INTRODUCTION

CHAPTER ONE : COMMONLY ASKED QUESTIONS ......................................1

CHAPTER TWO :STEPS FOR INCORPORATION.............................................23

CHAPTER THREE : ADVANTAGES OF INCORPORATION............................30

CHAPTER FOUR: TAX EXEMPTIONS...............................................................42

CHAPTER FIVE : ARTICLES OF INCORPORATION......................................141

CHAPTER SIX : BY-LAWS ................................................................................214

CHAPTER SEVEN: FIRST MEETING OF DIRECTORS....................................241

CHAPTER EIGHT: MEMBERSHIP CERTIFICATE............................................251

CHAPTER NINE : AFTERWARDS-POST INCORPORATION ACTS .............256

CHAPTER TEN: AMENDMENT OF ARTICLES................................................267

CHAPTER ELEVEN : CORPORATE MEETINGS...............................................275

CHAPTER TWELVE: CERTIFICATES FOR CORPORATE RESOLUTIONS....289

CHAPTER THIRTEEN : STATE LAWS................................................................297

INDEX ..................................................................................................................350

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This book is one of a series of legal books that has been written to address the needs of the average person. Each volume of the series is designed with the intent of serving as a guide and tool with which to help the reader cut through legal jargon and better understand and appreciate the reader's rights under the law.

As a self-help "HOW TO" book for forming a typical non-profit corporation, this work covers the basic problems are to be faced by individuals attempting to form a non-profit corporation. It covers, in detail, the steps and procedures necessary to be taken in order to get a federal and state tax exemption for the corporation.

This book covers the initial set up of the incorporation and the actions thereafter. Incorporation is basically easy if taken in an orderly approach and nothing fancy is sought to be done. The steps are outlined in the order that they should be considered and acted upon. If the reader has any doubts upon how something should be done, an attorney should be consulted on that issue. Even with a consultation with an attorney, it should still be cheaper for the reader to incorporation himself. Normally, an attorney is paid between $500.00 to $2,000.00 to do a normal incorporation. Therefore, if needed, a person can consult with an attorney while doing the work himself and still save money. In fact, many questions that a person may have over the procedure ofincorporation can be answered with a simple phone call to the State's Department of Corporation or Securities.

It may seem overwhelming or intimidating to incorporate a non-profit corporation without going to an attorney but it should not be so. It does take time to prepare the documents and make the various decisions for the corporation such as management, fiscal year and purpose. However, the book lays out and explains in detail the steps to be followed. Also the book contains sample Articles, Minutes, By-Laws, and Membership Certificates for most states. These items could be used in most states should the incorporator choose not to purchase a corporate kit for the state in question, which usually runs about $50.00.

A corporation exists when the Articles of Incorporation are filed and the membership certificates issued. So the basic steps needed to incorporate are filing of the Articles of Incorporation and then issuance of the membership certificates. When those steps are accomplished, the incorporation is complete. By carefully using this book, those steps can easily be taken.

GOOD LUCK

There are primarily three ways that people can carry on any non-profit activity. People can work together in an unincorporated association, a non-profit trust or a non-profit corporation. There are different tax considerations and legal consequences involved in each form of operation.

The main advantage that a non-profit corporation has a non-profit trust or association is that the member is not personally liable for the debts of the corporation or the actions of the employees. In an unincorporated association, if an associate or employee does an act in scope of their employment that injures another person, then each of the members of the association may, depending on state law, become personally liable to pay for the resulting damages. A non-profit trust can be created in all states. Such a trust, however, carries with it its own special limitations on management and generally too cumbersome for use by a small group. In addition, there is still the question of personal liability of the directors or trustees of a non-profit trust for the actions undertaken by employees or other directors or trustees.The risk of personal liability for belonging to an unincorporated association, especially if an officer or director, and the complicated management of non-profit trust are prime reasons for incorporating as a non-profit corporation.

After a non-profit corporation is formed, the yearly requirements for meetings and record keeping are not much more than required for any other non-corporate business. I have answered all of the general questions usually asked by a person considering incorporation. It might take longer to read this chapter than it would to actually incorporate. Incorporation is easy and I often refer to it as a one time insurance policy because it terminates personal liability against the shareholders.

A corporation is an artificially created entity in conformity with a particular state's law. As a distinct legal entity, a corporation is considered to be separate and apart from all of the people who own, control or operate it.

A corporation holds most of the rights of a legal person. As such, a corporation is capable of validly executing contracts, incurring debts, holding title to both real and personal property and paying taxes.

The attractiveness of corporations stems from the very fact that they are held to be separate legal entities from its owners, the shareholders, which gives them unique advantages over both sole proprietorships and partnerships.

A special type of corporation is a non-profit corporation. The primarily purpose of such a corporation is not to make money but instead to provide some type of beneficial service to the public, hence the name, nonprofit. The non-profit corporation is formed by one or more persons for the benefit of the public, the mutual benefit of its members or for religious purposes. Most non-profit corporations are formed for religious, charitable, literary, scientific or educational purposes.

Stock is not issued in a non-profit corporation nor are profits from the corporation, if any, distributed to the members. Most non-profit corporations are required by state law to transfer their assets to another non-profit corporation upon dissolution of

the corporation or to give the assets to the State. A non-profit corporation is usually organized to obtain an exemption from state or federal taxes on its operations. A non-profit corporation is not automatically exempt from federal taxation. A non-profit corporation must file an application with the I.R.S. for tax exempt status and have the application approved.

Except for the profit motive, a non-profit corporation operates the same as any other corporation. While stock is not issued in a non-profit corporation, memberships can be issued. Nonprofit corporations can sue in court, acquire property and do anything not inconsistent with its stated non-profit status.

Corporate power is the authority given to the corporation to conduct its business. Such corporate authority is granted by both the statutory law in the states where the corporation was formed along with specific grants of authority to the corporation in its Articles of Incorporation.

The Articles of Incorporation for a corporation must state the purpose for which it was incorporated. For a non-profit corporation, the Articles it must state what religious, charitable, literary, scientific or educational purpose it hopes to accomplish. The Articles for a for-profit corporation usually state that it is being incorporated to conduct any legal business in the state.

Under most state laws, a corporation is given certain powers in order to operate:

1. the right to adopt and use a corporate seal;

2. to adopt, amend and repeal By-laws;

3. to do business in other states;

4. issue and trade in its own stock pursuant to state law;

5. make donations to non-profit organizations;

6. operate pension plans for employees;

7. make loans to shareholders, directors and employees;

8. participate in joint ventures with other persons, and trusts and corporations.

With the above powers, a corporation is able to act and do nearly everything that an individual or partnership can do.

An incorporator is the person who signed and filed the Articles of Incorporation with the Secretary of State. It is the filing of the Articles that is the first and most important stepin forming a corporation.

Incorporators are the founders of a corporation. Incorporators adopt the initial by-laws for the corporation and appoint the first set of directors. After the directors are appointed, the incorporators resign and turn the management of the corporation over to them.

Incorporators, along with other persons, can also be promoters of the corporation. Promoters make the initial arrangements for the money, property, and whatever else is needed to establish the corporation. A corporation is not liable for any pre-formation contract executed by any promoter unless the contract is later ratified by the board of directors or the benefit of the contract is accepted by the corporation. However, the promoter may be personally liable for any pre-incorporation contract that he executes unless it is spelled out that the contract is only to become effective when the corporation is actually formed and the contract is ratified by the corporate board of directors. Usually, there is not a problem with pre-formation contracts because the incorporator is also the main or sole shareholder of the corporation and thus controls the corporation.

Articles of Incorporation that can be used in the individual states are set forth in the CHAPTER ARTICLES.

Directors are people elected by the members of a non-profit corporation to manage the corporation. The board of directors is the term referring to all of the directors. Directors are not required to be members of the corporation although they usually are members in the non-profit corporation.

Decisions concerning the management of the corporation are made by a majority vote of the directors. The board of directors appoint the officers of the corporation who run the day to day business of the corporation. The officers implement the wider plans and future visions of the board.

Directors are permitted reasonable compensation for their services. In small corporations, the directors usually serve for free since they are usually shareholders and are protecting their investments.

A director owes to a corporation a duty of loyalty. A director can not usurp a corporate benefit, that is take for himself a benefit that could go to the corporation. In short, a director owes to the corporation the right of first refusal on any business opportunities that the director becomes aware that could affect the corporation. For example, if the corporation is in the paving business, a director could not form a competing paving business and solicit business from the corporation's existing clients.

When a director has a personal interest on a matter before the board, the director is only allowed to vote on it if:

1. the director's interest has been fully disclosed to the board, and

2. the contract is just and reasonable.

A director is not personally liable for the debts of the corporation. A director can not be sued, by shareholders, for losses incurred as a result of the director's actions or decisions provided that they were undertaken in a reasonable and prudent manner.

The officers are the persons appointed by the board of directors to carry out the corporation's day to day business. The exact responsibility and authority of each officer is set out in the By-laws as adopted by the incorporator and as amended by the board of directors.

Normally, the corporate slate of officers consists of the president or chief executive officer, the vice president, treasurer and secretary. The officers do not have the authority to engage in major business transactions since these are entirely within the province of the board of directors.

As agents of the corporation, officers have the authority to bind the corporation by their actions. As such, the officers execute contracts for the corporation and likewise can subject the corporation to liability for damages arising from their negligent or intentional acts committed on the corporation's behalf.

As with directors, corporate officers are not personally liable for the debts of the corporation. Corporate officers remain, as individuals, personally liable for any torts, civil wrongs, that they commit. For example, if the President of the corporation gets involved in an auto accident while traveling on corporate business both the president and the corporation can be sued for damages. On the other hand if the President signs a contract for the corporation, then only the corporation can be sued for any breach of the contract.

Members are not the owners of the corporation. Members own membership certificates in the corporation and thus have the right to vote in the election of corporate directors. Members are not personally liable for the debts of the corporation.

Members, in addition to electing the directors, also are required to vote for the following acts:

1. any amendment of the Articles of Incorporation;

2. any sale, option or lease of substantially all of the corporation's assets,

3. any merger or consolidation of the corporation with another corporation.

In addition to the above, members can unilaterally hold a meeting to:

1. amend the by-laws,

2. remove and replace directors, and

3. dissolve the corporation.

There must be an annual member's meeting each year in order for the shareholders to review and approve or reject the actions of the board of directors for the previous year. The members also will re-elect or replace the directors for another year.

Members are given just one vote per member. A member can own only one membership certificate. A majority of those members voting is needed to carry the resolution, the matter voted upon.

The main advantage of a corporation, be it a profit or non-profit corporation, is the limited liability that it provides its shareholders or members. As a corporation, the most that its members, can lose in a lawsuit against the corporation is the assets that they contributed to the corporation.

