Caveat & Disclaimer: DISCLAIMER AND TERMS OF USE AGREEMENT: (Please Read This Before Using this book)

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1 Caveat & Disclaimer: DISCLAIMER AND TERMS OF USE AGREEMENT: (Please Read This Before Using this book) The author and publisher of this course and the accompanying materials have used their best efforts in preparing this course. The author and publisher make no representation or warranties with respect to the accuracy, applicability, fitness, or completeness of the contents of this course. The information contained in this course is strictly for educational purposes. Therefore, if you wish to apply ideas contained in this course, you are taking full responsibility for your actions. The author and publisher disclaim any warranties (express or implied), merchantability, or fitness for any particular purpose. The author and publisher shall in no event be held liable to any party for any direct, indirect, punitive, special, incidental or other consequential damages arising directly or indirectly from any use of this material, which is provided as is, and without warranties. As always, the advice of a competent legal, tax, accounting, medical or other professional should be sought. The author and publisher do not warrant the performance, effectiveness or applicability of any sites listed or linked to in this course. All links are for information purposes only and are not warranted for content, accuracy or any other implied or explicit purpose. ' Step by step guide for starting a nonprofit organization ' is licensed under a Creative Commons Attribution- Noncommercial-No Derivative Works 3.0 Unported License. This report is Copyrighted by Important legal notice: No part of this may be copied, or changed in any format, sold, or used in any way other than what is outlined within this course under any circumstances. Violators would be prosecuted severely.

2 Table of Content Section I - Basics Section II Drafting the strategic plan Section III - Basic Legal Framework Section IV Incorporation Section V - Filing under Sec 501 (c) (3) for Tax exemption with IRS Section VI Maintaining tax exempt status. Foreword All great achievements - material progress or progress in the field of Art started with a simple thought. Thoughts like seeds need proper care and the need for care is even more important at the time of germination. Now it s time to get to work and put those ideas into action. This book will guide you in the right direction on matters related to starting a nonprofit organization, such as setting up a board, incorporating, and filing for tax exemption, setting up the office, record keeping, book keeping, fund raising, compliance with Federal & state laws and several other issues that are to be managed for effectively starting and running a nonprofit organization. Below is a summary of the processes and steps involved in starting a Nonprofit organization. They have been elaborated in detail in the book. 1. Start with Fiscal Sponsorship 2. Steps to Incorporation a. Create Business Plan b. Draft Mission Statement c. Recruit Board Members d. Draft Articles of Incorporation e. Draft Bylaws f. Apply for Business Name g. Apply for Federal EIN# h. File Incorporation with State i. Apply for Federal Tax-Exempt Status j. Apply for Right to Solicit Donations 3. Response from the IRS a. Advanced Ruling b. Public Support Test 4. Fundraising

3 Section I - Basics 1) what is a non profit? (Vs Profit organization) 2) Types of Non profit organizations 3) Types of Incorporation 4) Should I start a non profit / for profit organization 5) Advantages of setting up a non profit corporation (over a for profit corporation) 6) Negatives of setting up a non profit 7) How non profits raise spend and make money What does nonprofit mean? The term nonprofit refers to an organization that prohibits distributing of its profits to individuals who control the organization such as its members, officers, directors, or trustees. While a nonprofit organization can make a profit, the profit it earns must be used toward the organization s activities. Thus, nonprofits operate for the common good and not for generating individual wealth. Non Profit organization Versus For-profit organizations Why to incorporate a non profit (or not-for profit as called in some states) Organization and why not a for-profit organization?

4 The following constitutes the most important differences between the two. 1) A non profit organization cannot distribute back the profits from its activities as dividends to its board or general members. The profits have to be ploughed back into the activities of the non profit organization. A for-profit organization on the other hand is entitled to apportion the profits generated amongst its constituting members. 2) A non profit organization is constituted for community welfare while a for profit organization is set up in expectation of personal welfare. 3) A non profit organization cannot have family members/ blood relatives on the board except for in exceptional circumstances and with prior approval and disclosures. A for -profit organization can have blood relatives on the board. 4) A non profit organization cannot issue stocks to its constituent members except for in cases of quasi non profit organizations like cooperatives and other hybrid incorporations. A for-profit organization can issue stocks/equity shares amongst its members. 5) A non profit organization cannot use its funds for purposed other than those laid down in its articles of incorporation while a for-profit organization can use its fund as per the board s discretion. 6) A non-profit organization is exempted from paying taxes (after obtaining approval from the Federal tax authorities). A for-profit organization is generally not exempted from paying taxes on its income. 7) In case of dissolution, a non profit organization cannot distribute the assets of the organization amongst the members. The assets in this case need to be transferred to another charitable organization. In case of dissolution of a forprofit organization, the assets can be apportioned and distributed amongst its constituent members. Given these differences, It is suitable to start a non profit organization, if :- a) The objectives of the organization are for community benefit b) The founders are willing to forego individual control over the functioning of the organization in favor of a board.

5 c) The founders are willing to forego the income generated from the organization. d) Profitability is a secondary or non motive for the founders. On the other hand a for profit organization is suitable if - a) Individual Profit making is the prime consideration. b) The incorporator (and his family members/ close associates) want to retain control over the over all functioning of the organization. Advantages of Starting a Nonprofit organization Most of the Income of a Non profit organization is exempt from Income taxes. The contribution from a donor is also tax exempt in most of the cases. A non profit organization can receive grants or aid in contrast to business entities that have to use loans as a means of raising funds. The satisfaction at being able to contribute to social development is immense. Disadvantages of Starting a Nonprofit organization Non profit organizations are subject to stricter reporting requirements. Benefits arising out of the nonprofit organization cannot be inured for its members, directors, officers beyond a permissible limit. Getting grants is a tedious job. In case, the incorporators decide to move onto some other pursuits in life, they cannot take along the assets accumulated by the Non profit organization. Myth blasting As someone who is contemplating to start non profit organization, you need to be clear on this.

6 What do you understand by a not for profit organization? When is it best to start a non profit? What and all to expect out of it? Why Non profit? Why not for profit? Lets try to figure out answers to these questions. This is very important because many people have several misconceptions about the motives of starting a nonprofit. To begin with here are some of the most common myths that shroud the non profit segment. Myth 1 ) Non profit organizations do not make profits On the contrary to this, most of the sustainable non profit organizations across the world run profitable activities. The difference then lies only in the fact that the profits generated by a commercial entity may be distributed amongst the stakeholders but in case of a non profit organization all the profits are to be ploughed back into the system. Myth 2 ) Non profit organizations is a good way to generate income If income is what you are primarily looking for, you better stay out of this. A non profit organization is definitely not the best way to earn money. The donors have very clear set of deliverable set for the recipient of funds and they have to be met to get funds. And most of the times, these deliverable s are much more tough and demanding than that of running a plain simple business. And if at all you manage to achieve those deliverable, you get paid for the work but only a small part of it can be drawn out as salaries or administrative expenses. All other funds have to be used for the actual developmental work for which it has been assigned. Myth 3 ) Non profit organizations can generate quick income If you look at the incubation period of any not for profit organization, it is higher than that of most of the businesses. While you can start generating returns in a business in less than 3 months or even lesser, you need to work hard for more than a year before fund start coming to you in major ways. You might get small helps in the beginning but it is actually tough. Actually properly speaking you start getting good projects after first year if you are extremely good. In most of the cases the incubation period extends up to 3 years from the date of starting a non profit organization. To sum this up, Non profit segments have a much larger learning curve than most of the traditional for-profit ventures out there. So now, Who would be an ideal candidate to start non profit organization?

