Incorporating and Tax Exempting Procedures for Friends

Transcription

1 Incorporating and Tax Exempting Procedures for Friends Sally Gardner Reed, Executive Director, United for Libraries

2 2012 by United for Libraries: The Association of Library Trustees, Advocates, Friends and Foundations. This toolkit has been developed as a benefit for personal and group members. If you wish to reproduce and/or redistribute significant portions or the entire toolkit to nonmembers, the charge is $5 per copy distributed and/or reproduced made payable to: United for Libraries 859 W. Lancaster Avenue, Suite 2-1 Bryn Mawr, PA Toll Free: (800) , ext Direct Dial: (312) Web site: united@ala.org If small portions of this toolkit are reproduced and redistributed, please credit United for Libraries in writing. Thank you. Revised November 2012

3 TABLE OF CONTENTS Introduction... iv Incorporating in Your State... 1 Filing for Federal Tax Exempt 501(c)(3) Status... 3 Appendix A Additional Resources... 5 Appendix B Sample Bylaws for Incorporated Friends... 6 Appendix C Sample Statement of Purpose... 9 Appendix D Sample Dissolution Statement Appendix E Sample Statement of Nonprofit Status... 11

4 INTRODUCTION Important Note: This document will help guide you through the legal process of incorporating your Friends group and applying for federal tax exempt status. United for Libraries highly recommends that you engage a tax attorney to assist you and/or review your applications prior to filing. For more information on organizing a new Friends group or revitalizing the one you have, see Toolkit #1 in the Friends & Foundations Zone. A special Thank You to Friends of Libraries in Oklahoma (FOLIO) and Julia Brady Ratliff for providing United for Libraries with much of the information contained here, including the Sample Bylaws included as Appendix B at the end of this toolkit. Sally Gardner Reed Executive Director, United for Libraries

5 INCORPORATING IN YOUR STATE When you decide to create a Friends of the Library group you will want to consider whether or not to incorporate. This is not the same as applying for federal tax exempt status - 501(c)(3) discussed below - but it is a pre-requisite to acquiring such status. What is a Corporation? A corporation is a legal entity that exists until it is purposefully dissolved. As a legal entity, it is separate from those who manage or govern the organization. A nonprofit corporation can conduct charitable and educational activities; it can enter into contracts; it can incur debt; it can hire employees who are eligible for benefits; and it is legally liable for its actions. Why Should We Incorporate? There are several very good reasons to incorporate. First, as stated above, your Friends group will not be able to apply for federal tax exempt 501(c)(3) status unless incorporated in your state. Secondly, as a nonprofit corporation you will also have limited liability for those who manage or govern your organization. As long as the your board members act prudently and reasonably in making decisions, follow a strict policy that ensures no board member personally benefits by his or her service, they are more likely to be absolved from personal liability when acting in their official capacity on the board. Finally, when you incorporate you are creating a stable organization that exists independently from the change of board members and personnel over the years. This will help the organization apply for grants, do business with other corporations, and again, help you to acquire federal tax exempt status. How Do We Incorporate? While it is true that the rules for incorporating vary from state to state, there are some basic guidelines that all states will require. You will need to draft a legal document called Articles of Incorporation to file with the state. These Articles will become a binding legal document. The contents will vary from state to state and should normally include only what is required by your state. Bylaws, which can easily be amended, should handle the more detailed regulations governing your organization (see Appendix B for sample bylaws). Typically you will need to include: Name of Corporation Statement of Purpose Location of the Corporation s Office List of Board Members Explanation Check with your state agency for any regulations concerning naming of your corporation. This is best if it is brief and broad so that your organization can easily evolve with the times and should clearly state your charitable (nonprofit) focus. This can be the library s address which will help groups without their own location to ensure consistency over time. Include the names and addresses of the members of the initial executive board. Additional Resources See Appendix C for sample. See Toolkit 1 on FOLUSA s website in the Friends Zone for information on