This limited liability for corporate shareholders is vastly different from an unincorporated association where the associates may be found to be totally liable for all debts of the association. In such an instance, the creditors of the association can seek and attach every dollar and piece of property that each associate owns in order to settle a judgment against the association. Such personal attachment to satisfy corporate debts can not be done against the assets of a member.

It is to cut off this unlimited liability that non-profit corporations are formed so as to pursue charitable or public purpose goals. Few people would ever participate in an organization for the public good, if by doing so, they risked losing everything that they have earned or will earn in the future.

A non-profit corporation will not be subject for taxes on its income derived from its normal activities, if it applies and receives a federal and state tax exemption. Chapter 8, Tax Exemptions, covers in detail how a tax emption is obtained. A non-profit corporation will only have to pay taxes on its unrelated business income. Under the Internal Revenue Code, unrelated business income is that income derived by a non-profit corporationwhich has not connection with and thus is unrelated to purposes for which the tax exemption was granted. All unrelated business income is taxed under regular corporate tax rules and regular corporate tax rates apply to that unrelated business income.

A corporation is normally said to have perpetual existence. In other words, a corporation will legally exist forever unless it is dissolved or terminated under state law. The fact that a non-profit corporation continues onward regardless of the death of its members, is what gives the corporation its stability. Most people are reluctant to participate in or deal with a charitable or public service entity which is not a corporation and thus may terminate upon the sudden death of any member. The stability of a corporation derives from its continuity of existence beyond that of its shareholders.

Costs for incorporating a non-profit corporation vary somewhat from state to state. In California, the costs for filing the Articles of Incorporation and the minimum franchise tax fee is about a $115 (There is also an $800 franchise tax fee which is refunded upon the corporation receiving a California State Tax Exemption). In Nevada, the fee is just $25 plus another $10 for the statement of Registered Agent. In addition, the corporate books, which include the minute books, membership book and the corporate seal, costs between $75.00 to $125.00. The attorney fees, if one is used, is normally around $800.00 to $1,000.00 in California.

The cost for applying for the Federal Tax exemption is $375.Most states will automatically grant a state tax exemption once the Federal Tax Exemption is obtained.

The cost of incorporation should be looked upon as a one time insurance premium. Once the non-profit corporation, the members are protected from individual liability from then forward for the actions of corporation or its employees. Peace of mind is an important consideration in addition to cost when deciding to incorporate.

It is legal for a corporation to hire a member. The reasonable salary paid to a member, for the value of work actually performed is deductible by the corporation as normal salary and is not considered as illegal self-dealing.

In a non-profit corporation, the members are not permitted to share in the profits of the corporation. This is the fundamental difference between a non-profit corporation and a for profit corporation. If the I.R.S. were to find that a member was paid excessively for the work that was actually done then the corporation could lose its tax-exempt status.

An association is an unincorporated group of individuals or entities which usually engage in non-profit activities. An association, because it is not incorporated will not be given tax-exempt status under the law. As such, the association will be taxed on the income that it derives using corporate tax rates. The association is taxed as corporate tax rates even though it isaccomplishing goals and purposes that would entitle it to a tax exemption if it were a non-profit corporation. Associates of an association may also become personally liable for the debts and obligations incurred by the association under state law. Many states consider association the same as partnerships and thus apply partnership liability rules. Because of its informal nature, an association does not have to keep minutes, hold regular meetings or comply with the requirements which a corporation must meet.

A non-profit corporation protects its members from liability for the debts and obligations of the corporation. A non-profit corporation can also apply for a federal state tax exemption for income derived from activities that qualify for tax exemption. A non-profit corp[oration is required to keep minutes, hold annual meetings of members and directors and keep complete records.

Membership certificates can not be thought of as the ownership interests in a non-profit corporation. Members of the non-profit corporation are given membership certificates to reflect their membership. Members do not own the non-profit corporation and have no right to share in the profits of the corporation. By the virtue of their being members and owning a membership certificate, the members can vote on the management of the non-profit corporation pursuant to the terms of the By-Laws.

Dissolution of a corporation is the termination of the corporation and is, in fact, its legal death. Dissolution usually occurs upon any of the following:

1. the members holding more than 50% of the membership certificates in the corporation vote to do so;

2. the board of directors can dissolve the corporation when

(a) the corporation never issued any membership certificates and thus was never really a corporation,

(b) the corporation has filed a chapter 7 bankruptcy petition,

(c) the corporation has disposed of all of its assets and hasn't conducted business for several years, usually five years.

3. creditors may file a legal action seeking involuntary dissolution of the corporation in order to have their debts paid through the liquidation of the corporate assets.

After dissolution has been approved or ordered, the corporation must stop doing business except to the extent necessary to wind up the affairs of the corporation. When resolution to dissolve is adopted or ordered, the corporation is required to file a certificate of dissolution with the secretary of state where it was incorporated.

After a corporation has been dissolved and its assets liquidated, the distribution is made to the extent of corporate assets as follows:

1. all federal and state taxes are paid,

2. all employee wages and benefits are paid,

3. all secured liabilities are paid,

4. all unsecured liabilities are paid,

5. the remaining funds, if any, are distributed to another tax empt entity.

Since members in a non-profit corporation do not share in the profits of the corporation, upon dissolution the assets of the non-profit corporation must be turned over to another tax-exempt entity. Such assets can be turned over to the United States Government if no other state or local tax exempt entity wants them.

Many companies sell the start up materials, called a corporate kit, for a newly incorporated non-profit corporation. The incorporator contacts such a company and requests the standard corporate kit for the state in question, say Kansas. The incorporator gives the company the name of the corporation, its date of incorporation and the number of shares of stock to be issued. The supplier takes this information and prepares the corporate kit. The complete corporate kit includes:

1. the corporate seal with the name, state and date of incorporation on it,

2. the corporate minute book,

3. the corporate membership book,

4. blank membership certificates in the corporation's name,

5. minutes for the first meeting of directors with spaces to be filled in,

6. general by-laws to be adopted by the incorporator, and

7. the form to be filed with the secretary of state for the state's tax exemption.

A corporate kit generally costs between $50,00 and $75.00 andis quite a bargain for the degree of work contained in it and the peace of mind obtained in using it.

By-laws are the rules for the general day to day management and operation of the corporation. The by-laws are adopted by the incorporator and thereafter can be amended by a majority vote of the members.

By-laws are an attempt to cover the many areas of potential conflict within a corporation and the delegation of duties and responsibilities. A copy of By-laws for use in most states follows in the BY-Laws chapter. By-laws can be general in nature or more closely tailored to the needs and desires of the members. Most By-laws will contain or mention most of the issues covered in the By-laws Chapter.

By-laws are not set in concrete. Members can alter or amend the By-laws by simply having a properly conducted meeting to do so. The purpose of By-laws is to set up the procedure for the daily administration and management of the corporation. As such, it is understood that as the corporation grows and develops the Bylaws may have to be amended to keep pace with the new requirements of the corporation.

The First Meeting of Directors is the first time that a corporation really and truly exists. After the Articles of Incorporation are filed, a corporation technically exists on paper. It does not exist in fact until membership certificates are issued along with the appointment of officers and directors to act for thecorporation.

The incorporator calls the first meeting of directors. At the meeting, the incorporator appoints the first set of directors, adopts the By-laws and then resigns as incorporator. The By-laws adopted by the incorporator require that written notice be given to the directors of a meeting before any action can be undertaken. The notice requirement to directors for a meeting is contained all By-laws. For the First Meeting of Directors to continue, the directors sign a waiver of notice agreeing to waive the required written notice and to proceed forward with the meeting. Following the Minutes Chapter is a waiver of notice of a corporation for its First Meeting of Directors.

After the waiver is signed, the directors then take over the meeting. The directors propose, consider and then adopt resolutions on such diverse matters as the tax year, opening a bank account, choosing a membership certificate and adopting the corporate seal. The directors then elect the officers of the corporation. Finally and most importantly, the directors issue membership certificates to the members. When the membership certificates are issued, the incorporation is complete.

Virtually every state requires a nonprofit corporation incorporated under its laws to annually file with the Secretary of State a list of its officers and directors. Most importantly the corporation is required to name the person appointed to receive personal service of documents for the corporation in the state.

Also, and perhaps most important in the state's view, is thefact that this list of officers and directors must be accompanied by a fee usually between $5.00 and $50.00. This list of officers and directors is open to the public. Anyone wishing to sue a corporation can request a copy from the Secretary of State to determine the name and address of the agent for service of process.

All states require that if any corporation does business under a name other than the exact corporate name in its Articles of Incorporation, then the corporation must file a fictitious business name statement. The purpose behind requiring the filing of a fictitious name statement is to give notice to the world as to who actually is running the business. Usually the filing is in the county clerk's office where the business is being conducted under the fictitious name. If the corporation does business under a fictitious name in several counties then the filing must be in every county where it does business.

Any employer is familiar with the Federal Identification Number since all employers are required to have one. Once a non-profit corporation is incorporated, the corporation needs a number because the corporation becomes an employer.

A Federal I.D. number is obtained by filing Form SS-4 with the I.R.S.. The corporation should file for the I.D. number as soon as possible after the Articles are filed. If the corporation wishes to receive a federal tax exemption, then the Form SS-4 must be filed with the application for tax exemption if it was not filed earlier.

There is no mystery or difficulty in forming a nonprofit corporation. In its simplest sense, a corporation of any type is merely a license to do business in a particular manner. In that sense the articles of incorporation should be considered an application that becomes the license when filed by the secretary of state. In fact in legal parlance a corporation is considered as having been "licensed to do business" once the articles are filed. In a few states the term "articles of incorporation" is not used but instead it is entitled a "certificate of incorporation" or a "charter of incorporation." In any event, whatever a state calls the formation document, they all require the same basic information.

The act of incorporating a nonprofit business is simple. All it entails is the filing of the articles of incorporation and the subsequent issuance of membership certificates. The actual act of incorporating is no more than having the articles file-stamped in the secretary of state's office (this can also be accomplished by mail). There are many companies that provide corporate kits which include basic articles, minutes and bylaws specifically designed for use in just one state. The usual cost is between $50 and $100. Unfortunately, the corporate kit does not address the many issues or provide the information containedin this book for issues occurring after the incorporation. This book goes beyond and provides guidance and advice on considerations that arise in forming any corporation. The articles contained in this book are a starting point for any incorporation. Before filing any articles the reader should decide any additional provisions wanted in the articles. In addition, the reader should read those provisions in the state's corporation code (available in most public libraries) to ensure the state law has not changed. A reader of this book may purchase a corporate kit for a particular state to supplement this book.

This book is designed to provide the user with a detailed analysis of the problems, issues and procedures faced in the formation of any nonprofit corporation, particular by those of a small local nonprofit organization. There are many choices that an incorporator must face in forming a nonprofit corporation. Those choices can be difficult given the many options available and the particular concerns of each business. Neither this book nor any book can replace the cold, practical consideration of the actual person forming the corporation. That person knows the purpose behind the incorporation and how the corporation will be operated. This book will steer the incorporator to those provisions and issues of concern and their most practical use.