7 Here s the basic desirable attributes - a) People with an undying passion for some cause. b) People who have stayed in a community for a longer time and are more or less aware of the community issues. c) People who have moderate monetary ambitions in life. d) People who can work for at least an year without getting bogged down by financial, emotional or social pressures due to slow developments in their work field. (Social work is a great task of community mobilization which does not happen in a few days) e) People with great leadership, community mobilization and communication skills. The list can have more of such attributes but for any one planning to start a non profit organization, its now time to first assess himself on these grounds and see if he would be a good fit to the demands of running a social organization. Types of Nonprofit organization There are many types of non profit organization and they have been classified into different categories as per Section 501 of the IRS rules. However we are concerned primarily with charitable organizations that fall into the category of Section 501 (c)(3) of the IRS rules. A new start up non profit organization falls under the jurisdiction of section 501 (c) (3) if it is a charitable, educational, literary, religious, scientific, concerned with public safety, promotes amateur sporting activities or works for the prevention of cruelty towards children or animals. Most of the non profit organizations do actually fall into charitable or any other category of this section. The term charitable in itself allows for inclusion of vast variety of non profit organizations and is thus applicable in most of the cases. Thus organizations like alumni associations, clubs, schools, chapters of international organizations also qualify as relevant for this section. If the organization that you want to set up does not fall into any of these categories, you may first have to identify the relevant category by studying the IRS publication 557 before you proceed. Besides this IRS classification, the non profit organizations can also be classified in the following way for a general understanding-

8 a) Private Foundations - A Private foundation solicits funds and donations from a limited number of members who contribute a major portion of donations to the organization. Foundations generally do not actively or directly engage in actual charitable work. Instead, they fund the organizations that work on the chosen causes. b) Public Charitable organization - A public charitable organization on the other hand accepts donations and funds from a large section of people through membership subscription or from a variety of funding agencies. To be classified as a Public charitable organization the body must have an active or continuing program to raise funds and receive donations from a number of sources which could include the private organizations, funding agencies, the general public, or the agencies set up by the Government. Public charity organizations can obtain tax exemption. The most common type of public charity organizations include charitable hospitals, churches, medical research centers, educational institutions including schools, colleges and universities, c) Quasi Non profit organizations These are hybrid organizations with a mix structure of different types of profit and non organization structures. We can ignore these for now as they are structured in a complex fashion and are not recommended for new start ups. Before taking the next step, it is vital to identify the classification that will apply to a start up organization as rules and processes vary with changes in classifications. If you have identified Section 501 (c) (3) as the relevant classification, you will have to decide the type from any one of the above. Other types of Non profit organizations (that do not come under 501(c)(3) classification) a) Advocacy groups - these kinds of organizations are formed to influence the legislations or Government policies on particular issues. Such non profit organizations do not classify as charitable organizations and as such cannot claim tax exemption under section 501(c)(3). Selective tax exemptions are available under different clauses of Section 501 (c) for such organizations.

9 b) Membership Organizations The are usually setup for the benefit of the members of the organization as opposed to a public charity that works for a community. Examples include Veteran s groups, Trade Associations etc. c) Recreational Clubs The primary activity of such groups is providing recreation facilities and platform for its members. Charitable activities may also be undertaken but not as a priority. Examples include country clubs, sports club etc. d) Auxiliary organizations These organizations are set as a subsidiary or as a support organization to a parent organization. The parent organization may be a for-profit or a not-for-profit organization in this case. e) Employee Benefit Funds -These are organizations which may or may not be supported by the employer of the organization but are established with the prime objective to formulate plans and raise funds for employee benefits. Types of Nonprofit organizations as per IRS classification (derived from "IRS Publication 557) Section of 1986 Tax Code 501(c)(1) 501(c)(2) 501(c)(3) Description of organization Corporations Organized Under Act of Congress (including Federal Credit Unions) Title Holding Corporation For Exempt Organization Religious, Educational, Charitable, Scientific, Literary, Testing for Public Safety, to Foster National or International Amateur Sports Competition, or Prevention of Cruelty to Children or Animals General nature of activities Instrumentalities of the United States Holding title to property of an exempt organization Activities of nature implied by description of class of organization. Further classified as: Private foundations Or

10 501(c)(4) 501(c)(5) 501(c)(6) Organizations Civic Leagues, Social Welfare Organizations, and Local Associations of Employees Labor, Agricultural, and Horticultural Organizations Business Leagues, Chambers of Commerce, Real Estate Boards, Etc. Public Charity organizations Promotion of community welfare; charitable, educational or recreational Educational or instructive, the purpose being to improve conditions of work, and to improve products and efficiency Improvement of business conditions of one or more lines of business 501(c)(7) Social and Recreation Clubs Pleasure, recreation, social activities 501(c)(8) 501(c)(9) 501(c)(10) 501(c)(11) 501(c)(12) Fraternal Beneficiary Societies and Associations Voluntary Employees Beneficiary Associations Domestic Fraternal Societies and Associations Teachers Retirement Fund Associations Benevolent Life Insurance Associations, Mutual Ditch or Irrigation Companies, Mutual or Cooperative Telephone Companies, Etc. Lodge providing for payment of life, sickness, accident, or other benefits to members Providing for payment of life, sickness, accident or other benefits to members Lodge devoting its net earnings to charitable, fraternal, and other specified purposes. No life, sickness, or accident benefits to members Teachers association for payment of retirement benefits Activities of a mutually beneficial nature similar to those implied by the description of class of organization

11 501(c)(13) Cemetery Companies Burials and incidental activities 501(c)(14) 501(c)(15) 501(c)(16) 501(c)(17) 501(c)(18) 501(c)(19) 501(c)(20) State Chartered Credit Unions, Mutual Reserve Funds Mutual Insurance Companies or Associations Cooperative Organizations to Finance Crop Operations Supplemental Unemployment Benefit Trusts Employee Funded Pension Trust (created before June 25, 1959) Post or Organization of Past or Present Members of the Armed Forces Group Legal Services Plan Organizations Loans to members Providing insurance to members substantially at cost Financing crop operations in conjunction with activities of a marketing or purchasing association Provides for payment of supplemental unemployment compensation benefits Payment of benefits under a pension plan funded by employees Activities implied by nature of organization n/a 501(c)(21) Black Lung Benefit Trusts Funded by coal mine operators to satisfy their liability for disability or death due to black lung diseases 501(c)(22) Withdrawal Liability Payment Fund To provide funds to meet the liability of employers withdrawing from a multiemployer pension fund 501(c)(23) Veterans Organization (created before 1880) To provide insurance and other benefits to veterans 501(c)(25) Title Holding Corporations or Trusts Holding title and paying over

12 501(c)(26) with Multiple Parents State-Sponsored Organization Providing Health Coverage for High-Risk Individuals income from property to 35 or fewer parents or beneficiaries Provides health care coverage to high-risk individuals 501(c)(27) 501(d) 501(e) 501(f) State-Sponsored Workers Compensation Reinsurance Organization Religious and Apostolic Associations Cooperative Hospital Service Organizations Cooperative Service Organizations of Operating Educational Organizations Reimburses members for losses under workers compensation acts Regular business activities. Communal religious community Performs cooperative services for hospitals Performs collective investment services for educational organizations 501(k) Child Care Organization Provides care for children 501(n) Charitable Risk Pools Pools certain insurance risks of 501(c)(3) 521(a) Farmers Cooperative Associations Cooperative marketing and purchasing for agricultural producers

13 SECTION II Strategic planning Strategic planning provides a well documented plan which forms the basis on which a nonprofit organization is formed. A documented strategic plan serves the following important purposes 1) Provides guidance to the management. 2) Serves as the content for the fundraising proposal 3) Provides IRS with a brief overview of governance and clarity of purpose of the organization which they assess at the time of granting tax exempt status. 4) Sets clear expectancies and deliverables for the board, officers, employees and fund raisers of the organization. Given the importance, this should not just be construed as a management exercise but as a beacon to guide all the activities undertaken by the organization. They important constituents of a strategic plan are - Organization Background - A brief on what your organization stands for, its structure, its vintage and other details like contact details. Project details - defines the purpose that is hoped to be achieved or issues that are proposed to be addressed. The project detail will have sub sections like - The Vision, Mission & Objectives The systems and procedures to be adapted to achieve the objective including details of resources that would be used in the process. Executing team details This section provides details like the name, age, qualifications and roles to be played by them for the success of the project. The Time Schedule - A detailed time bound schedule for the activities to be undertaken with a month to month break up. Rationale and justifications for taking up the project.

14 Outreach or Beneficiary details Provides the Beneficiaries details like- number, age group, addresses etc. The list may be further broken down into direct beneficiaries and indirect beneficiaries. A detailed Budget- this should include a break up of the proposed expenses and the details of funds required towards the same. The budget should be made for the entire period for which the project would run. If a project is perpetual in nature, the budget should be made at least for the next 3 years. Sustainability of the Project Most of the funding agencies prefers to support projects that have the probability of becoming self sustainable over a period of time. This section of the strategic plan talks about the processes and systems to be implemented to make the project self sustainable after the funding agency withdraws it support. Executive Summary This section is drafted at the last but eventually appears first in the strategic plan. Some times this is also attached with the covering letter to the funding agency. This section summarizes the entire project in 2-3 pages for the funding agency to pass a cursory glance over the salient parts of the project. We now proceed on how to go about drafting the strategic plan. Brainstorming to Forming If you don t ask the right questions, you don t get the right answers. A question asked in the right way often points to its own answer. What? Why? Who? Where? When? How? What? - What is the problem? What is needed? Take those general goals and break them down into specific tasks. Make these tasks measurable by using dates and numbers so you know when the tasks are completed. Why? - Why the problem exists? Why is it needed? Reasons for your group s existence Who? Who is creating the problem? Who can provide solution?