6 Type of Organization Dissolution Statement Clearly state that your group is a membership organization. The provision for the distribution of your group s assets when or if the group is officially dissolved. developing your initial board. See Appendix D for a sample. Before drafting your Articles of Incorporation, it is a good idea to check with your state s authorities to determine what state laws cover your organization and ask for guidance. Your state may regulate such things as the number of incorporators you need or may have limitations on your name selection. The agency can often provide assistance in the development of your Articles of Incorporation and legal requirements for board meetings. Information on filing your Articles of Incorporation and forms for doing so can be obtained from the state agency that handles registrations. Check with the Corporations Division or Business Bureau at the office of your Secretary of State. The National Association of State Charity Offices (NASCO) maintains a website that provides links to state offices that regulate charitable organizations and charitable solicitations online at The IRS website also maintains links for each state to its offices for charities regulation, tax filing, and business filing information. Visit the IRS website for charities and non-profits at and select State Links. Does it Cost Money to Incorporate? Yes. Most if not all states require you pay an application fee. Check with the office of your Secretary of State to find out what fee or fees will apply to you. In addition, FOLUSA recommends that you consult an attorney for review of your Articles of Incorporation prior to their filing. Hiring an attorney will also be useful in applying for your 501(c)(3) status. If you are just forming your Friends group and do not yet have funds you may be able to acquire pro bono assistance from a lawyer or legal firm in your community. Additional Notes on State Tax Status Requirements and application processes vary from state to state. Be sure to also determine how to obtain exemption from paying state sales tax on supplies you purchase for use by your organization. You will also need to determine if your group must collect sales tax on used book sales or items sold in a Friends bookstore or in the library to support your group.

7 FILING FOR FEDERAL TAX EXEMPT 501(C)(3) STATUS Why Should We Apply for Tax-Exempt Status? Official tax-exempt 501(c)(3) status is an important step in preparing your organization to accept donations and become eligible for grants. With this status, your group will not have to pay taxes on revenue generated and those who contribute to your organization will be able to claim the gift or donation as a charitable contribution on their own federal tax returns. In addition, many companies will award grants only to organizations with official 501(c)(3) status. How Do We Apply for Tax Exempt Status? Application for tax exempt status must be made to the Internal Revenue Service with the filing of Form Form 1023 and accompanying statements must show that all of the following are true: 1. The organization is organized exclusively for, and will be operated exclusively for, one or more of the purposes (charitable, religious, etc.) specified in the introduction of Chapter 3 of IRS Publication 557: Tax-Exempt Status for Your Organization. 2. No part of the organization s net earnings will inure to the benefit of private shareholders or individuals. You must establish that your organization will not be organized or operated for the benefit of private interests, such as the creator or the creator s family, shareholders of the organization, other designated individuals, or persons controlled directly or indirectly by such private interests. [See Appendix E for sample statement of nonprofit status.] 3. The organization will not, as a substantial part of its activities, attempt to influence legislation (unless it elects to come under the provisions allowing certain lobbying expenditures) or participate to any extent in a political campaign for or against any candidate for public office. [Voter education activities or public forums conducted in a non-partisan manner may not be prohibited political activity under section 501(c)(3). See IRS Publication 557 Tax Exempt Status for Your Organization for additional information.] Before filing for tax exempt status you must obtain an Employer Identification Number (EIN). You can apply online at and receive your EIN within minutes. In addition your application will need to include: Organizing documents. Your application must include a copy of your organization s Articles of Incorporation (and the Certificate of Incorporation, if available), Articles of Association, Trust Indenture, Constitution, or other enabling documents. Bylaws alone are not organizing documents, however, they should be submitted with your application. See Appendix B for sample bylaws. Description of activities. Your application must include a full description of the purposes and the activities of your organization. To determine the information you need to provide, refer to IRS Publication 557: Tax-Exempt Status for Your Organization. Chapter 3 on 501(c)(3) organizations describes the purposes and

