Introduction To
Nonprofit Corporations

Introduction
  • Running a nonprofit is a tough and very competitive business.  There is only a limited amount of funding available while there are a huge number of nonprofits trying to access it.  It is especially tough for a start-up organization with no track record.  Success often depends on the skill of the CEO (who, ideally, should have some prior experience in the a nonprofit sector.

What is the Difference Between a Non-Profit and a For-Profit corporation?
  • Unlike a for-profit corporation, a non-profit corporations can not distribute profits (or any surplus income) to insiders such as founders, members, or directors.  Wages and salaries, however, can be paid so long as the amount is "reasonable")

Reasons to Incorporate a Nonprofit
  • Limited liability protection for officers and directors (see below)

  • 501(c)(3) exemption from the IRS
    • Donors get a tax deduction for their gifts
    • The nonprofit qualifies for foundation grants

Who Owns a Nonprofit?
  • No one.  Unlike a for-profit, nonprofits don't issue stock.  Thus, nonprofits can't be bought or sold.  The power to appoint and remove directors, however, can given to specified persons or entities (thus giving those persons or entities effective control of the nonprofit).

Nonprofit Creation - initial organization
  • In Florida corporations are created by filing "Articles of Incorporation".  The filing fee is $70  Complete the initial organization by doing the following

    • Appoint initial directors
    • adopt bylaws
    • appoint officers
    • adopt conflict of interest policy
    • apply for 501(c)(3) exempt status

Board of Directors
  • Board Authorization Required: All actions of a corporation must first be authorized (or later radified) by a formal vote of the board of directors.

    • Formal Meetings - Generally, directors can act only by taking votes at a formal meeting where a quorum is present

  • Number of Directors and How Appointed: State law requires that all corporations be governed by a "board of directors".  A minimum of three directors is required.  Beyond that, the number of directors and how they are appointed or removed is governed by the bylaws.

  • Minutes - Formal mintues should be kept for each meeting.  All such mintutes should be stored in a paper (or digital) folder labeled "Minute Book".  CLICK HERE for sample mintues.

  • Terms - The terms to be served by directors are specified in the nonprofit's bylaws.  Corporations have flexibility.  Directors can either have fix terms or indefinite terms.  Many nonprofits opt not to have a fixed number of directors with fixed terms but, instead, adopt bylaws that allow the board to appoint and remove directors as it sees fit.

Bylaws
  • Bylaws are a corporation's rules of governance.  They are adopted by the board of directors. . They specify how directors and officers are appointed and which committees are authorized.

  • The most important provisions in the bylaws are the ones identifying who has the power to appoint and removed directors.  The two most common choices are as follows:

    • The Board of Directors Fills its Own Vacancies - This type of bylaws gives the board of directors itself the sole power to appoint or remove directors.

    • Membership Organization - This type of bylaws would specify that directors are appointed or removed by the vote of a group of people who have been defined in the bylaws as the "members".  Under this kind of bylaws the only role of the members typically is to elect or remove directors and nothing else

Avoiding Personal Liability for the Nonprofit's Debts
  • Limited liability protection can be lost if the corporate formalities are not observed

    • Follow the bylaws

    • Have all corporate actions either authorized or ratified by a formal vote of the directors

    • Maintain a credible "minute book".  This can be a paper folder labeled "minute book" into which actual minutes of meetings are stored.  It can also be a password protected folder on Google Drive (or other cloud storage service).  Only put actual minutes (with attachments) in the minute book.

    • The corporation must have its own bank account and credits cards (don't pay corporate debts with an officer's personal check or credit card)

    • CLICK HERE for an article about the corporate formalities and avoiding personal liability.

What is 501(c)(3)
  • All corporations must file a tax return with the IRS unless an exemption has been granted.  The most desired exemption is found in Section 501(c)(3) of the IRS code which is for "charitable, educational or religious" organizations.  Only nonprofits with this type of exemption can qualify for foundation grants or tax deductible contributions.  CLICK HERE for an overview of the 501(c)(3) tax exemption and how a nonprofit can qualify

Federal Employer Identification Number:
  • After the Articles of Incorporation have been mailed to the State the new corporation should apply for a federal "Employer Identification Number" (EIN) from the IRS.  The EIN is an official identification number similar to a social security number. You'll need it to open a bank account.  You can apply for the EIN on-line (it's free).  Go to the IRS website (irs.gov) and in the search bar at the top of the page type "EIN".  After finding the link click it to go to the application page. Upon completion of the on-line application a PDF letter from the IRS is instantly generated by your computer stating what the EIN is (print it).

Annual Report Must Be Filed With The State.
  • The new corporation must file an "Annual Report" with State on yearly basis to maintain “active” status.  The filing is done on-line through the state's Sunbiz.org website.  Each year the Annual Report must be filed between January 1st and May 1st.  The first Annual Report is due the year FOLLOWING the year that the nonprofit was first incorporated.  Mark this on you calendar because the State may not send you a reminder).  There is a fee of $61.25.  If you fail to file by mid September the corporation will be "administratively dissolved".

Bank Account:
  • It is very important that the new corporation have its own bank account.  All debts owed by the corporation should be paid out of that account and not out of the personal accounts of the officers or directors.  If a director or officer loans money to the nonprofit always make sure that the loan is properly documented with simple promissory note.

Written Acknowledgment Of Contributions:
  • In most cases when donations are made to the nonprofit, the nonprofit MUST provide contemporaneous written acknowledgment to the donor (for more information see IRS Publication 1771 - go to the irs.gov website and in the search bar search for the term "publication 1771")

Avoid Appearance Of "Improper Personal Benefit":
  • Payments should never be made to an officer or director unless it is reasonable compensation for services or goods that are actually provided (all such payments should be properly documented with invoices, contracts, promissory notes, etc. as might be relevant).  Generally, the nonprofit should never loan money to officers and directors.

Tax Returns:
  • All corporations, whether exempt or not, must file an corporate return with the IRS (Form 1120) unless the corporation is exempt under Section 501 of the Code.  Exempt organizations MUST file some version of IRS Form 990. Filing these forms is required whether or not the corporation conducted any business or made any money during the tax year in question.  Failure to file can result in penalties being imposed by the IRS.

General Advice:
  • The best defense against personal liability is to get in the habit of periodically having formal meetings of the board of directors where important decisions can be authorized.  Keep minutes of those meetings and store them in a special folder labeled "minute book".  If the nonprofit does not do that creditors of the corporation may be able to persuade a court to "pierce the corporate veil" allowing them to seize the personal assets of directors and officers (bank accounts, retirement accounts, vehicles, etc).

Self-Assessment
  • Periodically, a nonprofit corporation should undergo a self legal review for compliance with corporate, tax, and other laws. This review might best be conducted to coincide with the corporations' annual audit or annual tax filings.  CLICK HERE for a listing of some of the items for review

Corporate Transparency Act
  • Due to the recently enacted Corporate Transparency Act virtually every legal entity in the United States (with a handful of exceptions) MUST disclose information about it's owners, officers, and controlling persons.  The disclosures must be made to a federal agency known as the Financial Crimes Enforcement Network.  There is no fee.  CLICK HERE for more information