This book is intended to be used for the creation small or local nonprofit corporations. It allows small groups of individuals to create a nonprofit corporation to accomplishlocal charitable, educational, community safety or ecological concerns with as little expense as possible. For purposes of this book, a large nonprofit corporation is one that has many chapters throughout a state or the country. While there is no difference in the formation of a large or small nonprofit corporation, the applications for federal and state tax exemptions are more complicated for the larger one. In addition, the bylaws are more complex to accommodate the concerns and rights of members from all the chapters.

This book is for use by those individuals who seek to incorporate a single nonprofit corporation which will not have chapters with as little expense as possible. Whether the reader actually employs the articles, minutes, bylaws, resolutions and agreements in this book is not as important as providing him with the information contained here so he can make informed decisions.

The steps for incorporating a nonprofit corporation are simple: file the articles of incorporation and issue the membership certificates. In arriving at this result, the corporation will go through the following steps:

All corporations must have a name that denotes it is a corporation and not a partnership or sole-proprietorship. As such, the name usually must contain the word "Incorporated," "Corporation" or "Limited." The name must not mislead the public into believing it is an agent of the federal or stategovernment. The name of the corporation must not mention or suggest involvement in a regulated or licensed field unless the corporation has that license.

In practice the main concern is whether the proposed name is so similar to an existing corporation's name as to mislead the public. No state will permit two corporations to have the same name or names so similar that they are confusing.

To avoid the possibility of having the articles rejected because of similarity to the name of an existing corporation, the incorporator should conduct a name search with the secretary of state's office. If the name is not already reserved or in use, it can be reserved for a fee, usually $3 to $10, for 60 days or longer. The search can be done by mailing a request with the proposed name and a check for the search to the secretary of state. Telephone the secretary of state's office to determine the amount of the check and where to send it. A search through the secretary of state's office will take perhaps 30 days. There are attorney service firms near the state capitol that will do the name search and reservation within two days for about $30. From these firms can also usually be purchased a corporate kit for use in the state, if desired.

If the corporation will be doing business in other states, it must be aware that it may have to operate under a fictitious name if the corporate name is substantially similar to an existing business in any of those states.

A corporate name does not have to be reserved. If theincorporator feels the chosen name is unique, he can simply submit the articles for filing. If the corporate name is unique, the articles will be accepted. If a similar name has already been taken, the secretary of state will reject the articles. If it is discovered later that the articles were mistakenly filed and that a corporation with a similar name already existed, the secretary of state will require an amendment to be filed changing the name to one that is not similar to an existing corporation, or the secretary of state will cancel the incorporation.

After the corporate name is reserved, the incorporator then prepares and files the articles of incorporation. This book contains a detailed chapter for preparing the articles. Each state has it own requirements for the contents of the articles. This book provides a general set of articles sufficient for most states. The reader should nonetheless familiarize himself with the particular corporation law of the state where the corporation will be formed.

The articles contained in this book are skeleton articles. They may be retyped with additional provisions added. Moreover, a particular state may require provisions added to the articles to conform to changes in state law.

After the articles are prepared, they are filed with the secretary of state's office. Most states require the articles to be file in triplicate and all originally signed by theincorporator. Therefore, four or more copies should be filed so the corporation will receive a conformed, file-stamped copy. The filing can be made by mail; it will take 30 to 60 days for return. The alternative is to use an attorney service firm to file the articles. Such a firm usually takes only a week to get the articles returned and charges about $50 for the service. The advantage of using an attorney service firm is that any necessary corrections can be made faster.

At the time that the articles are filed, the incorporator must pay the filing fee and the yearly franchise fee for the corporation. The fee for formation of a nonprofit corporation is much less than that of a profit-making corporation. In Nevada, for instance, the fee is only $35 which includes $10 for the resident agent form. Telephone the secretary of state's office to obtain the correct amount of the fees. An attorney service firm also will know the amount of fees.

After the articles are filed, the corporation exists in a defacto mode. That means the corporation exists on paper only. Until membership certificates are issued it does not exist at law (de jure). It is the fact that the nonprofit corporation has outstanding membership certificates in the hands of its members that is the defining characteristic of a nonprofit corporation.

Once the articles are filed, the incorporator calls a special meeting of directors. In most states, the initial directors are named in the articles. In other states, theincorporator appoints the first directors at the meeting.

At the first special meeting, the bylaws are adopted by the corporation. This is an important step because adoption of the bylaws creates the officer positions of the corporation and governs daily operations. The officers of the corporation are then appointed.

The most important matter of business at the first meeting of directors is the issuance of membership certificates. When the membership certificates are issued to those persons or entities which are to become the nonprofit corporations' members, the incorporation is complete. The chapter entitled "First Meeting of Directors" amply covers the first meeting.

After the first meeting of directors, the corporation is fully formed. The matters undertaken thereafter are general housekeeping chores. They deal with filing the respective state notices of tax exemption, filing or publishing the articles, filing a fictitious name statement if necessary, and establishing the proper accounting procedures. These matters are discussed in the chapter "Afterwards: Post Incorporation Acts."

Once people decide to get together to conduct nonprofit activities, the next consideration should be whether or not to incorporate. Almost always there will be some person who will feel that the organization is too small and its operations too personal to need incorporation. Such were the arguments that were presented to the Aviation Association of a small Nevada county shortly after it was formed. The significant advantages of incorporation as a nonprofit corporation were discussed. In the end it was approved to incorporate the association and seek a federal tax exemption.

A corporation is an artificial entity created in conformity with a particular state's law. As a distinct legal entity, a corporation is considered to be separate and apart from all of the people who own, control or operate it. A corporation holds most of the rights of a legal person. A corporation is able to execute contracts, incur debts, hold title to both real and personal property and pay taxes. The attractiveness of corporations stems from the very fact that they are held to be separate legal entities from the owners (the shareholders). This gives them unique advantages over both sole proprietorships and partnerships.

A nonprofit corporation is a special type of corporation with its own body of law. The primary purpose of such a corporation is to provide some type of beneficial service to the public and notto make money, hence the name "nonprofit." A nonprofit corporation is formed by one or more persons for the benefit of the public, for the mutual benefit of its members or for religious objectives. Most nonprofit corporations are formed for religious, charitable, literary, scientific or educational purposes.

Stock is not issued in a nonprofit corporation, nor are any profits from the corporation distributed to the members. Most nonprofit corporations are required by state law to transfer their assets to another nonprofit corporation or give the assets to the state upon dissolution. A nonprofit corporation is usually organized to obtain an exemption from state or federal taxes on its operations. A nonprofit corporation is not automatically exempt from federal taxation. A nonprofit corporation must file an application with the IRS for tax exempt status and have the application approved.

The following arguments support of incorporation of any non-profit entity. These arguments apply to any group which is considering engaging in nonprofit activities.

The main advantage that a nonprofit corporation has over an unincorporated association is that a member is not personally liable for the debts of the corporation or the actions of the employees. In an unincorporated association, if an associate or employee does an act in the scope of employment that injures another person, each member of the association may (depending on state law) become personally liable to pay for the resultingdamages.

A few states apply the partnership liability rules to unincorporated associations. These states find that all members of an unincorporated association are liable for the payment of all debts of and all judgments against the association. In these states the liability is absolute, and it makes no difference whether the member agreed to the incurring of the debt or even knew about it. As long as the person was a member of the association, the member is responsible for payment of all debts and liabilities of the association.

Most states, however, do not apply the absolute partnership liability rule to an association. These states will find a member liable for the debts of or judgments against the association only if the member had consented to the action which resulted in the debt or judgment. This limitation of liability for an association is not as great a protection as it seems. The courts of these states have held that if a member consents to an action being taken by a fellow member or employee, that member is responsible for all damages resulting from that person's conduct in performing that action. This is known the theory of Respondeat Superior under the state's agency and partnership law. If a member agrees to the association pursuing a certain endeavor or course of conduct, that member will be personally liable for the debts incurred by the association in that pursuit. The member will have to be on record opposing the conduct to avoid such liability. Corollary: A member who initially opposed the association's conduct will be foundliable for resulting damages if he subsequently ratified the conduct by either word or deed.

The main advantage of a corporation, whether a profit or nonprofit corporation, over an association is the assured limited liability it provides its shareholders or members. As a corporation, the most that its members can lose in a lawsuit against the corporation is the assets they contributed to the corporation. This limited liability for corporate shareholders is vastly different from an unincorporated association where the associates may be found to be totally liable for all debts. The creditors of the association can seek and attach every dollar and piece of property that each associate owns to settle a judgment. Such personal attachment to satisfy corporate debts cannot be done against the assets of a member of a nonprofit corporation.

Few people would ever participate in an organization for the public good if they risked losing everything they had earned or will earn. At the meeting of the Aviation Association of Douglas County, the members were asked if they owned a house, a car, a plane, a pension plan or if they were employed. They were asked to look around the room, and they were told that under state law each one was personally liable for payment of any association debt or judgment which occurred from a act or policy to which he agreed. They were reminded that they had not worked all of their adult life to become a benevolent insurance company for other people's actions. They were told that every state has enacted a nonprofit corporation law to permit people like themselves to get togetherand operate for charitable purposes without incurring personal liability. When all was considered, the Aviation Association voted unanimously to seek nonprofit corporate status. Even those persons who were initially opposed voted for the incorporation. Yet the other advantages of incorporating had not even been discussed.

It is the risk of personal liability by belonging to an unincorporated association (especially as an officer or director) that is the prime reason behind incorporating as a nonprofit corporation.

The second advantage of incorporating is that a nonprofit corporation usually can qualify to receive federal and state tax exemptions that an unincorporated association usually cannot receive. A qualified nonprofit corporation which obtains federal and state tax exemptions will not have to pay any taxes on the income that is derived from its related business activities. By not having to pay taxes, the corporation will have 30% to 40% more in income to apply towards its exempt goals.

In addition, contributions to most tax-exempt nonprofit organizations are tax deductible: see section 501(c)(3) organizations for which this book is designed. This means that a person or entity making contributions to such an organization will be permitted to deduct the value of the contribution on the donor income tax return. It is very beneficial for a nonprofit corporation to receive a 501(c)(3) tax exemption rather than an exemption under the other 501(c) subsections. Once anorganization receives a 501(c)(3) tax exemption, all contributions to it are tax deductible. Tax deductibility of contributions is a prime incentive for donors to make contributions to an organization.

A 501(c)(3) tax exemption is the most desired status. It is advantageous for a nonprofit organization to have a 501(c)(3) tax exemption because contributions to the organization are tax deductible by the donor. A contribution to a tax-exempt organization that is not tax deductible cannot be used to reduce the donor's federal income tax: the contribution is made in after-tax dollars. Most donors want the tax advantage of being able to include a portion of their contributions on their income tax return as a deduction. More money is contributed to an organization if the contributions are tax deductible.