8 activities that your organization must pursue, engage in, and include in your application in order to achieve exempt status. Financial data. You must include in your application financial statements showing your receipts and expenditures for the current year and the three preceding years (or for the number of years your organization has been in existence, if less than four years). If you have not yet begun operations, or have operated for less than one year, a proposed budget for two full accounting periods and a current statement of assets and liabilities will be acceptable. To apply for tax-exemption, obtain IRS package 1023 at This site maintained by the IRS is a gold mine of resources for your organization. Here you will find: Life Cycle of a Public Charity. During its existence, a public charity has numerous interactions with the IRS from filing an application for recognition of tax-exempt status under the law, to filing the required annual information returns, to making changes in its mission and purpose. Follow this link for detailed information about each step to obtain your 501(c)(3) status. Bookmark this site and refer to it often as you apply for your exempt status as well as annual filing requirements once you receive exempt status. State Links. A collection of links to state government web sites with useful information for exempt organizations. Whether you are already operating or just starting, there is something here for you. Included are links to the following for each state: o State Charities Regulation o State Tax Filing o Business Information Filing Revised Form Application for Exemption. Here you can download a PDF of the form and instructions. You will also find a comprehensive list of Frequently Asked Questions to help you understand the form and application process. Does it Cost Money to File for Tax Exempt Status? Yes. The law requires payment of a user fee. Submit the appropriate user fee based on your average annual gross receipts as indicated on Form You may pay your user fee with a personal or certified check, bank check, or cashier s check. Go For It! Don t be defeated by the size of the application form (28 pages!). Many of the questions are very quick yes or no questions. As with all things worthwhile, however, some time and effort will be required. Again, FOLUSA recommends that you engage an attorney to guide you through this process. Important: Your Form 1023 should be filed within 15 months of your organizing date. Though it is certainly appropriate to file at any time, the tax-exempting process becomes more complicated if your application is filed later.

9 APPENDIX A ADDITIONAL RESOURCES This website, posted as a public service by Sandy Deja, a tax consultant with over 30 years experience with IRS Form 1023, is designed to help new non-profit organizations complete the Application for Exempt Status Under Section 501(c)(3) of the Internal Revenue Code. Nolo is the nation s leading provider of do-it-yourself legal solutions for consumers and small businesses. Their goal is to help people handle their own everyday legal matters -- or learn enough about them to make working with a lawyer a more satisfying experience. From the website, click on Business and Human Resources, then click on nonprofit organizations. You will find a wealth of helpful information here all written in language for the layperson.

10 APPENDIX B SAMPLE BYLAWS FOR INCORPORATED FRIENDS Friends of the Public Library, Inc. ARTICLE I. MEMBERSHIP AND DUES Categories of membership and dues shall be determined by the Board of Directors. ARTICLE II. MEETINGS The annual meeting shall be held at a time and place fixed by the Executive Committee and shall be in March or April of each year. ARTICLE III. Section 1. Section 2. Section 3. BOARD OF DIRECTORS AND OFFICERS Board of Directors The business, property, and affairs of this organization shall be managed by a Board of Directors composed of forty-two (42) persons 1 who shall be members of this organization. Each Director shall hold office for the term for which he is elected and until his successor is elected and qualified. Classification of Directors. At the first organization meeting of the corporation, the members of the Board of Directors shall be divided into three (3) classes of fourteen (14) members each. The members of the first classification shall hold office for a term of one (1) year, the members of the second classification shall hold office for a term of two (2) years, and the members of the third classification shall hold office for a term of three (3) years. At all annual elections thereafter, fourteen (14) Directors shall be elected by the members for a term of three (3) years to succeed the fourteen Directors whose terms then expire; no Director shall serve for more than three (3) consecutive terms. Meetings of the Board of Directors. (A) The Board of Directors shall, after their election at the annual meeting of the organization, meet for the purpose of electing a President, First Vice-President, Second Vice-President, Secretary, and Treasurer, who shall serve for one year. All other meetings of the Board of Directors shall be called at the President s request or at the request of five (5) Directors or any two (2) officers, and upon giving at least three (3) days written notice 1 A large board such as this serves as an advisory board from which is elected a much smaller executive committee to handle the business of the organization.