15 List of the people who share the groups interests and goals and another list of people who possess the skills and contacts you will need to run the organization. List of people who will oppose your plan and decide how they will affect the success of the group. Where? Where does the problem exist? Where do we get in? When? When did the problem begin? When do we involve? How? How can this problem be tackled? How will the activities you organize meet your goals Vision, Mission and Objective statements Mission Statement The mission statement articulates a organization s purpose. It explains why the organization exists in the first place. A clearly articulated mission statement gives a clear idea of the purpose and hence acts as a tool to measure the effectiveness of its programs against the benchmark of the mission. The mission statement must have a meaning that incites a sense of purpose in the members of the organization and should not be just an exercise for the sake of having a mission statement. The mission statement conveys the founder's core values and beliefs. While having a mission statement is not a legal requirement, the Internal Revenue Service encourages organizations to establish and regularly review the mission statement. An organization with a clearly articulated mission statement scores better in assessment of its tax exemption application. 3 steps to writing a Mission statement

16 Step 1) Write down in plain English, what your organization does or plans to do - No fancy statements just plain simple facts. e.g. At Kites (that s the name of the organization), we provide educational services for adolescents Step 2) Describe how you do it - e.g. through interactive and fun based workshops on life skills using art as a medium for creative expression Step 3) Add why you do it - what are the underlying values e.g. aimed at helping the adolescents channel their energy to become life-long learners and contributing members of our community Combining all the 3 statements, we get our mission statement At Kites, we provide educational services for adolescents through interactive and fun based workshops, using art as a medium for creative expression aimed at helping the adolescents channel their energy to become life-long learners and contributing members of our community After you are done, have another look at your mission statement to ensure that it says what you want to say and if there is a better way of phrasing it. Put your mission statement to work. Some organizations go so far as to make their mission statements the central message of their advertising campaigns. If you do not go that far, you should at least make sure your mission statement is visible in central places of your organization premises, your website and all other key places where it is visible to you yourself, employees, visitors and other stakeholders. A mission statement is often used by funding agencies to understand the core purposes of an organization. Thus it's also the statement that explains to them why they would want to do business with you.

17 Vision statement A vision statement is a broader articulation of the purpose of the organization. It serves as a lighthouse, a beacon using which you can occasionally revise your strategies to make sure you stay on the right track. A vision statement is a statement of How you see the world change and be after X years from now? What will the world look like, should your interventions be successful? e.g of a Vision statement: One day, our grand children will go to museums to see what poverty was like - Mohammed Yunus, Founder Grameen foundation world s largest micro credit bank. Drafting the Vision statement A simple method for drafting the vision statement is to begin with a statement that reads X years from now For instance, taking the example of Kites for which we drafted a mission statement, the vision statement could read something like 10 years down the line, Kites will be managed by at least 3000 students who would be volunteering in different community projects across Colorado. The Vision statement, like the mission should be kept visible to all employees, members, directors and every other stakeholder of the organization. Objective Statement The last in the series - Objectives are much more precise and specific in the sense that they lay out the set of actionable for the organization over a shorter time frame.

18 The Objective should be performance based and not just a general remark with no clear guidelines for action. For e.g. - A statement like to raise awareness about saving water is not a valid objective statement. Instead a statement like - To Design a poster on water conservation could be a valid objective. Just like human beings, Objectives need to be SMART Where S stands for Specific M stands for Measurable A stands for Actionable R stands for Realistic T stands for Time bound To clarify this using an example, let us take a general objective statement and make it SMART Say one of the objectives of Kites is to form clubs in schools in Colorado. This can be turned into a smart objective in the following ways S To form clubs in Schools with a predominant Black skinned population. M To make at least 4 clubs. A by formally instituting a club with paid option for membership R Nothing to add but a check to ensure that the objective is realistic. T - by end of Jan Combining all these together, one of the objectives of the organization would be - To form at least 4 paid clubs by the end of Jan, 2008 in schools with students from economically weaker sections of the society Unlike the Mission and the Vision statements, an organization may have multiple objectives. For instance the objective of the HR department of Kites could be - To empanel at least 8 active volunteers for the organization by end of Jan 2008 Drafting organization s profile

19 Drafting a good project report is the key to get funds from funding agencies for new start up non profit organizations. The first section of the project report describes the Organization Profile. The organization profile section of the project report outlines the following details about the organization - Name, Address and Tel. no of the Organization: Registered address: XXXXXX Address of Branch offices (if any): XXXXXXXx Telephone: Contact: Website: Name & details of contact person: Background of the Organization: This section delves into topics like - 1) Vintage of the organization. 2) Purpose behind starting the organization. 3) Discussions on the novelty of the idea. 4) Community survey and research data to validate the need for starting the non profit organization. 5) Activities undertaken so far. 6) Vision and goals of the organization. 7) Board member details name, age, qualifications, role in the organization 8) Team members names & the proposed roles in the organization. Catchments analysis Catchments analysis constitutes an important section of the Project report of a new start up non profit organization. This section involves presenting the demographic, psychographic and behavioral aspects of the people of the location where the non profit organization proposes to operate. An analysis of these aspects helps the organization to decide the program structures to suit the local tastes and preferences, there by maximizing the impact of the programs undertaken by the organization. Drafting program approach and strategy

20 In this section of your start up strategic plan you need to mention the following details 1) Overview of the program Describes what the program is all about, who are its beneficiaries, structure of the program, the reason for choosing the program to achieve the organization s objectives and the method that would be applied to measure the effectiveness of the program. 2) The second part of this section delves into the achievements of the program so far. 3) Another section of this part of the project report delves into the actual proposal for which funds are being sought by the new startup non profit organization. Budget preparation for start up non profit Budget constitutes the final part of the Project report that is send to funding agencies for consideration. Budget making is difficult when starting a non profit organization, because there is no base on which costs can be estimated. Each of the major estimation in the budget is to be backed by a schedule that explains the rationale behind the estimation. When estimating the income, it is equally important that you do not solely rely on the funding agency for financing 100% of expenses. The bottom line be as exhaustive as possible when presenting the budget as a new start up really does not have a lot to show in its body of work. This budget includes the following necessary components - 1) Estimated expenses & capital expenditure for the proposed project 2) Proposed means of financing the expenses estimated above. 3) Schedule of Expenses A sample budget for a non profit organization would look like: Category Year 1 Year 2 Year 3 Schedule Source of Inflows

21 Proposed Funding from (funding agency 450, ,000 1,100,000 name) Funds raising in schools 100, , Funds from Subcription fees 3,000 7,000 25,000 Interest Income Total Income 553, ,000 1,285,200 Expenses Salaries to YR coordinator 320, ,000 Salary to YRC suppport staff 80, , ,000 Honorarium to external facilitaroes & english 40,000 40,000 40,000 teacher Security deposit for YRC 18,000 36,000 36,000 YRC furnitute & fixture Rent for YRC 60,000 80, Utilities for YRC 24,000 26, Printing & Stationery 2,000 1, Telephone 3,000 2, Library expenses 24,000 26,000 36,000 Newspaper & Journals 12,000 15, YRC film screening & equipments 15,000 17, Magazines & Subscriptions 1,200 1, Brochures & banners Repairs & Maintenance 1,250 1, Internal training expenses 3,000 3, days residential camp Publication of newsletter 4,500 4, Awareness campaign 45,000 49, Interclub meet 12,000 13, Field visit expenses 8,000 8,

22 Scholarships /Fellowship 80,000 80, Annual Youth Festival 70,000 70, Vocational training expenses at YRC2 35,500 39, ,700 10, Total Expenses 550, ,678 1,284,140 Net Income $2,806 $2,322 $1,060 Measuring Project outcomes & Indicators The project report of a start up non profit organization should clearly spell out the methods that the organization proposes to apply to measure the success of the proposed project. Accordingly the project report should clearly specify the following aspects - 1) Social impact expected of the program. 2) Expected outcome of the program proposed by the non profit organization. 3) Indicators to measure the success of programs. 4) Means of verification. Conclusion A well drafted strategic plan culminates into the form a project report which is the key to attract funding agencies to support the project. Many funding agencies provide for specific format for applying. However, these are some of the most common things that generally form a part of the project report of a non profit organization.