Another advantage of receiving a federal tax exemption is that gifts made to the organization after the death of the donor are deducted dollar-for-dollar from the gross estate of the donor. Federal tax law requires that all estates over $600,000 that pass to someone other than the donor's spouse be taxed on a progressive scale which reaches 55%. Gifts to a 501(c)(3) organization reduce the gross estate of the donor for tax purposes.

An advantage of nonprofit corporations over unincorporated associations is the availability of federal and state grants. Both federal and state governments have many agencies which will bestow grants to qualified nonprofit corporations. Such grants are notusually available to unincorporated associations. Information for state grants can be difficult to obtain unless the state publishes a list of such grants. If such a list is not published, information on state grants can be obtained from state legislators.

It is much easier to get information on federal grants. The U.S. Printing Office, Washington, D.C. publishes the Catalog of Federal Domestic Assistance which lists every federal agency which gives grants. These grants are almost always limited to nonprofit corporations or other governmental agencies. A few of the grants from federal programs for which a nonprofit corporation formed through the use of this book might be interested are:

DRUG ABUSE RESEARCH PROGRAM

PUBLIC HEALTH SERVICE

MS. McKENNEY

DEPARTMENT OF HEALTH AND HUMAN SERVICES, EPS-216

BETHESDA, MD 20892

(301) 443-6021

Grants are given to develop new knowledge for the treatment and diagnosis of drug abuse and intravenous related AIDS. Annual funds available: $191,205,000.

HUMAN GENOME RESEARCH PROGRAM

PUBLIC HEALTH SERVICE

DR. MARK GUYER

DEPARTMENT OF HEALTH AND HUMAN SERVICES, EPS-216

BETHESDA, MD 20892

(301) 496-0844

Grants are given to develop new knowledge for DNA sequences of the genomes for humans for use in developing treatment for genetic diseases. Annual funds available: $78,000,000.

CANCER CAUSE AND PREVENTION RESEARCH PROGRAM

NATIONAL CANCER INSTITUTE

NATIONAL INSTITUTES OF HEALTH

MR. LEO BUSHER, JR.

DEPARTMENT OF HEALTH AND HUMAN SERVICES, EPS-216

BETHESDA, MD 20892

(301) 496-7753

Grants are given to develop new knowledge for the treatment and diagnosis of cancer. Annual funds available: $286,888,000.

Another related program is CANCER DETECTION AND DIAGNOSIS AND RESEARCH to help identify cancer early enough to use the latest treatments. Annual funds for this program: $75,000,000.

RURAL HEALTH RESEARCH CENTERS PROGRAMS

OFFICE OF RURAL HEALTH POLICY

PUBLIC HEALTH SERVICE

DEPARTMENT OF HEALTH SERVICES

DR. TAYLOR

PARKLAWN BLDG, ROOM 14-22

5600 FISHERS LANE

ROCKVILLE, MD. 20857

(301) 443-0835

Grants to support the development of rural health research centers to provide an information base and a policy analysis on rural health issues. Annual funds available: $1,800,000.

MENTAL HEALTH RESEARCH GRANTS PROGRAM

NATIONAL INSTITUTE OF HEALTH

PUBLIC HEALTH SERVICE

DEPARTMENT OF HEALTH SERVICES

MR. RINGLER

PARKLAWN BLDG, ROOM 7C-15

5600 FISHERS LANE

ROCKVILLE, MD. 20857

(301) 443-3065

Grants to support research into and to improve treatment methods of mental illness and behavioral disorders. Annual funds available: $257,000,000.

BIOLOGICAL RESPONSE TO ENVIRONMENTAL HEALTH

HAZARDS PROGRAM

DIVISION OF EXTRAMURAL RESEARCH AND TRAINING

DR. SCHONWALDER

NIEHS, NATIONAL INSTITUTE OF HEALTH

DEPARTMENT OF HEALTH AND HUMAN RESOURCES

P.O. BOX 12233

RESEARCH TRIANGLE PARK, NC. 27709

(919) 541-7634

Grants are available to promote the understanding of how chemical and physical agents cause diseases. Annual funds available: $65,000,000.

ENERGY RELATED INVENTION PROGRAMS

OFFICE OF ENERGY RELATED INVENTIONS

NATIONAL INSTITUTE OF STANDARDS AND TECHNOLOGY

MR. GEORGE LEWITT

GAITERSBURG, MD. 20899

(301) 975-5500

Grants are available to develop non-nuclear energy technologyby promoting promising energy-related inventions. Annual funds available: $5,700,000.

BASIC ENERGY SCIENCES

DEPARTMENT OF ENERGY

OFFICE OF ENERGY RESEARCH

MR. WILLIAM BURRIER

MAIL STOP G-236

WASHINGTON, D.C. 20545

(301) 354-4946

Grants are available to support fundamental research and activities in basic science and advanced technology concepts in fields related to energy. Annual funds available: $438,000,000.

CONSERVATION RESEARCH AND DEVELOPMENT PROGRAMS

OFFICE OF MANAGEMENT AND RESOURCES

CONSERVATION AND RENEWABLE ENERGY

MS. JUDY SEWELL

WASHINGTON, D.C. 20585

(202) 586-9320

Grants are available to research energy conservation technologies into the areas of buildings, industry and transportation. Annual funds available: $2,000,000.

PROMOTION OF THE ARTS PROGRAMS

NATIONAL ENDOWMENT OF THE ARTS

1100 PENNSYLVANIA AVENUE, NW.

WASHINGTON, D.C. 20506

(202) 682-5435

Grants are available for projects designed to support the various arts. DESIGN ARTS ($3,686,000), DANCE ($8,500,000), LITERATURE ($4,435,000), MEDIA ($11,700,000), THEATER ($9,600,000), VISUAL ARTS ($5,300,000), FOLK ARTS ($2,800,000).

In addition to receiving grants, nonprofit corporations can receive donations and loans of personal property from government agencies and other nonprofit corporations. Some of the programs which are available to eligible nonprofit corporations are:

ARTS EXHIBITS

THE SMITHSONIAN INSTITUTE

1100 JEFFERSON DR., S.W., ROOM 3145

(202) 357-3168

The Smithsonian Institute Traveling Exhibition Service works with local nonprofit organizations to sponsor between 80 and 100 exhibits each year throughout the United States. Over half of the exhibits are in rural counties.

BOOKS

LIBRARY OF CONGRESS

EXCHANGE AND GIFT DIVISION

1ST & INDEPENDENCE STREETS, S.E.

MADISON BUILDING, ROOM 303

WASHINGTON, D.C. 20540

(202) 707-9511

Free books can be obtained from the Library of Congress. The Library of Congress first offers books for sale. Books which are not sold can then be given or sold to nonprofit corporations.

FOOD AND SURPLUS COMMODITIES

USDA FOOD DISTRIBUTION PROGRAM

3100 PARK CENTER DRIVE, ROOM 502

ALEXANDRIA, VA. 22302

(703) 756-3660

Nonprofit groups may apply for surplus commodities held by the Agricultural Department. Such commodities include flour, oils, milk and cheese. A nonprofit corporation which runs a food bank or food kitchen can qualify for such commodities.

HOUSING FOR THE HOMELESS PROGRAM

DIVISION OF HEALTH AND HUMAN SERVICES

MS. JUDY BREITMAN

PARKLAWN BLDG, ROOM 17A-10

5600 FISHERS LANE

ROCKVILLE, MD. 20857

(301) 443-2265

A nonprofit corporation which provides housing for the homeless may lease or be deeded title to unused federal real property to aid in its operations. A list of available property can be obtained by calling 1-800-927-7588. The publication "Obtaining Federal Property for the Homeless: Questions and Answers about Federal Property Programs" can be obtained from the above agency.

MISCELLANEOUS PROPERTY

OFFICE OF TRANSPORTATION AND PROPERTY MANAGEMENT

DIRECTOR, PROPERTY MANAGEMENT

WASHINGTON, D.C. 20406

(703) 557-1234

The General Services Administration (GSA) donates property to nonprofit organizations which has not been sold. Such property is usually sold for 2% of its value plus a handling fee. The property handled by the GSA can be anything that the federal government owns. The nonprofit organization will make a request for property that will aid its exempt purposes.

All of the above programs and many others not mentioned are available to nonprofit corporations. To access such programs, the corporation must contact the agency administering the program andask for the appropriate application and information. Most agencies are very happy to reply because the more interest they have, the more money they can seek from Congress and the bigger they can grow.

If two or more individuals wish to engage in a nonprofit activity, they should incorporate. Every state has enacted a nonprofit corporation act to protect individuals engaged in nonprofit activity from the personal liability for the debts of the organization in which they are involved. This protection is not available to individuals engaged in an unincorporated association even though it exists for nonprofit purposes. For this reason if no other the organization should incorporate.

In addition to the limited liability for its members, a nonprofit corporation has a significant tax advantage over an unincorporated association if it gets a federal tax exemption under section 501(c)(3) of the Internal Revenue Code. Contributions to such a nonprofit corporation are tax deductible to the donor. The tax deductibility is a great incentive for donors to contribute to a nonprofit corporation rather than an unincorporated association to which such contributions are not deductible.

Finally, a nonprofit corporation is able to tap into a wide variety of state and federal programs which are not available to unincorporated associations. Such programs may result in the corporation having access to funds or property which are not available to unincorporated associations.

Based upon the foregoing discussion, it is generally in the best interest of any group intending to operate for nonprofit purposes to become a nonprofit corporation and to seek federal and state tax exemptions.

One of the most important reasons for forming a nonprofit corporation to conduct nonprofit activities is because a nonprofit corporation usually can receive federal and state tax exemptions while an unincorporated association usually cannot receive them. A qualified nonprofit corporation which obtains federal and state tax exemptions will not have to pay any taxes on the income that is derived from its related business activities. By not having to pay taxes, the corporation will have 30% to 40% more income to apply towards its exempt goals. For example, assume that an unincorporated association operates an art museum earning $100,000 per year after expenses. Since it does not have a nonprofit federal exemption, it will have to pay approximately $28,000 in taxes. On the other hand, an art museum that is a nonprofit corporation, with a federal tax exemption, would not pay any federal taxes for its exempt activities.