11 to the Directors. Fourteen (14) members of the Board of Directors shall constitute of quorum. (B) Vacancies of the Board of Directors of any office of the organization shall be filled for the remainder of the unexpired term by the Board of Directors. Section 4. Executive Committee. The members of the Board of Directors shall elect an Executive Committee consisting of twelve (12) members, five (5) of whom shall be the officers. The Executive Committee shall exercise all the powers of the Board between meetings of the Board. Seven (7) members of the Executive Committee shall constitute a quorum. ARTICLE IV. DUTIES OF OFFICERS Section 1. Section 2. Section 3. Section 4. Section 5. The President Shall preside at all meetings of the organization and shall have general supervision of the affairs of the organization. He/She shall be an ex officio member of all committees. The First Vice-President shall assume the duties of the President in his/her absence. The Second Vice-President shall assume the duties of the President in his/her absence and the absence of the First Vice-President. The Secretary shall take the minutes of all the meetings and keep an accurate record of all business transacted. The Treasurer, or other officers designated by the Executive Committee, shall be custodian of all moneys and shall deposit them in a bank designated by the Executive Committee, and the Treasurer shall disburse the same only upon order of the Executive Committee. The Treasurer shall present financial statements to the Committee at its regular meetings, prepare an annual report for the annual meeting, and keep complete organizational accounts. Section 6. The Board of Directors may elect such Additional Officers, including Assistant Secretaries, as it shall deem desirable and may assign additional duties to officers as it deems appropriate. ARTICLE V. COMMITTEES The President, with approval of the Executive Committee, may appoint such committees as are necessary for carrying out the activities of the organization. ARTICLE VI. AMENDMENTS These Bylaws may be amended at any meeting of the Board of Directors by a majority vote of the Directors present and voting; Provided that notice of the proposed amendment is included in the notice of the meeting.

12 ARTICLE VII. ELECTIONS OF TAX STATUS The Officers and Directors of the Corporation may, from time to time, make such elections of tax status under the United States Internal Revenue Code of 1954 (or the corresponding provision of any future United States Internal Revenue Law) and the Oklahoma Tax Code as are appropriate and in the best interests of the Corporation and not in violation of the Certification of Incorporation, provided that no such election shall be made which forfeits the tax-exempt status of the Corporation under Sections 170, 501, and 4911 of the Internal Revenue Code, or any equivalent provisions in subsequent, other, or related enactments. The Officers and Directors of the Corporation may elect to become an organization entitled to make expenditures to influence legislation as contemplated by Sections 501(i) of the Internal Revenue Code of 1954 (or the corresponding provision of any future United States Internal Revenue Law), or equivalent provisions in subsequent, other, or related enactments. ATTEST: President

13 APPENDIX C SAMPLE STATEMENT OF PURPOSE The Purpose or purposes for which the corporation is formed are: Educational We seek to encourage the public s use and support of the library, to supplement library services and materials, and to provide programs in accord with the library s policies and needs. Said corporation is organized exclusively for charitable and educational 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 of 1954 (or the corresponding provision of any further United States Internal Revenue Law).

14 APPENDIX D SAMPLE DISSOLUTION STATEMENT Upon dissolution of the corporation, the Board of Directors shall, after paying or making provision for the payment of all the liabilities of the corporation, dispose of all of the assets of the corporation exclusively for the purposes of the corporation in such manner, or to such organization or organization organized and operated exclusively for charitable, education, religious, or scientific purposes as shall at the time qualify as an exempt organization or organizations under section 501(c)(3) of the Internal Revenue Code of 1954 (or the corresponding provision of any future United States Internal Revenue Law), as the Board of Directors shall determine. Any such assets not so disposed of shall be disposed of by the District Court of the county in which the principal office of the corporation is then located, exclusively for such purposes or to such organization or organizations, as said Court shall determine, which are organized and operated exclusively for such purposes.

15 APPENDIX E SAMPLE STATEMENT OF NONPROFIT STATUS No part of the net earnings of the corporation shall inure to the benefit of, or be distributed to, its members, trustees, officers, or other private persons, except that the corporation shall be authorized and empowered to pay reasonable compensation for services rendered and to make payments and distributions in furtherance of the purposes set forth in Article 4 hereof. No substantial part of the activities of the corporation shall be the carrying on of propaganda, or otherwise attempting to influence legislation, and the corporation shall not participate in, or intervene in (including the publishing or distribution of statements) any political campaign on behalf of any candidate for public office. Notwithstanding any other provision of these articles, the corporation shall not carry on any other activities not permitted to be carried on (a) by a corporation exempt from Federal Income tax under section 501(c)(3) of the Internal Revenue Code 1954 (or the corresponding provision of any future United States Internal Revenue Law).