages of Unincorporated Associations–
· Informality
· Flexibility
· Unlike a nonprofit corporation, no governmental approvals must be obtained in order to form or dissolve unincorporated associations.
· An u
ct to changed circumstances such as the resignation or death of a director.
o The charitable corporation is an artificial entity that can sue and be sued, contract, and hold property in its own name. It has an indefinite existence, and centralized management known a BOD.
· Directors of a nonprofit corporation are held to a lower standard of care than charitable trustees.
· Directors also enjoy the advantage of limited liability.
· Public Benefit v. Mutual Benefit–
o A public benefit organization can be defined as a group serving what may loosely be called a public or charitable purpose (to do good works, benefit society or improve the human condition)
· The public benefit category embraces what are known for tax purposes as Section 501(c)(3) public charities and private foundations, which derive their exempt status form Section 501(c)(3) of the IRC.
· Members can have no ownership interest in the corporation.
· The assets are held for public or charitable purposes and NOT to benefit members, directors, officers, or controlling persons.
· The assets may NOT be distributed to members, directors, or officers either while the public benefit corporation is operating or upon its dissolution.
· A membership may NOT be sold or otherwise transferred.
· Generally have NO members, and are governed by self-perpetuating BODs.
· Generally, public benefit corporations are MORE strictly regulated by the state than mutual benefit corporations.
o A mutual benefit organization is that they are formed primarily to further the common goals of their members rather than for profit or religious purpose.
· In theory, the members of these organizations have pooled their resources to do what they might have chosen to do separately without additional tax consequences.
· Mutual benefit corporations hold themselves out as benefitting, representing and serving a group of individuals or entities.
· Members may have an economic interest in mutual benefit corporations.
§ They may NOT receive distributions while a mutual benefit corporation is operating.
§ Membership interest may be sold or transferred to the corporation or 3rd parties.
§ Members may receive distribution when the corporation dissolves.