Another significant reason for seeking a federal tax exemption is that contributions to section 501(c)(3) tax exempt nonprofit organizations (those for which this book is designed) are tax deductible to the donor. This means that a person or entity making contributions to such an organization will be permitted to deduct the value of the contribution from reported income on the donor's tax return. It is very beneficial for a nonprofit corporation toreceive a 501(c)(3) tax exemption instead of an exemption under the other 501(c) subsections. Once an organization receives a 501(c)(3) tax exemption, all contributions to it are tax deductible. Tax deductibility of contributions is a prime incentive for donors to make contributions to an organization. Example: John Smith wishes to give $150,000 to charity. If Smith gives it to an unincorporated association, he will not get a tax deduction. Instead, if Smith gives it to a tax section 501(c)(3) organization (defined below) the contribution will be deductible. Smith is in a 33% tax bracket. He will save $50,000 on his taxes: his actual cost of the gift is $100,000, and the charity gets $150,000. The donor to a 501(c)(3) nonprofit corporation receives a premium for the contribution in the amount he can deduct from his taxable income. As a result, donors are more willing to make their contributions to an organization when the donor will be able to deduct the value of the contributions and thus reduce his tax liability.

Another aspect of an organization having a federal tax exemption is that gifts made to the organization after the death of the donor are deducted dollar for dollar from the gross estate of the donor. Federal tax law requires all estates over $600,000 that pass to someone other than the donor's spouse be taxed on a progressive scale that reaches 55%. Gifts to a 501(c)(3) organization reduce the gross estate of the donor for tax purposes. For example, assume that John Smith, a widower, has an estate of $2,100,000. Smith's last will gave $1,000,000 to a local homelessshelter which is a nonprofit corporation with a federal tax exemption. Smith's estate is then reduced to $1,100,000. The taxable estate is $500,000 ($1,100,000 minus the $600,000 unified credit). The state tax is $155,800 If the gift had not been made the taxable estate would have been $1,500,000. The estate tax would have been $555,800.

A nonprofit corporation also can receive a state exemption from taxes. Many states will not require any forms to be filed to get a state tax exemption because they grant such exemptions automatically to nonprofit corporations. Other states will grant the exemption only after the corporation receives the federal tax exemption and will then retroactively apply the tax exemption.

After receipt of the state tax exemption, the corporation should contact the local county tax agency to determine if any forms must be completed to be exempt from local real property and personal property taxes. Such exemptions are automatically granted once the organization receives the state income tax exemption. The State's Laws chapter lists the taxing agency for each state that governs the granting of state tax exemptions.

There are two types of tax exempt organizations: those to which contributions are deductible and those to which contributions are not deductible. This book can be used to incorporate a nonprofit corporation. In applying for tax exemption, this book is geared to those nonprofit corporations to which contributions will be deductible by the donor. The reason for this is that nearly all nonprofit corporations which receive a tax exemption qualify as asection 501(c)(3) organization and thus contributions to them are deductible. This book will discuss in a general way those special tax-exempt corporations to which contributions will not be deductible, and it will detail how to complete a tax exemption application and discuss other aspects of the donor-deductible-contribution nonprofit corporation.

Under the Internal Revenue Code certain specifically defined nonprofit organizations are permitted to receive a federal tax exemption. However the tax law does not allow contributions made to these designated nonprofit organizations to be deductible by the donor on his tax return. These nonprofit organizations are treated differently than the majority of nonprofit corporations formed under section 501(c)(3) (discussed below) that are not only tax deductible but contributions to them are deductible by the donors. These organizations must complete IRS FORM 1024 to receive a tax exemption. Form 1024 is similar to FORM 1023 used by nonprofit corporations seeking an exemption under section 501(c)(3). An organization that must file FORM 1024 can review how FORM 1023 is completed in this book and use it for reference. Such an organization should also review IRS publication 557 "Tax-exempt Status for Your Organization" before completing the tax exemption application. FORM 1024 and Publication 557 can be obtained free from the IRS by calling 1-800-TAX FORM.

The following are those special tax corporation for which contributions usually will not be deductible:

1. Section 501(c)(2). CORPORATIONS HOLDING TITLE TO PROPERTY FOR EXEMPT ORGANIZATIONS. Such nonprofit corporations exist to hold and manage property for other tax exempt organizations. Form 1024 is used to get the tax exemption. Contributions to the nonprofit corporation are not deductible to the donor.

2. Section 501(c)(4). CIVIL LEAGUES, SOCIAL WELFARE ORGANIZATIONS OR LOCAL EMPLOYEE ASSOCIATION. Such organizations exist exclusively to promote social welfare or employee associations which are composed of employees from one employer for charitable, educational or recreational purposes. Examples: volunteer fire companies, search and rescue companies, homeowners associations. Form 1024 is used to get the tax exemption. Contributions to the nonprofit corporation are usually not deductible to the donor. Such contributions can be deductible only when they are to be used exclusively for public purposes rather than to benefit the members of the organization.

3. Section 501(c)(5). LABOR, AGRICULTURAL OR HORTICULTURAL ORGANIZATION. Such nonprofit corporations are composed of workers to promote their industry and protect their jobs. Form 1024 is used to get the tax exemption. Contributions to the nonprofit corporation are not deductible to the donor.

4. Section 501(c)(6). BUSINESS LEAGUES, CHAMBER OF COMMERCE OR BOARDS OF TRADE. Such nonprofit corporations are composed of persons to improve business in general or particular industries. Form 1024 is used to get the tax exemption. Contributions to the nonprofit corporation are not deductible to the donor.

5. Section 501(c)(7). SOCIAL AND RECREATIONAL CLUBS. Such organizations exist exclusively to promote pleasure, recreation and other nonprofit purposes. Examples: model flying clubs, bowling clubs, search or hunting clubs. Form 1024 is used to get the tax exemption. Contributions to the nonprofit corporation are not deductible to the donor.

6. Section 501(c)(8). FRATERNAL BENEFICIARY SOCIETIES. Such groups are organized under a lodge system for the exclusive benefit of its members. They usually provide benefits such as life, medical or accident insurance to their members. Examples: Lions, Moose, Shriners. Form 1024 is used to get the tax exemption. Contributions to the nonprofit corporation areusually not deductible to the donor. Some contributions may be deductible if used exclusively for section 501(c)(3) purposes.

7. Section 501(c)(9). VOLUNTARY EMPLOYEE BENEFICIARY ASSOCIATIONS. Such groups of employees are organized to provide benefits to their members. None of the earnings inure to the benefit of any individual member except in accordance with the group benefit plans. Form 1024 is used to get the exemption. Contributions to the nonprofit corporation are not deductible to the donor.

8. Section 501(c)(10). DOMESTIC FRATERNAL SOCIETIES. Such groups are organized under a lodge system exclusively for religious, charitable, scientific, literary, educational or fraternal purposes. They do not provide benefits such as life, medical or accident insurance to their members. Form 1024 is used to get the exemption. Contributions to the nonprofit corporation are usually not deductible to the donor. Some contributions may be deductible if used exclusively for section 501(c)(3) purposes.

9. Section 501(c)(11). LOCAL TEACHER RETIREMENT FUND ASSOCIATIONS. Such nonprofit corporations are formed to receive money from public taxes, from assessments on the teaching salaries of its members and investment income. Such funds are used exclusively to provide retirement benefits for the members. No form is used to get the tax exemption instead a letter requesting the exemption is sent to the local IRS District Director. Contributions to the nonprofit corporation are not deductible to the donor.

10. Section 501(c)(12). BENEVOLENT LIFE INSURANCE ASSOCIATIONS, MUTUAL WATER AND TELEPHONE COMPANIES. Such organizations exist on a mutual or cooperative basis to provide life insurance, water or telephone service to their members. Eighty five percent (85%) of the income must come from the members and the income must be used exclusively for expenses of the organization. Form 1024 is used to get the exemption. Contributions to the nonprofit corporation are not deductible to the donor.

11. Section 501(c)(13). CEMETERY COMPANIES. Such organizations exist exclusively to provide cemetery services to their members. Form 1024 is used to get the exemption. Unlike most non-501(c)(3) tax exempt organizations, contributions to this nonprofit corporation are usually deductible to the donor.

12. Section 501(c)(14). CREDIT UNIONS. Such nonprofit corporations are formed to provide mutual financial services to their members. They are organized without stock and fornonprofit purposes. No form is used to get the tax exemption instead a letter requesting the exemption is sent to the local IRS District Director. Contributions to the nonprofit corporation are not deductible to the donor.

13. Section 501(c)(15). MUTUAL INSURANCE COMPANIES. Such organizations exist on a mutual or cooperative basis to provide life insurance to their members. Form 1024 is used to get the exemption. Contributions to the nonprofit corporation are not deductible to the donor.

14. Section 501(c)(16). FARMERS COOPERATIVES. Such nonprofit associations are formed to provide for the marketing of their members' produce or products on a cooperative basis. No form is used to get the tax exemption instead a letter requesting the exemption is sent to the local IRS District Director. Contributions to the nonprofit corporation are not deductible to the donor. Note subparagraph 19 below.

15. Section 501(c)(17). WAR VETERAN ORGANIZATIONS. Such organizations exist to provide benefits to their members. Form 1024 is used to get the exemption. Contributions to this nonprofit corporation are usually not deductible to the donor. Contributions will be deductible if 90% of the members of the organization are war veterans.

16. Section 501(c)(20). GROUP LEGAL SERVICE ORGANIZATIONS. Such organizations exist exclusively to provide a qualified legal services plan to their members. Form 1024 is used to get the exemption. Contributions to such nonprofit corporations are not deductible to the donor.

17. Section 501(c)(25). TITLE HOLDING COMPANIES. Such nonprofit corporations exist to hold and manage property. Income from the property is distributed to 501(c)(3) tax exempt entities that are the shareholders of the corporation. Form 1024 is used to get the tax exemption. Contributions to the nonprofit corporation are not deductible to the donor.

18. Section 501(d). RELIGIOUS AND APOSTOLIC ORGANIZATIONS. Such organizations engage in common business for the benefit of their members. Each member's share is included on his tax return. No form is used to get the tax exemption instead a letter requesting the exemption is sent to the local IRS District Director. Contributions to the nonprofit corporation are not deductible to the donor. This is a seldom-used provision for getting a tax exemption because a religious organization can usually qualify for a 501(c)(3) tax exemption which bestows more favorable tax treatment.

19. Section 512(a). FARMERS COOPERATIVE ASSOCIATIONS. Theseare farmers' cooperatives which exist to market the members' products and to purchase equipment. Form 1028, not Form 1024, is used to get the exemption. Contributions to the nonprofit corporation is not deductible.

A nonprofit corporation which is formed to accomplish any of the above purpose will receive a federal tax exemption. Contributions to such a corporation, however, will usually not be deductible. This rule is not hard and fast. It is possible for a non-501(c)(3) corporation (one of the above) to establish a fund from which it will conduct only activities that would otherwise satisfy 501(c)(3) purposes. Contributions to this special fund will be tax deductible. The rules for establishing this separate 501(c)(3) fund are covered in Publication 557.