23 Section III Legal Framework for Nonprofit organizations Section II - Basic Legal Framework 1) Possible organization structures Unincorporated organization, Trust or Corporation. Starting an unincorporated non profit organization If an organization is expected to work on a small scale or if the members do not wish to go that far to keep qualified staff for meeting with compliances required by

24 an incorporated organization, they may decide to start a non profit organization without incorporation. An unincorporated non profit organization is similar to a incorporated organization except for the following practical differences - A) The protection against personal liabilities is not available to an unincorporated organization. (See discussion on how an unincorporated organization can provide partial protection against personal liabilities to its members) B) An unincorporated organization does not have to draft articles. Instead it has to draft and adopt a constitution which has similar contents as those of articles of incorporation of a non profit organization. C) The organization may or may not draft its by laws. D) The unincorporated organization does not have to file annual reports and other compliances with the secretary of states. (Other than those reports that need to be filed for fundraising regulation purpose) While incorporation may not be necessary for organizations that do not envision to operate on a large scale, incorporation must be considered as it provides credibility in the eyes of funding agencies. Limiting personal liability in case of Unincorporated Non profit organizations Limiting of personal liability is cited as one of the greatest advantages of incorporating a non profit organization. This may be true to a large extent however incorporation is a costly affair in terms of the expenses involved, documents to be maintained, compliances to be undertaken, hiring of qualified staff and being ready for external audits and inspections. For individuals wanting to start a non profit organization on a small scale, this is highly impractical. On the other hand, if one decides not to incorporate, this could subject the members of the organization to personal liability in the event of the organization being sued. An unincorporated non profit thus often finds it difficult to attract quality members for fear of invoking of personal liability issues during its day to day transactions.

25 However Incorporation is not the only way in which a nonprofit organization can separate the personal and the organizational liabilities. Listed below are some of the alternate ways in which an organization can somewhat achieve this. 1) Providing for Indemnity clause in the bylaws Most of the states in the United states have provisions for allowing indemnification. An indemnification clause in the bylaws of the organization is an undertaking by the organization to cover for all legal expenses and other incidental charges to prevent the organizational liabilities to fall upon its members. The insertion of indemnity clause in the by laws should be worded in clear and unambiguous terms. A sample indemnity clause could read like - The organization agrees to indemnify, defend and save harmless the board members, its officers, directors and employees, from and against all liability, loss, cost or expense (including attorney s fees) by reason of liability imposed upon the Client, arising out of or related to organization s activities, whether caused by or contributed to by the members or any other party indemnified herein, unless caused by the sole negligence of the member or any other party indemnified herein. 2) Personal Liability Insurance Purchasing a personal liability Insurance cover is similar to indemnification with a difference that the risk of liabilities is shifted to the Insurer, thus protecting both the members and the organization. The flip side is that the organization needs to pay hefty premium for coverage and the coverage is also partial in most of the cases. For instance most of the insurance companies will not cover issues like anti trust, employment discrimination, criminal offences and select civil offences. Insurers that cover these will charge an indiscriminately higher premium. 3)Immunity under statutes - Many states in the United States have passed laws that protect members of a non profit organization from incidences of personal liability. You will need to consult a qualified legal professional from your area for information on the protections available, if any. Conclusion If you are incorporating, you need not worry about indemnity or immunity. You can still consider taking an insurance cover to transfer the risk from the organization to the insurance company. If incorporation seems impractical, you should get the indemnity clause drafted in such a way to protect your members from incidences of personal liability.

26 Starting with a Fiscal Sponsorship Fiscal sponsorship is a formal arrangement whereby a 501(c)(3) tax exempt organization financially supports another organization, Individual or a project that may not have a tax exempt status. The organization that agrees to provide fiscal sponsorship is called the sponsor or the fiscal agent From the point of view of many organizations, sponsoring is a good idea as many tax exempt organizations have viable projects in hand, but don t have support staff to execute these projects independently. Thus this serves as a kind of delegation or outsourcing to other individuals or organizations that are willing to take them up. From the point of the individuals/projects (the grantee), this is a very popular alternative to starting a nonprofit which allows them to enjoy all the benefits of tax exemption without having to bother about complying or reporting to the IRS. The sponsor generally charges a fees ranging from 1% to 10% of the amount of sponsorship depending on the extent of services offered which could range from simply granting of funds to also managing and administering the paperwork or even providing in house resources, support and guidance. A fiscal sponsorship is a good alternative to starting a non profit organization if - 1) The members do not propose to enter into this sector on a full time basis. 2) The founders want to test waters before committing full time involvement. 3) The proposed objectives of the organization are likely to be met in a year or two. 4) The founders do not want to or are not equipped to meet all statutory obligations that need to be complied by a typical nonprofit organization. 5) An organization has applied for tax exempt recognition, but is yet to recieve its recognition from IRS. Finding a Fiscal sponsor

27 The first step is to locate all possible fiscal sponsors with similar mission and objectives as the IRS requires that a sponsored Project to be consistent with the mission of the sponsor. This can be done by searching through several fiscal sponsorship directories. The IRS directory of Tax Exempt Organizations (Publication 78) should be the first place to begin the search. You can also obtain this data by calling the IRS office at is another exhaustive directory where you can search for fiscal sponsors from across the United States. is another place where you can specifically look for organizations seeking to support through the fiscal sponsor route. This is to be followed by drafting a project report to present the project as deserving case. (see previous section on strategic planning for details). The project report is to be circulated amongst all probable sponsors by personally meeting and explaining the case to the representatives of these organizations inquiring about the possibility of sponsorship. The proposal for establishing a fiscal sponsorship relationship needs to be approved by the board of the sponsoring organization.the in principle approval by the board is to be followed by working out the finer details of the proposal. Details to be worked out would include - 1. Consitency factor -This involves formally establishing the consistency of purpose between the sponsoring organization and the sponsored projects to safeguard and justify the relationship with the IRS. 2. Scope of Sponsorship 3. The tenure of the relationship Will include beginning and the end date and the possibility of renewal of relationship. In the beginning it is a good idea to keep the duration short (say 6 months) as it provides flexibility to both the parties to reconsider their involvement. 4. The method of evaluation This is perhaps one of the most important aspects to be finalized when starting a fiscal sponsorship relation. The evaluation process should be quantifiable to the extent possible to ensure objectivity.

28 5. Accounting This involves deciding issues like the account where the funds would be disbursed, the books to be maintained and the vouching method to be applied by the sponsored project. 6. Disbursement procedure Includes finalizing issues like who is authorized to request disbursement, the procedure to be followed at the sponsor s end at the time of disbursement, the mode of disbursement -(whether one-time or several part disbursements) and the documents to be submitted before every disbursement. 7. IRS reporting This involves fixing of responsibilities towards preparation of reporting documents and the responsibilities of furnishing timely data for preparation of the reporting documents. Penalties for delays in compliance should also be clarified in the very beginning. 8. Audit An audit might be a good option when the amount of fiscal sponsorship is considerable. The agreement between both the parties should clearly specify the scope, the tenure and the processes allowed when an audit is conducted by the sponsoring organization. 9. Fee payment The fiscal sponsorship agreement must clearly specify the fee structure payable by the sponsored project. This section should also clarify the deadlines by which fee must be paid by the sponsored project. 10. Other details to be worked out include buying of insurance cover, terms of use of brand names and resources. A sample Fiscal sponsorship agreement is available at Starting as a trust A non profit organization can also be started as a trust as an alternative to incorporation. While trusts are the common structure of Starting a non profit organization in the United Kingdom, they are rarely used in the United States. In the United states, trusts are more commonly used for Will and estate planning, Employee plans and for personal tax planning. This is because the trust laws of most of the states are ill suited for establishing a non profit organization even though they are relatively easy to set up.

