POINTS TO CONSIDER BEFORE YOU START A NONPROFIT

POINTS TO CONSIDER BEFORE YOU START A NONPROFIT

Before you decide whether or not to start and to incorporate a nonprofit, you should
consider a number of questions. They are serious questions. They will cover the next several sections of this paper. I recommend that you sit down, spend some time and write
your answers to the questions on a pad. There are many successful nonprofit
organizations and there are failures. For the purpose of this paper, I am not including the
incorporation of churches and other religious houses of worship; schools, colleges and
universities; hospitals and medical research organizations; section 509 (a) (3) supporting
organizations; private operating foundations, homes for the aged or handicapped,
organizations providing scholarship benefits, student aid, etc. to individuals; or
successors to "for profit" institutions. All of those are required to file the Federal Form
1023 that is addressed in this article. There are, however, additional schedules for those
organizations that are not addressed here. Those additional schedules are not difficult but
you may want to talk to an attorney familiar with tax exempt and nonprofit law. I have
included notes about incorporating childcare centers.

The first know charity law began in 1601 with the passage of the Statute of Charitable
Uses in England. More than half the nonprofits that exist in America were started after
1945. Some of the most successful providers of care were begun more than 100 years
ago. The five oldest national organizations are still in the top 400 recipients of
contributions: YMCA (1851), YWCA (1866), Salvation Army (1879), American Red
Cross (1881) and Volunteers of America (1896). See
http://fdncenter.org/learn/topical/fdnhist.html and
http://www.cof.org/Content/General/Display.cfm?contentID=60 for additional history.

Historically in the United States examples of a charitable organization include:

• Relief for the poor, the distressed or the underprivileged
• Advancement of religion
• Advancement of education or science
• Erection or maintenance of public buildings, monuments or works
• Lessening the burden of government
• Lessening of neighborhood tensions
• Elimination of prejudice and discrimination
• Defense of human and civil rights secured by law, and
• Combating community deterioration and juvenile delinquency.

Elsewhere the IRS Code section 501 (c) (3) describes charitable organizations as those
that are formed for "religious, charitable, scientific, testing for public safety, literary or
educational purposes or to foster national or international amateur sports competition".

There are benefits and detriments in becoming a nonprofit organization under State and
Federal laws. They will be discussed shortly. At this point, it is important to realize that
being recognized as a nonprofit organization in your State and as a section 501 (c) (3)
corporation by the IRS gives the organization public recognition of tax exempt status. It
gives contributors an advance assurance of deductibility of contributions and it allows the
nonprofit to be exempt from certain State taxes and Federal excise taxes. Foundations
and government grants are available to nonprofits that have the recognition of the IRS.
There are other benefits including nonprofit mailing privileges and it may provide relief
from property taxes. I say, "may provide relief from property taxes" because there have
been periodic movements by lawmakers to tax certain nonprofit property. Early in 2001
Baltimore MD considered taxing the huge holdings of Johns Hopkins University and
other large NPOs in the city, but the matter was settled by negotiations. NPOs may have
to pay property taxes if the property is viewed as a profit-making source of revenue.
According to the New York Times on January 6, 2001, Bridgeport CN was initiating a
property tax on all nonprofit organizations.

In most states there are property tax assessments that can be charged to nonprofits
including houses of worship, churches, synagogues, mosques and other NPOs as they are
with businesses and housing. Each can be required to pay property tax on space leased to
other entities such as a day care center, a weekday parking lot or for-profit-businesses. A
number of churches have leased their steeples or towers to cell phone carriers. Usually it
is up to the local municipalities to enforce the law and to assess the appropriate property
tax. That is the bad news. The good news is that the assessment on these lease
agreements may help protect houses of worship and other NPOs from fully losing their
status as a tax-exempt organization.

There is no way to know how many nonprofit organizations exist beyond paper and are
currently viable. The only organizations that can be ascertained as having some money
are those which file Federal Form 990 because they have annual revenue of $25,000 or
more. When we look at nonprofits as a whole, we have to realize that faith-based
religion, universities and colleges and hospitals are in the mix. Religious organizations
do not have to file Form 990 if they do not want to.
Independent Sector published a report on July 18 2001 showing there has been a 74%
increase in the number of charities in the United States in the last ten years. There are
now about 1.626 million nonprofit organizations including 734,000 501 (c) (3) charities.
A copy of the press release and the report can be viewed at
http://www.independentsector.org/ and "Nonprofit Information Center" at
http://www.independentsector.org/Nonprofit_Information_Center/information_center.ht
ml. The American Bar Association reported in late 2001 that the IRS is receiving 85,000
requests for 501(c) (3) application a year, about 325 a day!

The intent here is to challenge you to give you the best shot at success.