Only contributions to a nonprofit corporation that received a federal tax exemption under IRC section 501(c)(3) will be deductible to the donor. A 501(c)(3) tax exemption is the most desirable form in the IRS inventory. It is advantageous for a nonprofit organization to have a 501(c)(3) tax exemption because its permits deductions to the organization to be tax deductible by the donor. A contribution to a tax exempt organization which is not tax deductible cannot be used by the donor to reduce his federal income tax: the contribution is made in after-tax dollars. Most donors want the tax advantage of being able to deduct a portion of their contributions from their personal reportable income on their income tax return. Moreover, more money can be contributed to the organization if the contributions are deductible.

Section 501(c)(3) organizations are nonprofit corporations which are formed exclusively to accomplish one or more of the following purposes:

1. Religious purposes,

2. Charitable purposes,

3. Scientific purposes,

4. Literary purposes, or

5. Educational purposes.

A nonprofit corporation that is formed exclusively to pursue one or more of the above purposes will receive a federal tax exemption under section 501(c)(3). It is relatively easy for a tax exempt organization to qualify for 501(c)(3) tax exempt status. An important aspect to remember is that whatever activity is undertaken, its function must be to achieve or further one or more of the stated purposes:

A religious tax-exempt organization under section 501(c)(3) includes both formalized churches and the auxiliaries. The IRS does not question tenets of faith as long as they are not against the law. As long as the activities of the organization foster religious worship or advance a religious purpose or belief, the organization will be found to have a religious purpose and qualify for a 501(c)(3) tax exemption.

Nearly any activity which furthers the advancement of religion will satisfy the religious purposes test. It is not uncommon for such an activity to satisfy a charitable or educational purpose while satisfying a religious purpose as well. For example, assume that a religious organization operates a soup kitchen for the destitute. It would qualify for a 501(c)(3) tax exemption both as a religious organization and as a charitable organization. Publishing a newsletter to promote religious belief or interests has been held to promote religion and qualify for a 501(c)(3) tax exemption.

An organization has the option of applying for a 501(c)(3) tax exemption as either a church or a religious organization. If the organization qualifies as a church, it will receive automatic public charity status. An automatic public charity does not have to meet public support standards in order to maintain its tax exemption. All other 501(c)(3) organizations must maintain a minimum of public support to continue to receive their public charity status (as discussed below). To be considered a church, theIRS and the courts will closely examine the operation of the organization. Any organization seeking church status will be required to complete a special IRS schedule which, among other matters, will investigate the following:

1. Whether or not the organization practices a recognized creed.

2. The government of the organization.

3. The doctrine of the organization.

4. Whether or not the organization has ordained ministers or clergy.

5. Whether or not the organization has formal meetings and services.

6. Whether or not the organization has places of worship.

Most of us tend to know if an organization really qualifies as a church or is just a religiously affiliated organization. From a practical standpoint, both types of organization will get a tax exemption. The religiously affiliated organization, however, will have to be concerned with satisfying the public support requirement for maintaining the tax exemption.

It is under the charitable purpose requirement that nearly all 501(c)(3) organizations qualify for their tax exemption. The reason for this is that the word charitable is broadly defined to encompass anything that is "beneficial to the public interest." Most nonprofit corporations have activities that satisfy an educational, literary or scientific purpose that will usually also satisfy a charitable purpose.

A charity exists to benefit the public. The public is defined as being an indefinite number of persons rather than defined individuals. A charity can exist to aid a particular group as long as the group is open and the persons to receive the benefit are not specifically identified. For example, assume that a nonprofit organization formed to aid the homeless in a city has a charitable purpose; an organization to aid specially named homeless persons. Such a nonprofit organization will not have a charitable purposefor tax purposes.

"Charitable purpose" is, as stated above, broadly defined. A charitable purpose is anything that aids the public. Examples of charitable purposes have been:

1. Protecting the environment.

2. Providing food to the elderly.

3. Providing education.

4. Providing medical services to the indigent.

5. Operating a museum.

6. Operating a library.

7. Operating a park.

8. Operating a hospital.

A charity is permitted to make money from its activities. It is just not permitted to distribute the money earned to any shareholder or member. The profits of the charity must be used to achieve or further the charitable purpose for which the nonprofit corporation was formed.

The other remaining purposes for the 501(c)(3) tax exemption overlap so much that the definition of "charitable purpose" must be included. The test is whether the public is benefited by the activity performed by the nonprofit corporation. Scientific research to find a cure for a disease or add to human knowledge qualifies for a tax exemption as both a scientific and charitable purpose. In applying for a tax exemption under any of these purposes, the application should be broadly drawn to highlight the charitable aspect of the activity as well.

The above five purposes are the only ones for which a 501(c)(3) tax exempt nonprofit corporation can be formed. A tax exempt corporation cannot mix 501(c)(3) purposes with any of the other 501(c) subsections discussed above. If it does, the corporation will still be tax exempt, but it will be tax exempt under the other 501(c) subsection and not section 501(c)(3). Example: A 501(c)(3) organization also performs functions as a civic league. It may lose its 501(c)(3) status and be treated asa 501(c)(4) nonprofit corporation.

There are two types of 501(c)(3) tax exempt organizations: the public charity and the private foundation. The differences between the two types are in the percentage of contributions which a donor may deduct on his income tax return and operating limitations. The differences are discussed in detail below.

Of the two types of 501(c)(3) organizations, the best one to be is a public charity. The advantages of a public charity over a private foundations are:

1. Contributions to a public charity are deductible to 50% of the donor's adjusted gross income. Contributions to private foundations are deductible only to 30% of the donor's adjusted gross income.

2. A public charity does not have the operating limitations which are placed upon a private foundation.

3. A public charity does not have to pay the 2% excise tax that a private foundation must pay.

These advantages make it desirable for a nonprofit corporation to be classified as a public charity rather than a private foundation. The Congress, however, is concerned with collecting as much tax revenue as possible. More tax revenue will be collected if a 501(c)(3) organization is treated as a private foundation. For this reason, Congress has decreed that a 501(c)(3) tax exempt organization will be classified as a private foundation unless it can prove that it is a public charity.

In order for a 501(c)(3) organization to prove that it is entitled to public charity status, it must pass one of three tests. The three tests which determine if a 501(c)(3) tax-exempt organization should be classified as public charity are:

1. The automatic charity test.

2. The public support test.

3. The general support test.

Some lucky 501(c)(3) organizations are automatically classified as public charities and do not have to pass either of the two following tests. Nonprofit corporations that qualify for public charity status have as their main purpose the operation of

1. Churches rather than mere religiously affiliated groups. A determination that an organization is a church rather than just a religious organization requires, as discussed above, that detailed information regarding its operation be submitted. If such a favorable determination is made, the church need not be concerned with ever having to satisfy either of the two other tests in order to maintain its public charity status. Churches are governed by section 509(a)(1) and 170(b)(1)(A)(i) of the Internal Revenue Code.

2. Schools. For a school to be classified as a public charity, the IRS looks at its operations and particularity how formalized it is and whether it has a regularly enrolled student body. The more the school takes on the attributes of a traditional school, the more likely it will be classified as a public charity. Schools are governed by section 509(a)(1) and 170(b)(1)(A)(ii) of the Internal Revenue Code.

3. Hospitals and Medical Research Organizations. Nearly any nonprofit organization that provides health care in any form (such as medical clinics, drug abuse centers, mental health clinics) will qualify as a public charity. Organizations which are involved in medical education or research will receive public charity status only if they are associated with a hospital and provide medical care to patients in the hospital. Such organizations are governed by section 509(a)(1) and 170(b)(1)(A)(iii) of the Internal Revenue Code.

4. Public Safety Organizations. Nonprofit organizations which are formed to conduct public safety tests automatically qualify for public charity status. Such tax exemption is governed by IRS section 509(a)(4).

5. Supporting Organizations. Under IRS 509(a)(3), an organization which is formed solely to aid in the operationof another public charity (except for a public safety organization) will itself also be classified as a public charity. In other words, if a public charity has a subsidiary or affiliate organization, that subsidiary or affiliated organization also qualifies as a public charity.

While it is desirable for a 501(c)(3) organization to be classified as a public charity, few such organizations qualify. An organization which does not meet the public charity requirement may still be classified as a public charity if it passes either of the two public support tests defined below.

A 501(c)(3) tax-exempt corporation will be classified as a public charity if:

1. At least 1/3 of its total support per year is derived from:

(a) Support from government agencies,

(b) Contributions from the general public, or

(c) A combination of (a) and (b), or

2. It meets an "attraction of public support requirement" and at least 1/10 of its total support over a four-year period is derived from:

(a) Support from government agencies,

(b) Contributions from the general public, or

(c) A combination of (a) and (b).

In determining public support membership, fees and dues are treated as public support as long as the members do not receive a benefit in exchange for them. As long as the fees and dues are solely to acquire and maintain membership, they are counted as public support. If the fees and dues are used to purchase a benefit from the organization (such as use of it facilities) they are not considered public support. The defining point is whether the member receives anything of value for the fees or dues.

Investment income is not considered public support but is considered in calculating the corporation's total support. Hence, an organization with large investment income may have problemssatisfying the public support percentages. In the same vein, income derived from unrelated business activities (those not furthering the exempt purpose of the organization) is not counted as public support but is counted towards total support.

Income derived from the sale of assets or from the performing of tax exempt activities is not counted in any way. Such income is not counted either for total support or public support of the corporation. Income derived from performing exempt activities includes admission fees for public events and fees charged for hosting seminars or for selling merchandise related to the corporation's exempt purposes.

As with most government tests, there are always qualifiers. In calculating total support, all funds that the corporation receives during the four-year period are included. When calculating the public support percentage, however, there are limitations on the amounts of contributions from certain individuals which can be considered.

In determining the percentage of public support, there is a limitation on the amount that an individual, trust or corporation contributes to the nonprofit corporation that can be counted toward public support. The total amount of contributions from any individual, trust or corporation for any four-year period which will be counted towards a nonprofit corporation's public support cannot exceed 2% of the corporation's total support. This limitation only applies to contributions from the public. There is no limitation on the amount of contributions from government agencies or other public supported organizations that can be included in calculating total public support. For example, assume that ABC nonprofit corporation received $100,000 in total support over four years. $60,000 came from government grants and $40,000 from the public. George Smith contributed $20,000. In calculating total public support, the $60,000 from government sources is counted in total, the $20,000 from other public sources is also counted in total. Smith's contribution is limited to $4,000 (2%of the total $100,000). The total public support is $84,000 (84%). Since public support percent is over 33%, the organization qualifies as a public charity.

On the other hand if ABC nonprofit corporation received $1,000,000 in total support over four years with $300,000 coming from three people each and $100,000 from a fourth person, the limitation on contributions from each individual would be 2% of $1,000,000 or $20,000. The total public support would be $80,000. The corporation would fail this test because public support would be only 8%.

