A reader recommended I write about non-profit entities. Nonprofits are organizations whose purpose is to serve a public interest. The Red Cross, religious organizations, and groups like Friends of National Parks organizations are typically nonprofit businesses. They receive state and federal tax exemptions. Nonprofits can have more income than expenditures with the understanding that the profit is spent to fulfill the mission of the organization. Below is information about the different types of nonprofit organizations and where to find out more information.
A nonprofit business must be established through federal and state procedures. “501(c)(3)” is a term thrown around and refers to a section of IRS code allowing organizations to be tax exempt and is referenced as nonprofit organizations. Corporations, trusts, LLCs, unincorporated associations, and nonprofit corporations can all be a nonprofit organization. Organizations such as Teach for America, Boy Scouts, and Girl Scouts are nonprofit organizations each with unique business structures.
Public charities, private foundations, and private operating foundations are the most common organizations who use nonprofit status. Churches, animal welfare agencies, and conservation organizations are examples of public charities. A public charity must earn a majority of its revenue from the general public or government entities. To continue as a nonprofit, at least 1/3 of its donated revenue must be obtained from public individuals, companies, or public charities. Public charity donors can deduct up to 50% of their income donated as an individual and up to 10% as a corporation. Public charities require a governing body of unrelated individuals and are actively involved in their cause. For instance, the Red Cross is a public charity with a board of directors that depends on donations from private individuals, organizations, and grants. It provides services to people in need and responses to disasters.
Private foundations are also called non-operating foundations and do not have any active programming. Private foundations usually consist of a limited number of donors or single donors. Private foundations do not require a governing board. The Bill & Melinda Gates Foundation is an example of a private foundation with two primary donors and managers, Bill and Melina Gates. Donations to a private foundation are tax deductible for up to 30% of the donor’s income.
Private operating foundations maintain active programs similar to public charities but can have the same governance structure of a private foundation with one or two people. They are a hybrid between public charities and private foundations. So if Red Cross continued its efforts to help those in need but was managed by only a few donors, such as Bill and Melinda Gates, it would be considered a private operating foundation.
Nonprofits are highly regulated in their governance structures and activities. For instance, no earnings can unfairly benefit the employees of the nonprofit or public individuals. Further, nonprofits cannot endorse/oppose candidates for public office and must keep legal advocacy and legislative activity limited in proportion to their annual budget. Nonprofits must also annually disclose their financials to the IRS who publicly publishes this information.
Still excited about your nonprofit idea? After deciding on your federal nonprofit structure, you must next file with the IRS and incorporate within the state of Utah. This includes filing for a tax identification number, incorporating with the state of Utah, creating a conflict of interest policy, and applying for federal and state exemptions. Nonprofits must also file for a Charitable Solicitations Permit and provide an annual report to the Utah Division of Corporations. Unless your organization is exempt (such as churches and organizations receiving less than $5000, annually), you must also file federal 990 forms.
The Utah Nonprofits Association (utahnonprofits.org) provides excellent resources for Utahans planning to start a non-profit organization.
So as fall begins, let the dreaming start and determine if your next big idea would be a nonprofit organization. Before you begin, remember that planning and establishing a nonprofit can take three to six months – just for the paperwork. Until then, please contact me with your legal questions at firstname.lastname@example.org
Disclaimer: All materials in this article are prepared for general information purposes only to permit you to learn more about legal concepts. The information presented is not legal advice, is not to be acted on as such, may not be current, and is subject to change without notice.
Published 10/5/2017 in The Wayne & Garfield Insider.