29 While they are easier to set up, the governing rules/trust laws for most of the states are much more stringent than those applicable to a non profit corporation. For instance, a trustee is not protected from personal liability as is available to members of a corporation. A Trust is suitable if a non profit is established solely for the purpose of administering the property of the settlor which is proposed to be managed by other individual(or group of individuals) as its trustee (s). If your organization falls into this category, you can as well consider forming a trust, even though similar effects can be achieved by incorporation as well. If you decide to set up a trust, you will have to execute a trust agreement (also called trust deed or a declaration of trust ). In most of the states a trust can be formed by a single trustee. The trust can also adopt by laws like corporations. Starting an Incorporated Nonprofit organization Incorporation of a non profit organization is a vast subject and needs a comprehensive treatment. This section provides just a brief outline. Incorporation is covered in detail in a separate section. To or Not-to Incorporate? While making this choice, We would recommend an organization to incorporate if - a) The expected annual budget for the organization in years to come exceeds USD (Just a thumb rule) b) The organization is expected to continue its activities in the foreseeable future. You might decide to start an unincorporated non profit organization if - a) This is a temporary project that you wish to undertake b) The annual budget is less than USD 20,000. (Again a thumb rule) The advantages of incorporation are as follows - Increased Credibility: Perhaps the greatest advantage of incorporating is an increase in the credibility of the organization. Incorporation provides a formal and a legal structure to a non profit organization. An incorporated organization is also perceived to be more accountable than an unregistered organization. For these

30 reasons, Funding agencies do prefer incorporated organizations over the unregistered ones. Limited Liability: Incorporation also allows separating the personal liabilities of the incorporators from the organization s liabilities. Post incorporation the liabilities of the organization are treated as separate from the personal liabilities of the incorporator, board members, employees and officers. Thus the personal assets of the members are protected and not at risk, in the event of suit against the organization where the organization may become liable to pay. Tax exemption: Incorporation is a must, if the organization seeks tax exemption of any kind. In the case of unincorporated organizations, the income of the individual running the organization is subject to be taxed as per federal, state and local laws. Tax exemption also attracts funding agencies as they can be assured of a certain level of accountability on the part of the recipient organization, if it is duly incorporated. Other benefits A duly incorporated non profit organization enjoys certain other benefits like accessibility to cheap postage rates, free access to select media for announcements and publicities and greater acceptance by volunteers and other stakeholders of the organization. However Incorporation also brings along certain serious disadvantages. Delegation of control: The greatest disadvantage of incorporation is the loss of a centralized control. More often than not, the idea of setting up a non profit organization is conceived by enterprising individuals with certain vision in mind. An ideal situation in such case is not to let dilute the vision in anyways. However Incorporation leads to dilution of control from a few individuals to a larger board of members. The control further dilutes as rights and responsibilities are delegated to employees and non members after incorporation. This is a major issue that needs to be tackled effectively after incorporation. Compliance costs: Incorporation brings along the need for multiple compliances with strict deadlines. The burden of increased paper work is even more during the formative years for the organization. The documentation and administrative work involved in forming and subsequently running a non profit organization can be really intimidating for an incorporated organization. To be able to comply, the organization first needs to set up a formal accounting system in place. This would in turn require hiring of qualified accountants.

31 Failure to comply with the obligations can lead to serious consequences including civil and criminal proceedings against the organization and the defaulting members. Some of the major compliances includes conducting of annual audits, filing of annual reports, passing of resolutions for all major activities, filing tax returns and paying taxes, maintaining a vouching system, preparing budgets, conducting annual and periodical board meetings, complying with the conditions of funding agencies, conducting internal inspections and internal audits, filing employee related documents like attendance, payroll processing, employee benefits management. And there are certain compliances where they have to be separately dealt with for federal, state and local laws. All these compliances entail one time and recurring costs. Absence of privacy: Incorporation means complete transparency in the operations of the organization. A lot of vital information is to be periodically submitted to the office of attorney general, department of secretary of state, Revenue department and others. Types of Non Profit Incorporation A non profit organization may be established in 3 different ways - 1) As a Private Foundation This type of incorporation is suitable for organizations that expect funds to be raised from a limited number of members. This is mostly suitable for incorporating funding agencies. 2) As a Membership organization This class of incorporation is suitable for organizations that are being established for the benefit of or information sharing amongst its constituent members usually comprising of specialized group of individuals. 3) Service Organizations This incorporation is suitable if the organization proposes to provide charitable services to the public at large and not to a small or a restricted beneficiary group. Jargons used in Incorporation process

32 When Incorporating a nonprofit organization, you may encounter certain terms very frequently. A brief of these is mentioned below - 1. Shareholders - A shareholder is a person owning stocks in a corporation. A share holder may be entitled to voting rights and to dividends (in case of equity shares) or returns (for preference shareholders) in case of a for-profit organization. However in Nonprofit organizations a shareholder is not entitled to any dividends or returns- though he may still have voting rights. 2. Board of Directors This is the top tier body of an organization that is responsible for making major organizational policies and for electing officers. In case of small organizations the board members may also undertake the roles of the officers. Many states also allow for incorporation with a single member on the board. 3. Officers - Collective term used for individuals who are responsible for running the day-to-day activities of the nonprofit organization. The typical designations for officers include president, secretary, treasurer, CEO, CFO etc. There are no hard and fast rules for naming of officers and an organization is free to choose its own designations based on the nature of its activities. 4.Registered Agent The registered agent (also called the resident agent in some cases is a person identified by the corporation to receive all legal notices and documents on behalf of the corporation. A resident agent is a corporation s official contact individual and address. Accordingly, the agent receives service of process for lawsuits, notices, demands and any acts as a liaison with the Secretary of State and other regulatory agencies, and forwards any court notices and state reports to the organization. The registered agent is generally required to sign an undertaking by most of the states agreeing to carry on this responsibility by making himself available at the registered office of the corporation. If an organization does not have a valid street address of the state where it wants to incorporate, it can appoint commercial registered agents who act as registered agent for organizations in return of a small annual fee. The registered agent at all times must have a valid street address of the state where he/she is acting as the resident agent. 2) Stake holders

33 Board of Directors Duties of the Board members The board of a new start up non profit has the following responsibilities - 1. FORMULATE ORGANIZATION S VISION MISSION AND OBJECTIVE A Vision statement imparts a long term direction for the non profit organization. A mission statement is a more specific draft of the vision while the Objectives statement provides very specific goals and the methods proposed to be applied to achieve those goals. The board of the non profit organization is responsible of formulating the vision, mission & objectives of the organization. In addition the board is also responsible to periodically reassess the effectiveness of the methods being applied towards achieving the desired ends. The Vision, mission and objectives must be drafted with mutual consensus of all the board members and it is vital that each of the members on the board understands its meaning and implications in totality. 2. APPOINTING THE CHIEF EXECUTIVE MEMBER The board of the non profit organization is responsible for selecting from amongst themselves a chief executive member who will undertake and supervise the execution work. 3. PROVIDE SUPPORT RESOURCES TO THE CHIEF EXECUTIVE AND PERIODICALLY ASSESS PERFORMANCE The board members of the non profit organization are responsible for providing necessary support in terms of resources required to realize the objectives of the organization. The board is also required to conduct periodical revaluation of the activities of the organization. 4. FORMULATE REALISTIC PLAN IN CONSULTATION WITH THE STAFF MEMBERS The board members are the stewards of the organization and therefore they must actively participate with the staff members in the planning process. The board is responsible for drafting realistic plans for the non profit organization. 5. ARRANGE FOR MAINTENANCE OF ADEQUATE RESOURCES The board of a non profit organization is primarily responsible for mobilizing all resources required for the organization to achieve its objectives. The board

34 should work in close cooperation with the staff members to raise funds, hire staff and arrange for all other resources required for the purpose. 6. MANAGE RESOURCES RESPONSIBLY AND SYSTEMATICALLY The board of a non profit organization is accountable to its donor in particular and the public in general. Thus the board is responsible for proper utilization of resources and its proper documentation. This is one of the vital things assessed by tax authorities while granting the tax exempt status to a non profit organization. 7. ESTABLISH PROGRAMS AND REVIEW THEIR EXECUTION FROM TIME TO TIME The board members of the non profit organization are responsible for establishing programs to be undertaken to achieve the organizations plans.they are also responsible for monitoring the programs effectiveness from time to time. 8. IMPROVE THE IMAGE OF THE ORGANIZATION WITH ITS STAKEHOLDERS. The board of the non profit organization is responsible for maintaining and improving the image of the organization with its stakeholders. The stakeholders of a non profit organization includes the immediate community, the public and the mass media. 9. ENSURE STATUTORY COMPLIANCE & ETHICAL INTEGRITY The board of the non profit organization is responsible for complying with all statutory compliance of the land. The board is also responsible for determining the ethical standards for the organization by drafting HR policies for the organization. 10. INDUCT NEW BOARD MEMBERS AND CONDUCT SELF APPRAISALS The board of the non profit organization is responsible for recruiting and inducting new board members. They are also responsible for conducting periodical self appraisals. The member of a board of non profit organization has several responsibilities towards the organization and towards the stakeholders of the non-profit organization and it is important that you know your duties before you start a non profit organization. The duties of a non profit board member can be broadly classified into two- the statutory duties and the non statutory but desirable duties. While the laws and