As with any rule, there are exceptions to the 2% limitation on public contributions when calculating support. If the contribution takes the form of an unusual contribution, it will not be counted either for public support or total support. An unusual grant is considered to be one that:

(1) Was given to the organization to further its tax exempt purpose,

(2) Was unexpected in the sense that it is not routinely given to the organization or has been given in an unusually large amount, and

(3) Because of the size of the grant, counting it in support calculations would prevent the organization from meeting public support test.

If an organization is found to have received an unusual grant, the value of the grant will not be considered in determining the percentage of public support. It is to the advantage of an organization to strive to maintain a level of public support so that it will meet the required minimum standards.

If the corporation cannot meet the 33% minimum of public support, it will still be classified as a public charity if it has at least 10% public support and satisfies an IRS requirement of attracting public support.

In determining if an organization has been attracting public support, the IRS evaluates several separate factors, none of whichare determinative in itself. The IRS looks at:

1. Whether the organization is actively seeking funds from the public or relying mainly on old sources of funding. An important consideration is whether the corporation is actively seeking new members and soliciting support from government and private sources.

2. Whether most of the organization's funds come from the community and government agencies or a group of individuals with special interests. The broader the source of funding, the better the IRS likes it and the greater the chances of being found to be publicly supported.

3. Whether the board of directors represents the community at large. Toward this end, the IRS likes to see public officials on the board as representatives of the public.

4. Whether the corporation provides facilities or services to the public. Examples of such activities include operating a museum, holding concerts and giving seminars.

If an organization is able to pass this test, it will be classified as a public charity. If the corporation is unable to pass this test, it may still achieve public charity status if it passes the General Support Test below.

(iii). GENERAL SUPPORT TEST

A 501(c)(3) tax exempt corporation will be classified as a public charity if it passes the general support test. Under this test, the corporation will be a public charity if:

1. It receives 1/3 of its total support each year (rather than over four years) from qualified public support. What makes the general support test better than the public support test is that gross receipt from the performing of tax exempt activities are counted both for total support and public support. Hence organizations that will support themselves through the admission fees of their tax exempt activities will be more likely to pass this test than the public support test. Gifts, government grants, public contributions and membership fees are treated in the same manner as in the public supporttest above.

2. The organization must not receive more than 1/3 of its total support from unrelated business income or investment income.

In place of the 2% limitation used in the public support test, this test has a limitation of $5,000 or 1% of total support that can be received from individuals, corporations or entities for the performance of any tax exempt activity. This limitation applies only to performance of tax exempt activities, it does not apply to contributions, membership fees or grants to the organization that are not receipts or payments for the performance of tax exempt activities. For example assume that ABC Orchestra nonprofit corporation holds a charitable auction to buy new instruments. The corporation earned $250,000 for the year. At the auction, it sold John Smith a violin for $50,000. The greater of $5,000 or 1% of $250,000 (which is $2,500) will be counted as the public support from John Smith.

Grants are not subject to the $5,000-or-1% limitation if they are not for the performance of tax-exempt activities; the person or entity making the grant does not expect to receive any personal benefit from the performance of the tax-exempt activity. This issue most often arises where a tax-exempt entity is given a grant which is specifically dedicated for use in conducting tax-exempt activities that somehow benefits the donor. Thus the grant is for performance of tax-exempt activities and is therefore subject to the $5,000-or-1% limitation. For example, assume that a farmer gives to a nonprofit scientific research corporation specifically for use to develop bug-resistant crops. The grant is subject to the limitations. As with the public support test, when the grant is found to be unusual, it is excluded from both the total support and public support calculations for the general support test.

The general support test is the test by which most 501(c)(3) organizations will receive their public charity designation. This test is most useful for self-sustaining organizations which must rely upon themselves to survive.

If a 501(c)(3) tax-exempt corporation cannot pass any of the above three tests, it will be classified as a private foundation and treated accordingly. Even if a tax-exempt corporation cannot become a public charity, becoming a private foundation still delivers strong advantages.

A tax-exempt organization formed under IRC section 501(c)(3) will be either a public charity or a private foundation. If the organization fails to meet any of the three tests for a public charity, it will be classified as a private foundation. If a private foundation is going to be a private operating foundation (one that performs activities or provides services rather than merely distributing funds to other tax-exempt organizations), it is required to meet its own special income test and one of the three following tests: an assets test, an endowments test or a support test. It is assumed that the nonprofit corporation being formed will seek public charity status. If a private foundation is being created, the instructions for completing Form 1023 are still valid, but Publication 557 should be read prior to completing the application.

The IRS assumes that all 501(c)(3) organizations are private foundations unless they can prove by their applications that they are entitled to public charity status. Unless the tax-exempt organization applies for public charity status (submits Form 1023) within 15 months of formation (or within any granted extension) it will be classified as a private foundation even though it would otherwise qualify as a public charity.

The main difference between a public charity and a private foundation is who runs it and where does it get its money. A public charity must receive a minimum amount of support from the general public or governmental agencies. In addition, public charities must have boards which are open to the public. By comparison, private foundations do not have fixed minimums for public or government support. In addition, the boards for privatefoundations are often closed to input from the public. Private foundations often are established by wealthy families, (Ford Foundation, Rockefeller Foundation) etc. and are often controlled by members of that family. The funds for many private foundations come mostly from endowments provided by the creators of the foundation and subsequent investment income.

Because private foundations usually have a close relationship with its founders, Congress has imposed special operating restrictions on them. The purpose of these restrictions is to assure that private foundations are not used to give any special tax benefits to their creators. These limitations are covered in IRS Publication 578, TAX INFORMATION FOR PRIVATE FOUNDATIONS AND FOUNDATION MANAGERS, and are as follows:

1. Contributions are tax deductible to a private foundation only to a maximum of 30% of the donor's adjusted gross income as opposed to 50% of the donor's gross income for contribution to public charities. IRS Publication 526 CHARITABLE CONTRIBUTIONS discusses the rules for contributions to private foundations.

2. There is a 2% excise tax (reduced to 1% for certain private foundations) on the net investment income of the private foundation. This tax does not apply to public charities.

3. There are restrictions on self-dealing between the private foundation and the disqualified persons. Under the IRC, disqualified persons are:

a. Officers, directors and managers of the private foundation,

b. Substantial contributors to the private foundation, and

c. Persons or entitles owning 20% of the voting power of a corporation, partnership, or association which is a substantial contributor to the private foundation.

For self-dealing there is an excise tax of 5% on theamount involved in the transaction. In addition, the foundation manager involved in the self-dealing is assessed another 2 1/2% excise tax. If a disqualified person other than a foundation manager is involved in the self-dealing, that person is assessed an excise tax of 200% of the amount involved in the self dealing.

4. There are limitations on investments in private businesses, and

5. A private foundation must not make investments which could jeopardize the ability of the organization to carry on its tax exempt purposes.

In order for a nonprofit corporation to receive a tax exemption as a private foundation, the articles of incorporation for the organization must meet the following provisions:

1. The corporation will distribute its income for each tax year and in such manner as not to become subject to the tax on undistributed income imposed by section 4942 of the Internal Revenue Code of 1954 or corresponding provisions of Federal Tax Laws.

2. The corporation will not engage in any act of self-dealing as defined in section 4941(d) of the Internal Revenue Code of 1954 or corresponding provisions of any subsequent Federal tax laws.

3. The corporation will not retain any excess business holdings as defined in section 4943(c) of the Internal Revenue Code of 1954 or corresponding provisions of any subsequent Federal tax laws.

4. The corporation will not make any investments in such manner as to subject it to tax under section 4944 of the Internal Revenue Code, or corresponding provisions of any subsequent Federal Tax Laws.

5. The corporation will not make any taxable expenditures as defined in section 4945(d) of the Internal Revenue Code of 1954 or corresponding provisions of any subsequent Federal Tax Laws.

The Articles of Incorporation contained in this book include these provisions. Hence if the IRS finds the corporation does not qualify as a public charity but does qualify as a private foundation, the tax exemption as a private foundation could then be issued. Without such provisions, the tax exemption would be denied, and the corporation would have to amend the articles to get the private foundation tax exemption.

There are certain limitations on the operation of 501(c)(3) corporations that apply whether or not they are public charities or private foundations.

There is a unique limitation on how a 501(c)(3) organization can operate. A corporation might offer to sell to the public or offer services to the public which could be obtained free from the federal government or for a nominal fee. If it does, section 6711 requires the corporation to include a statement in its offering materials (or otherwise inform the client) that such information or services can be obtained for free or at a nominal charge from the government. Failure to disclose this information will subject the corporation to fine. This matter is discussed in detail in Publication 557.

A 501(c)(3) organization is forbidden from substantially engaging in activities that are not related to furthering the tax exempt purposes for which the organization was formed. It is recognized most nonprofit organization must engage in some unrelated business activities to raise money to survive. The prohibition applies only where a disproportionate amount of the organization's time, energy and resources are used in unrelated business activities and the tax-exempt purposes suffer.

A 501(c)(3) organization is prohibited from being formed or operated in such a way as to bestow special benefits on particular individuals rather than the public at large. Specifically, to prevent this benefit of private persons or entities, a 501(c)(3) corporation is:

1. Prohibited from distributing any of its net earnings orprofits to any person or entity that is a member, shareholder or contributor, and

2. Required upon dissolution to distribute its assets to another tax-exempt organization or government entity rather than to any person, member, shareholder or non-tax exempt entity.

A 501(c)(3) tax-exempt organization is permitted to pay reasonable salaries to its directors, salaries and employees without violating the prohibition. Such salaries and payments are permitted as long as the above persons substantially engage in activities to further the exempt purposes of the organization.

To get a tax exemption as a 501(c)(3) entity, a nonprofit corporation must file a Form 1023 along with several other forms. The application and all accompanying forms will be sent to the Internal Revenue office where Form 8718 is to be sent.

In addition to Form 1023, the corporation must apply for a federal identification number if it had not done so previously. An identification number is obtained by filing a Form SS-4. Following this chapter is a blank Form SS-4 and its instructions.

Few things from the government are free, and that includes filing for tax exempt status. Every organization applying for a tax exemption must file Form 8718 "USER FEE FOR EXEMPTION DETERMINATION LETTER." This form is simple to complete. A new organization that expects to average less than $10,000 per year for the next four years will check that box on the form and submit a check in the amount of $150. If the organization expects to earn more than $10,000 per year, it checks the next box and pays $465. If the organization pays the $150 and actually averages more than $10,000 for the next four years, the IRS will bill it for an additional $315.

The first part of Form 1023 is the easiest to complete. This section is simply a statement of the basic information regardingthe corporation.

Line 1 (a-d) lists the name and address of the corporation.

Line 2 lists the identification number of the corporation. If the corporation has not yet received one, it should write "applied for" and attach Form SS-4 to the application.

Line 3 is the name and phone number of the person the IRS is to contact if they have questions.

Line 4 requires listing the date for closing of the corporation's fiscal year. Most corporations use a calendar year for their fiscal year so the date would be December 31.

