NY Startup Law

A businesslaw blog for New York entrepreneurs by Marc Law Associates PLLC

STARTING A NON-PROFIT ORGANIZATION IN NEW YORK

I know most of you reading this may not care about doing anything that has the words “not for profit” in it, and who can blame you? The words themselves seem so counter productive to what most people think about when starting a business. Most people associate these organizations with people that have big hearts and charitable intentions. However, as we’ve seen lately with the proliferation of politicians in New York getting busted for self dealing and looting from these organizations, this isn’t always the case.

That being said, I know maybe one or two of you may want to start a non-profit corporation (“NFP), so this Blog’s for you.

MAKE SURE YOUR ORGANIZATION FITS INTO ONE OF THE PERMITTED PURPOSES OF A NEW YORK STATE NON PROFIT

Section 201 of the New York NOT-FOR-PROFIT organization outlines a list of general purposes of starting a NFP in NY and assigns them Types from A to D. Type A, for instance is for a trade association. Type B is assigned to charitable, educational, religious, scientific, literary, cultural or to prevent cruelty to children and animals.

FILING THE CORPORATION PAPERS IN NEW YORK STATE

Once you’ve determined that your purpose is lawful, the next step is to file for incorporation of the NFP with the Department of State. This basically requires the same steps as incorporating any other corporation, including choosing an available name for the NFP, filing a certificate of incorporation, organizational meeting to discuss the by laws, etc.

One should hire an attorney to do this, because there are various formalities in creating this type of entity that are more restrictive than starting a normal C corporation. Some of these include restrictions on the name, purposes, and the forms for incorporating.

In addition, depending on your purpose for creating the NFP, you may have to get approval from a New York agency before filing the necessary state forms. For instance, the Attorney General Antitrust Bureau has to approve any trade organization prior to filing. The Office of Children and Family Services has to approve any institutes for kids, domestic violence centers, or shelters for unmarried mothers. Failure to get this approval before filing will result in the Department of State rejecting your filing and returning all filing documents to you.

Finally, contrary to popular belief you don’t obtain automatic tax exempt status. The IRS has to approve the NFP, and the filing papers must be tailored to gain this approval. The IRS code outlines permissible purposes to achieve tax exempt status. The IRS also expects certain provisions in the NFP’s  certificate of incorporation. Failure to follow these formalities can result in wasted time and money.

FILING TAX EXEMPTION STATUS WITH THE IRS

Now that the NFP has successfully filed with the state, the next step is to file with the IRS for to attain tax exempt status. Otherwise, you may have a valid NFP, but still pay taxes, which we both know isn’t the goal for most NFPs.  The two most used designations are 501(c) and the 501(a), but most NFPs will file for the 501(c) exemption. The NFP should use IRS form 1023 for 501(c) status or form 1024 for 501(a). This MUST be done within 15 months of the last day the NFP filed incorporation with the state. For form 1023, the IRS requires the following with the application: The certificate of incorporation, the NFP’s bylaws, a user fee, a filing fee, a Power of Attorney via IRS form 2848, and IRS form 5768 which concerns the NFP’s spending money on influencing legislation (Lobbyists).

501(a) status applies to many NFPs. Some examples are title corporations, business leagues and chambers of commerce, fraternities, unions, and trusts  created for the purpose of administering an employee profit sharing, pension, or stock bonus program.

The most popular of the 501(c) organizations is the 501 (c)(3), which  is often used by churches or religious organizations, schools or universities, and heath facilities among others. One important distinction is that donations to a 501(c) are tax deductible, which makes them a better corporate vehicle to attract donations. In addition, the IRS classifies every 501(c)(3) in one of two ways; either as a public charity or private foundation. If your NFP wants public charity treatment, there may be more papers to file with the 1023 when applying. The public charity status will afford an NFP with more favorable tax status than that of a private foundation.

501(c)(4) are classified as organizations working toward social welfare. They are allowed to lobby, and participate in political campaigns as long as it’s related to social welfare. Donations to these organizations are treated differently from 501(c)(3) in that they are not tax deductible. Some examples are homeowner’s associations, veteran’s administrations, etc.

501(c)(6) status is afforded to business leagues and industry trade groups such as sports leagues, chambers of commerce, real estate boards to name a few. These organizations are also allowed to lobby and campaign as long as the primary purpose of the organization is to promote social welfare.

FILING EXEMPTIONS WITH NEW YORK STATE

If your NFP plans on soliciting or using charitable contributions to operate, it should register with the Charitable Bureaus office of the state Attorney’s General Office.

If the NFP chooses the 501(a) route, and doesn’t issue or have any stock, and no officer, director or member benefits from any net earnings, the NFP may file for exemption from NY franchise tax with the New York State Department of Taxation (“NYSDOT”)

If the NFP doesn’t attempt to influence legislation, refrains from participating in political campaigns altogether,  doesn’t use any of it’s profits to benefit private individuals, and keeps its assets dedicated to it’s exempt status, it may apply for sales tax exemption. The Taxpayer Assistance, Exempt Organizations division of the NYSDOT is where an NFP that fits this criteria would apply.

CONCLUSION

Any of you that are thinking of going this route, should enlist the services of a knowledgeable attorney, and an accountant who knows this area. The process for creating an NFP is obviously very technical, and any misstep can cause a company to waste valuable time and money.

 

Patrick Marc, Esq.

 

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