35 procedures for starting a non profit organization differ from place to place, the underlying concepts remain the same. Fiduciary duties of board members 1) Duty to attend board meetings The frequency of board meetings is laid down in the bye laws of the organization. Most of the boards meet at least once in the annual general meeting and at least twice more during the year. The chairman of the board generally has the discretion of calling the members for more frequent meetings or to discuss some urgent issue. The board members have a duty to keep themselves abreast of the activities of the organization by participating in the meetings. 2) Duty to monitor the activities of the organization - The board members are representatives of the various stakeholders in the organization. In this capacity, a board member should keep himself informed of the activities of the organization and to monitor the progress of the organization. The board members must periodically inspect the documents of the organization to ensure that they adhere to the legal requirements as well as to the internal policies of the organization. 3) Duty to express independent views on matters The board members must act independently and should not accept or reject a decision on some personal grounds. The board member is also responsible for ensuring that his decisions are objective and are not based merely on emotional or personal justifications. 4) Duty to be familiar with the legal requirements - A non profit organization is supposed to comply with many rules and regulations. This includes compliance to the state policies, the revenue department policies, policies on hiring people, licensing policies, accounting policies and many others. A board member has the duty to acquaint himself with these policies for an effective compliance. 5) Duty of being loyal A board member is to act in the interest of the non profit organizations. Acts done in self -interest must be clearly demarcated and should not be undertaken with the resources of the non-profit organization under any circumstances. If the organization enters into an agreement where you have a personal interest, the interests of the organization should always supersede the member s interests and this fact should be clearly disclosed to the stakeholders of the organization through the annual report of the organization.

36 To conclude, these duties do not in any way expect a board member to be an all knowing expert. Instead if the board member works in good faith and attempts to upgrade his understanding of the various aspects of running the non profit organization and is not guilty of willful neglect of his duties, he is considered to be doing his duty well. State laws for electing nonprofit organization directors The minimum number of directors is 1 to3 in different states. This is governed by the respective state statutes that govern the formation and management of the nonprofit organization. Some states place an added restriction that Interested party cannot be admitted as board members. Interested Party in a loose sense of understanding (not in legal language) refers to Individuals who have received or are entitled to receive compensation, directly or indirectly, from the corporation for services rendered to it within the previous 12 months, whether as full- or part-time employees, independent contractors, consultants or otherwise, excluding any reasonable payments made to directors for serving as directors; or Any spouse, brother, sister, parent or child of any such relatives of an individual. The State wise rules for admitting directors on the board of a nonprofit organization are as follows - U.S.A State Minimum Number of directors Should Directors be Independent? Minimum age prescribed for directors Alabama 3 Not required None Alaska 3 Not required None Arizona 1 Not required None Arkansas 3 Not required None California 3 Not more than 49% of the board may be interested parties* None Colorado 1 Not required None Connecticut 3 Not required None Delaware 1 Not required None District of Columbia 3 Not required None

37 Florida 3 Not required 18 Georgia 1 Not required 18 Hawaii 3 Not required None Idaho 3 Not required None Illinois 3 Not required None Indiana 3 Not required None Iowa 1 Not required None Kansas 3 Not required None Kentucky 3 Not required None Louisiana In bylaws Not required None Not more than 49% of the board may be Maine 3 interested parties* None Maryland 1 Not required None Massachusetts 3 Not required None Michigan 3 Not required Not required Majority of quorum must be 18 Majority of quorum Minnesota 3 must be 18 Mississippi In bylaws Not required None Missouri 3 Not required None Montana 3 Not required None Nebraska 3 Not required None Nevada 1 Not required 18 New Hampshire 5 Must have 5 not-related voting members. Employee cannot chair the board None New Jersey 3 Not required 18 New Mexico 3 Not required None New York 3 Not required 18 North Carolina 1 Not required None Not more than 49% of the board may be interested parties* Officers must be 18 North Dakota 3 Ohio 3 Not required None Oklahoma 1 Not required None Oregon 3 Not required None Pennsylvania 1 Not required 18 Rhode Island 3 Not required None South Carolina 3 Not required None South Dakota 3 Not required None Tennessee 3 Not required None Texas If a corporation has a board of directors, Not required Directors & Officers must be 18

38 the minimum is 3. The management may be alternatively vested with the members with no board of directors. Utah 3 Not required None Vermont 3 Not required None Virginia 1 Not required None Washington 1 Not required None West Virginia 3 Not required None Wisconsin 3 Not required None Wyoming 3 Not required None Setting the Board of Directors Given the responsibilities to be shared amongst the board of directors of an organization, the Incorporators of a nonprofit organization are likely to come across the issue of fixing qualifications, eligibility and admission process for board of directors. Deciding the qualifications and eligibility criteria for recruitment of directors on the board of a nonprofit organization? When forming the initial board, it is recommended to recruit members who can contribute with - 1) Wealth: Those that can support you with money 2) Work: Those who are willing to volunteer their time and talents to further the cause of the organization. 3) Expertise: Those who have expertise in areas that matters. (Say, people with experience in the nonprofit sector, lawyers, financial specialists, accountants, Fundraising specialists, local community leaders etc)

39 Anyone who fits on any or all of these criterions is suitable for recruitment to the board of the nonprofit organization. While it is often tempting to seek community leaders or celebrities on board, it may be sometimes be good idea to avoid them on board of a start up organization, if you feel that the leader might have a limited amount of time to devote to your organization. Board members not being able to provide time could in fact prove to be a hindrance in managing the day to day affairs of the organization and should not be kept on board of the non profit organization. It is a good idea to place such individuals as members of the advisory council, without any defined role or governing responsibilities. Whatever you do, never turn away anyone who shows an interest or a willingness to help. Keep in contact even if you don t have an immediate place for them. At some point in the life of your organization, you will need their help. Officers Difference between directors and officers Directors are the principal people responsible for the governance of the organization. Officers on the other hand are specific positions such as president, vice president, secretary, and treasurer. Typically these officer positions are held by directors. In many cases one director or individual can simultaneously serve in more than one office subject to state restrictions. Officers responsibilities The officers responsibilities are generally described in the organization s bylaws. There are no standard responsibilities of officers in sense that they are decided based on specific requirements of the organization. However, normally, a President is responsible for guiding the overall mission of the organization and running the day-to-day affairs of the organization. A Chairperson of the Board or the President usually has the responsibility of presiding the board meetings and to ensure that the meetings are conducted in accordance with bylaws. The Secretary is generally responsible for managing

40 the records of the organization such as serving notices of meetings, posting agendas for the meetings maintaining minutes of meetings etc. The Treasurer is responsible for supervising the the finances of the organization, maintaining of record, disbursing funds. Note that these are the most commonly delegated responsibilities of officers. In addition the bylaws or the board of directors may assign further responsibilities for each of the officers based on the specific needs of the organization. Board committees: their roles in a non profit organization The board usually has separate committees set up for effective implementation and management of its various activities. The committees are smaller sub groups within the larger framework of the board and they act as specialized teams, each handling its area of operations. Formation of committees makes the work of the Non profit organization more streamlined and increases accountability. Committees in a non profit organization may be formed keeping in view the administrative structure of an organization or in many instances are formed in accordance with certain important issues and long term vision of the organization. A non profit may have various committees made to further its activities and vision. Appointment of people to different committees should be based on the past experience, skills, interests and strengths of the members. All members in the committee have to make a serious commitment to participate in all activities of the committee. It is normally recommended that every board member should be part of at least one but not more than two committees at one time. Normally members will be appointed after consultation with the nominating committee. There is no limitation on the size of a committee, however it would be prudent to select members based on needs of the board and a general assessment of the number of people required to complete the work that the committee is supposed to execute. Too many members will result in misuse of manpower and too less may result in the members being overworked and thus unproductive at times. Members of a board committee of a non profit organization is usually comprised of board members, however even it may also include people who are not on the board such as members of the staff of the non profit and even prospective board members.

41 The board of a non profit organization can have various committees based on the activities it wishes to pursue however there are certain standing committees which are set up according to the by laws of the non profit. Some of the standing committees are as follows; 1. Executive committee The executive committee forms the nerve center of all committees and sometimes even acts on behalf of the board of the non profit organization, although within strictly laid down guidelines and in between meeting. The committee presents before the board all items that need to be discussed and then approved by the full board. 2. Nominating committee The nominating committee as suggested by its name works to identify and nominate members to the chair in various committees and also works to develop the potential and train prospective members. 3. Development committee Mainly works as the primary body within the non profit organization that raises funds for its various activities. Has a very important role in the non profit since it leads the board members in all fund raising activities and is also instrumental ion drawing up a fund raising plan for the non profit organization. 4. Finance Committee Another very important committee in the non profit organization, it works to keep a complete watch over and guide all financial policies and activities of the non profit. It studies and reviews the annual budget of the non profit, recommends all the financial guidelines to be followed and also monitors all the financial reports of the non profit organization. 5. Human resource committee This committee takes care of all human resource issues of the organization, right from staffing, duties and responsibilities and all other personnel policies of the non profit organization. It advises the chief executive of the non profit on all such matters. 6. Audit committee This board committee provides the board of the non profit organization with a overview of the annual audit process and audit report of the non profit and explains the audit report to the board.