Line 5 requires listing the date the articles of incorporation were filed.

Line 6 requires the corporation to fill in a maximum of three activity codes that best describe the activity of the corporation. The codes are on the last page of Form 1023. A corporation should use three codes to make their statement of activity as broad as possible.

Line 7 applies to special tax-exempt organizations and usually will be left blank. Section 501(e) organizations are those that will perform cooperative services to hospitals. Section 501(f) organizations are those performing collective investment services for educational organizations. Section 501(k) applies to child-care organizations. Such organizations will qualify for 501(c)(3) exemption if they meet special requirements which are set forth under "Child Care Centers" in Publication 557.

Line 8 requires the organization to state if this application is its first. Some organizations will have had their first application denied, and they have reorganized so they can reapply. If such is the case, a letter of explanation should accompany the application.

On Line 9 the corporation must state whether it will be required to file a Form 990. Most 501(c)(3) organizations will have to file a Form 990. Form 557 lists the few organizations (which are usually automatic public charities) that will not have to file a Form 990.

Line 10 requires the corporation to state if it previously filed a tax return. This is important because if the corporation has been in existence for more than 15 months prior to filing the application and did not revive an extension, it might be barred from receiving a public charity status.

Line 11 requires the organization to state whether it is a corporation, trust or association. If the organization is a nonprofit corporation, which it would be if it uses the forms in this book, it must also attach copies of its articles of incorporation and bylaws.

The answers to this section must be completed. If the space given for the answers is not sufficient, separate pages should be attached to explain further. An example of the form of attachments:

"Attachment for Part 1. Line 2.

Additional sources of the corporation's income will be:"

The point to remember is that the IRS will assume nothing. If the information is incomplete or hard to understand, the application will be denied. Time and care should be taken in completing the application to avoid having to redo it later.

Line 1. The information herein is probably the most important of the entire application. For that reason, this information should be carefully drafted by the person with the most information and understanding on the proposed operations of the corporation. The corporation is required in this section to provide information that proves that the corporation will engage in tax-exempt purposes. Information that specifically defines the corporation's purposes must be stated. A restatement of the corporation's purposes as stated in its articles of incorporation is insufficient. There must be specific statements about what the corporation intends to do. Example: An organization is being formed to promote the musical arts. The corporation should state something to the effect that it will hold concerts open to the public. The proceeds of the concerts will be used to fund concerts and to employ local musicians.

The proposed activities of the corporation must be stated with particularity. This includes when the activities will be held, where they will be held, what they will be and who will be performing them. A point to remember: Public charities will need to receive a minimum percentage of public support. The application must therefore be written so that the IRS will understand that the minimum requirement of public support will be met. If it is not made clear that the required minimum of support is met, the organization may be classified as a private foundation.

Line 2 requires a listing of all current and projected sources of funding. The entity should rely most often on membership fees and dues. Government grants and receipts from performance of tax-exempt activities should also be stressed. The importance of unrelated business income and investment income (income from activities which do not further the tax-exempt purposes such as a museum or running a hotel) should not be overly stressed. Remember a public charity must have a minimum percentage of public support; hence all sources of public support should be stated.

Line 3 requires the fund-raising activities of the organization to be stated. Most new corporations will not have decided how they will proceed to raise moneys. That is usually an advantage. The corporation can state that most of its fund raising will come from membership and dues, which is public support. The corporation can also state that once it gets its tax exempt status, it will apply for government grants to help promote its tax-exempt purposes. The corporation seeking public charity status should stress that it will continue to have an aggressive membership recruiting activity. Another fund-raising activity which should be stressed is the performance of the tax-exempt activity. For example, assume that a museum states that many of its fund-raising activities will be special art shows at which it charges the public small admission fees.

Line 4 requires a listing of the corporation's officers and directors. If any are public officials, they must be identified. The IRS likes to see public officials serving as officers or directors. The IRS views them as proof of public support. The IRS also requires that if any of the officers or directors of the corporation become engaged in self-dealing with the corporation, their relationship will be disclosed. There are severe penalties for disqualified persons engaging in self-dealing with a private foundation. Such relationships must be disclosed to the IRS.

Lines 5, 6, 7 and 10 involve the disclosing of any relationship with another organization. Most nonprofit corporations are not controlled by another corporation or accountable to anotherorganization. Thus most corporations seeking tax exemption will mark "no" to these questions. Any "yes" answers must be explained with particularity.

Line 8 requires that the corporation state what assets are used in performing its exempt function. Example, a nonprofit museum states its real property and its art inventory. If the activity is entirely performed by volunteers, the answer is "none" with an explanation as to why it is none.

Line 9 requires an answer of whether or not it will be funded by a tax-exempt bond offering. The answer is almost always "no." Generally, only nonprofit organizations intimately related to a government unit will qualify for such bond financing; that is not the ordinary nonprofit corporation.

Line 11 requires information about whether the corporation is a membership organization. If so, the subparts a, b and c must be answered. The only issue of concern is 11(c) where any benefits for membership must be stated. Remember dues received in exchange for benefits other than voting rights are not considered public support. Most corporations should write "beyond voting rights, the members receive no special benefits in exchange for their dues; see corporate bylaws."

Line 12(a) requires the organization to state whether or not it will charge the public for providing services, benefits or products. This is entirely permissible. It is understood that nonprofit corporations need to make money in order to pay their expenses. As such, the corporation must explain how the charges will be calculated and attach any fee schedule.

Line 12(b) requires the corporation to state whether or not its benefits, services or products will be restricted to specific individuals. The usual answer is "no." Discrimination that is too narrow could prevent the granting of tax exemption. Limitation to a specific group is permissible when the group is large and related to the specific purpose of the organization. Examples: helping the homeless, abused children or the elderly.

Line 13 requires the corporation to state whether or not itwill be influencing legislation. The answer should almost always be "no." Any "yes" answer could jeopardize the tax exemption. Generally, 501(c)(3) organizations are forbidden from engaging in political activities. Any such organization which does so could lose its tax-exempt status. A discussion of the limitation of political activities is set forth in Publication 557.

Line 14's response should follow that one given in line 13. A 501(c)(3) corporation is not permitted to participate in political campaigns. Such participation is limited to providing nonpartisan voter education. Most organizations should refrain from all political campaigns and attempts to legislate or first consult a tax attorney. Generally, such activities will invalidate a tax exemption.

C. PART III. TECHNICAL REQUIREMENTS

Line 1 requires the corporation to state if it is filing the application within 15 months. If "yes" (as it should be), go to line 8.

Lines 2 through 7 apply to an organization that files for a tax exemption under section 501(c)(3) more than 15 months after formation. By completing these lines, the organization is attempting to get relief from the rule that the excessive delay in filing requires the corporation to be limited to private foundation status, even if it otherwise qualifies as a public charity.

Line 8 requires the corporation to state whether or not it is a public foundation. If the answer is "no" (because it is seeking public charity status), the corporation skips to line 10. If the answer is "yes," the corporation goes to line 9.

Line 9 requires that the corporation must state whether or not it is a private operating foundation (one that conducts exempt activities as opposed to one which merely distributes money to other exempt organizations). The corporation then goes to Part 4.

Line 10 requires a corporation seeking to be a private foundation to check which of the boxes best fits why it should be so classified. If the organization is seeking public charity status (church, school, hospital, medical research organization, orsupport organization) for other tax-exempt organizations, it must complete special schedules A, B, C or D, respectively. Most 501(c)(3) organizations are not formed for such purposes and do not have to complete any additional schedules in order to receive tax exempt status as a public charity.

Line 10, box h is for organizations which qualify under the public support test.

Line 10, box i pertains to those organizations which satisfy the general support test.

Line 10, box j applies to those organizations which believe they qualify under either the public support or general support test but are unsure which one. By checking this box, the organization leaves it to the IRS to apply both tests and grant the exemption if either test is met.

If boxes a through f are marked, the corporation then goes to question 15. If box g is marked, the corporation goes to Line 12. If either box h, i or j is marked, the corporation goes to Line 11.

Line 11 requires the organization to state whether or not it is seeking a definitive ruling or an advance ruling. A definitive ruling is a final statement of whether the corporation qualifies henceforth as a public charity or as a private foundation. To receive a definitive statement, the corporation must have been in existence for at least eight months and have received sufficient support during that time for the IRS to make its decision. Generally, a new corporation will not have enough support for several years for the IRS to issue a definitive ruling. In such an event, the IRS will issue an advance ruling, even though a definitive ruling had been requested. The definitive ruling will only be issued when the IRS has sufficient information to make a determination on the organization's status.

An advance ruling is a temporary ruling by the IRS of whether the corporation qualifies as a private foundation or a public charity. Any new corporation in existence for less than eight months before filing for the application is limited and can only request the advance ruling. The IRS usually only grants advanceruling unless the organization has a great many financial records. Therefore, most organizations should simply apply for the advance ruling. The IRS will look at the submitted financial information. Then it usually grants an advance ruling for a public charity when it appears that the anticipated sources of support qualify the corporation as a public charity. At the end of a 5-year period, the IRS will review the financial records of the corporation. If the public support over this period satisfies either of the public charity support tests, the corporation will receive a definitive ruling to that effect. If the public support received by the corporation fails both of the public support tests, the corporation will be classified as a private foundation and have to pay a 2% excise tax on its investment income for those years. The advance ruling is sought by submitting Form 872-C.

Line 12 requires that any unusual grants be disclosed at this time. The purpose of disclosing unusual grants is such grants are not used in calculating total or public support under the support tests for public charities.

Line 13 is completed only by a corporation that is seeking a definitive ruling under the public support test. If the corporation is seeking an advance ruling instead (which most corporations should seek), this line is left blank.

Line 14 is completed by a corporation which is only seeking a definitive ruling under the general support test. If the corporation is seeking an advance ruling instead (which most corporations should seek), this line is left blank.

On Line 15 each question must be answered with a truthful "yes" or "no" concerning the applicant. If any question is answered "yes," the appropriate schedule must also be attached. Generally, most nonprofit corporations which will be formed using this book will answer "no" to all of the questions. The possible exception would be a nonprofit corporation that is going to act as a private operating foundation. Such a corporation will have to complete Schedule E.

Part 4 of Form 1023 provides the financial data from which the IRS will make its determination of whether or not the corporation should receive a tax exemption. There will be no hard financial data for the newly formed corporations. The corporation can submit projected financial data, and the IRS will base its determination on that data.

Instructions for completing Part 4 are covered in Form 1023. The point to remember in completing Part 4 is that although the information is an estimate, it must be reasonable. If reasonable, the IRS will base a determination upon this information.

Another point to bear in mind when completing this application is that if the organization is not shown to meet the minimum support standards for a public charity, the application to receive a tax exemption as a public charity will be denied. Should denial occur, the group should consider a plan to increase projected fund-raising activities to meet the minimums or plan to apply for ta