42 7. Strategic planning committee This committee plays an important role in deciding the long term vision and plans of the non profit organization. It represents and coordinates the views of the entire board and then presents a report to the full board of all future activities that the non profit organization will undertake. Apart from these standing committees there are also other committees that the non profit organization can form based on its vision and nature of activities undertaken. Committees such as the marketing committee, public relations committee and program committee are also popular options for committees in a non profit organization. All these committees will undertake their respective roles and will all work towards the common vision of the non profit organization. Being a nonprofit employer A nonprofit organization can use the services of : a) Employees Including full time, part time employees and/or officers b) Independent Contractors - for availing one-time or specialized services c) Volunteers - to execute programs and activities as outlined in the organization s mission though technically this does not constitute hiring. The moment a nonprofit organization hires its first employee, it is bound to comply to certain rules. Some of these rules are also applicable when hiring an Independent Contractor. These include registering with a few Government departments, complying with a few federal and state rules and taking steps for employee protection. The major compliances to be met by a nonprofit employer are as follows - 1) Obtaining a unique Employer Identification number This is a on time activity to be undertaken by an organization. An employer Identification number can also be obtained online by U.S employers by simply filling in a few details. Overseas employers cannot apply online. Visit for obtaining the EIN for your organization.

43 2) Complying with the provisions of the Fair Labor Standards Act - Any nonprofit employer with a gross receipt of USD 500,000 or more needs to comply with the rules laid under this Act. The rules are applicable for employees but not for independent contractors or volunteers. All employers including nonprofits need to comply with the minimum wage requirements of federal (USD7.25 per hour) and state laws (this rate varies amongst states). All Nonprofit must also comply with the hour laws and rules pertaining to overtime. 3) Obtaining Worker s compensation Insurance: As an employer, a nonprofit organization will have to purchase Worker s Compensation Insurance to provide compensation for its employees who are injured in the course of employment. Obtaining this Insurance also protects the nonprofit employer from any possible litigation filed by an injured employee against the organization while simultaneously transferring the financial risks to the Insurer. The extent of Insurance coverage varies from state to state. Insurance cover can be obtained either from the State Compensation Insurance Fund (SCIF or also known as State Fund) or from private Insurers. (There are around 15 private Insurers that provide this cover) 4) Complying with the Federal Occupational safety and health administration (OSHA Act,1970) framework - This Act requires an employer (including nonprofit employers) to provide its employees with an safe, hazards free, sanitary work conditions and healthy environment. The major reporting requirements as per OSHA include the duty of an employer to report any work related deaths, fatal on the job heart attacks or hospitalization of 3 or more employee within 8 hours of its occurrence. An OSHA inspector is also allowed to conduct inspections of work premises during the working hours. The Act also requires a nonprofit employer to communicate with employees about possible workplace hazards and their prevention methods. An employer is also required to maintain a record of every non-consumer chemical product used or lying at the workplace. Employers are also required to report any injury or job-related illness in a prescribed format. An annual summary report also needs to be filed by all employers. 5) Complying with state Occupational safety and health laws Besides OSHA, an organization needs to comply separately to its state laws.

44 6) Withholding Federal Income taxes The federal tax laws requires an employer to ensure withholding of income taxes on payments made to its employees and pay it directly to the Internal Revenue services. The amount of tax that is required to be withheld by an employer differs from year to year with changes in tax rules for the year. The latest withholding tax rules can be obtained from 7) Withholding FICA taxes (Medicare and social security tax) Besides Income tax, an employer is required to withhold Social Security and Medicare taxes before payment of wages to employees. The amount of withholding on Social security tax is to be calculated at a flat rate adjusted every year for inflation and subject to a wage cap. Medicare tax on the other hand is not subject to any wage cap. 8) Providing disclosures of wages and withholding to all employees As an employer, a Nonprofit organization is required to provide adequate disclosures to its employees with respect to the wages paid the amount of withholding and the basis of its calculation. 9) Filing Form W-2 with the IRS The wages and the Withholding amount are to be reported to the IRS by the organization by duly filling and submitting form W-2 with the IRS. 10) Pay the Employers Contribution of FICA taxes All employers are required to pay their contribution of FICA taxes at a flat rate (6.2% of Wages as Social security tax and 1.45% of wages as Medicare taxes at the time of writing this). 11) Withholding State Income tax from employee wages The withholding rates vary from state to state. Contact state tax department for more information on this. 12) Depositing the Withholding amount with the State tax department 13) Annually Paying and Filing of IRS form 940 on -Employers Federal Unemployment tax return All Employers including Nonprofit organizations that employs are required to report this tax by annually filing an this with the IRS by duly filing FORM 940. In some cases, the employer are required to pay the unemployment tax in installments during the tax year.

45 14) Paying and Filing State Employers Unemployment tax return.(if applicable to your state) - Backup Withholding When you are dealing with an Independent contractor, insist on the contractor to furnish his tax-payer ID number. In case the IC does not have this ID, you will have to withhold the tax portion and subsequently deposit the same with the IRS, if the payments to the IC exceed USD600. This process is called backup withholding Volunteers: taking their services An organization is liable for the negligent actions of its volunteers. Accordingly, organizations must exercise reasonable due diligence in accepting volunteers. This goes beyond defining the roles and responsibilities for each volunteer to Actually monitoring and supervising their activities. As a safeguard measure, it is advisable to add an indemnification clause into the organization s bylaws to protect its volunteers. Further adequate insurance cover is advised to mitigate both the organization and its volunteer s liability. Conclusion As is evident, the formalities to be undertaken increase manifold for a nonprofit organization the moment it employs a person. If an organization can continue with volunteers or Independent contractors, there is no need to hire employees. Hire employees, if the benefits accrued out of hiring are considerably more than the cost of these compliances. State laws governing formation of Nonprofit corporations Incorporating a Nonprofit organization is a state subject. Listed below are the Chapters or the Sections of the statutes that govern the setting up and running of nonprofit organizations in all the states of America. Along side each of the states, we have also provided the URL where you can get a copy of the statutes for your record. Please note that these URL are functional

46 at the time of writing of this book but the website URL may change over a period of time. The laws are available on several websites and if the URL of the website provided here is not functional for any particular state, you will have to search using the key phrases provided in the previous column for alternate online locations for these statutes.

47 State Law Locator/ Key Phrase Online url Alabama Chapter 3 A Alabama Nonprofit Corporation Act Chapter : ALASKA Alaska NONPROFIT CORPORATION ACT Arizona Arkansas California Colorado Connecticut Delaware District of Columbia Florida Georgia Hawaii Idaho Illinois Indiana Iowa Kansas Kentucky Louisiana Maine Maryland Massachuse tts Michigan Minnesota Mississippi Arizona Nonprofit Corporation Act Arkanasas nonprofit corporation Act,1993. Nonprofit Corporation Act of California. Colorado Revised Nonprofit Corporation Act (Articles Connecticut Revised Nonstock Corporation Act. The delaware general corporation law D.C nonprofit corporation Act (Title 29, Chapter 3 of the DC code). Florida Not for profit corporation Act (Tite XXXVI (Business Organizations)Chapter 617 Georgia Nonprofit corporation code (Title 14, chapter 3 of the Georgia code) Hawaii Nonprofit Corporations Act, Chapter 414 D Idaho Nonprofit Corporation Act. (Title 30 Chapter 3) General Not For Profit Corporation Act of 1986 of Illinois Indiana Nonprofit Corporation Act of 1991 Revised Iowa Nonprofit Corporation Act, Chapter 504 of the Iowa code Chapter 17 of the Kansas statute (Article 60 onward) Private corporations and association section of the Kentucky statutes (Title XXIII, Chapter 273) Title XII, Chapter 2 of the revised statutes of Louisiana Title 13-B: MAINE NONPROFIT CORPORATION ACT Corporations And Association staute of Maryland Title XXII Chapter 80 of the General Law of the Commonwealth of Massachusetts Nonprofit Corporation Act 162 of 1982 Chapter 317 A of the Minnesota Statutes Title 79, Chapter 11 of the corporations, associations and partnership section of the Mississippi code abama/1975/ htm rces/arizona_nonprofit_corporation_act op.asp ns/index.html htm ex.shtml /default.asp?sp=dcc m? App_mode=Display_Statute&URL=Ch061 7/titl0617.htm&StatuteYear=2009&Title=- %3E2009-%3EChapter% Corporate/IowaCodeChapter504.aspx er_17/article_60/ 08_Ch /HRS0414D/HRS_0414D-.htm toc/30003ktoc.html apter65/2280.html /ar17/ /161.html tes/13-b/title13-bch0sec0.html stock.pdf ornp/npfrm.htm %28e2fwwo55rdisx345xz2yob45%29%29 /mileg.aspx? page=getobject&objectname=mcl id=317a 11/index.htm

48 As a first step, you should copy all the sections of the Act and keep it for offline reference. We shall be referring to the various sections of the Act over the time and you may also need to refer to them for matters related to the day to day functioning of your nonprofit organization. Most of these statutes are derived from one or a combination of Model Nonprofit Corporation Act, 1964 (Revised in 1987) and/or Uniform Unincorporated Nonprofit Association Act, Thus the typical structure of all these statutes is almost similar except for a few differences here and there. Once you have copied all the sections of the Act and kept it for offline records, its time to read through the Act. Though not all clauses will be not be included in all state statutes and will not necessarily be found in the order mentioned here, you will find that typically tese statutes have sections like Introductory clauses: Like Short Title, Definitions, Purposes, General Powers, Clauses Pertaining to Incorporation: Like Corporate Name, Registered Office and Registered Agent, Incorporators, Articles of Incorporation, Filing of Articles of Incorporation, Effect of Issuance of Certificate of Incorporation, Fees for Filing Documents and Issuing Certificates, Powers of Secretary of State, Appeals from Secretary of State, Certificates and Certified Copies to be Received in Evidence, Forms to be Promulgated by Secretary of State. Clauses pertaining to day to day functioning: By-Laws, Organization Meeting, Meetings of Members, Notice of Members' Meetings, Voting Members' List for Meeting, Quorum of Members, Voting of Members, Board of Directors, Number, Election, Classification, and Removal of Directors, Vacancies, Quorum and Voting Directors, Committees, Place and Notice of Directors' Meetings, Officers, Removal of Officers, Officer Liability, Greater Voting Requirements, Waiver of Notice, Action Without a Meeting by Members, Directors or Committees, Meetings by Telephone Conference or other Remote Communications Technology, Application to Foreign and Interstate Affairs, Books and Records, Financial Records and Annual Reports, Corporations Assisting State Agencies, Power to Indemnify and to Purchase Indemnity Insurance, Duty to Indemnify, Dividends Prohibited, Loans to Directors Prohibited, Liability of

49 Directors in Certain Cases, General Standards for Directors, Delegation of Investment Authority, Interested Directors, Power to Serve as Trustee, Conveyance by Corporation, Sale, Lease or Exchange of Assets. Clauses pertaining to Amendments: Change of Registered Office or Agent, Change of Address of Registered Agent, Service of Process on Corporation, Members, Right to Amend Articles of Incorporation, Procedure to Amend Articles of Incorporation, Articles of Amendment, Filing of Articles of Amendment, Effect of Certificate of Amendment, Restated Articles of Incorporation, Procedure for Merger of Domestic Corporations, Procedure for Consolidation of Domestic Corporations, Approval of Merger or Consolidation of Domestic Corporations, Articles of Merger or Consolidation of Domestic Corporations, Effect of Merger or Consolidation of Domestic Corporations, Clauses pertaining to Dissolution: Voluntary Dissolution, Application and Distribution of Assets, Plan of Distribution, Revocation of Voluntary Dissolution Proceedings, Article of Dissolution, Filing of Articles of Dissolution, Fraudulent Termination, Involuntary Dissolution; Reinstatement, Notification to Attorney General, Notice to Corporation and Opportunity to Cure Default, Venue and Process, Appointment of Receiver for Specific Corporate Assets, Appointment of Receiver to Rehabilitate Corporation, Jurisdiction of Court to Liquidate Assets and Affairs of Corporation and Receiverships, Qualification, Powers, and Duties of Receivers; Other Provisions Relating to Receiverships, Clauses pertaining to Foreign Corporations: Admission of Foreign Corporations, Powers of Foreign Corporations, Corporate Name of Foreign Corporation, Application for Certificate of Authority, Registered Office and Registered Agent of Foreign Corporation, Change of Registered Office or Registered Agent of Foreign Corporation, Service of Process on Foreign Corporation, Withdrawal or Termination of Foreign Corporation, Conducting Affairs Without Certificate of Authority, Clauses pertaining to reporting requirements: Report of Domestic and Foreign Corporations, Failure to File Reports; Forfeiture; Right of Corporation to Cure Default, Penalty for Signing False Document

50 I) Copy all the sections and clauses of your respective State statute and keep it for offline records. II) Open the offline copy of your state statue and locate and read: a) Clauses pertaining Incorporation and b) Clauses pertaining the day to day functioning and make a note of all important restrictions and rules that you come across in a fresh note book. Federal State Unrelated business Income tax Introduction A nonprofit organization that has received tax exempt recognition under Section 501(c)(3) of the IRS code is exempt from taxes on Income from any activity which is substantially related to its tax exempt purpose. Income derived from the normal purpose for which the organization has been established is called as the Exempt function income. Exempt function income is exempt from Income taxes even though it may be a regular trade or business income for the Non profit organization. Alternatively, if the nonprofit organization indulges in certain activities that are not substantially related to its exempt purpose, the organization is liable to pay taxes on Income from such Unrelated business. The purpose behind the enactment of the Unrelated Business income provision was to prevent tax exempt organizations from unfairly competing with businesses that pay regular taxes, thereby aiming to restrict individuals who try to evade taxes under the garb of a tax exempt nonprofit organization. As per IRS guidelines, all tax exempt Nonprofit organizations their unrelated business Income on form 990 T, if the organization s gross Income from Unrelated trade or business income is $1000 or more.

51 Definition of Unrelated Business Income For an income to be considered as unrelated business Income, it must fit these three criteria 1) The Activity must be a trade or business. ( i.e. the activity must be conducted for income or profit) 2) The trade or business must be carried on regularly (i.e. the frequency of activity could be similar to the frequency of a commercial entity operating in the same business.) 3) The business must not be related substantially to the organization s tax exempt purposes. Exceptions which are not considered Unrelated Business or Trade Trade or Business performed by unpaid volunteers Trade carried on for the convenience of the organization s students Some qualified sponsorship payments Selling of donated merchandise Selling of Low cost Articles (low-cost article, for organizations eligible to receive charitable contributions, was increased to $9.50 for 2009) Exchanges Involving donors Qualified trade show activity. How is Unrelated Business income Tax Calculated? Unrelated Business Income is taxed at the normal corporate rates and in the same manner as it is applied to other commercial entities. Summary of Unrelated Business Income section Can a nonprofit organization sell goods or render services for profits? Selling goods or services does not risk an organization's tax-exempt status with the IRS, provided the revenue out of the sales is used to promote the organization's tax - exempt purpose and the organization duly files and pays the applicable taxes on its unrelated business income.

52 However if a Nonprofit organization has a substantial unrelated business Income which is out of proportion to its spending on its tax exempt purpose, it may risk loosing its tax exempt status. For more information on Unrelated Business income: refer to Publication 598 of IRS. The Publication can be downloaded at:

53 Section IV - Incorporation 1) Choosing the place for incorporation 2) Obtain incorporation documents from secretary of state 3) Choosing a Corporate name Name & Checking name availability 4) Name Search & Reserve your corporate name 5) Preparing Articles of Incorporation & Filing articles of Incorporation 6) Preparing organization bylaw & Membership provision Choosing a Place for Incorporation Incorporation (both for-profit and non-profit ) is a subject of state laws. While the general principles and rules remain same throughout the states, there are some vital differences. For instance, there are differences in the application process, the membership requirements, the filing fee and few other norms. The difference is more pronounced in the state taxation laws. Thus the place of incorporation is a vital decision to be made when starting a non profit organization. Technically speaking, a non profit organization incorporated in one state is a foreign corporation in all other states and will thus have to comply to specific requirements if they conduct any business outside the state of Incorporation. When it comes to decide the place of incorporating a new non profit organization, the following must be kept in mind -