Nonprofit Law

 

 

Getting Started

Do you have an idea to make your community a better place? Starting a nonprofit organization isn’t difficult. All it takes are the right tools and a little time and planning.

  1. Write a mission statement. What is your organization all about? What do you hope to accomplish? How do you expect to change the world?
  2. Develop a business plan. Even nonprofits need to operate as a business. How will you obtain your operating funds? What resources do you need to operate? How will you sustain the organization financially, and how will you sustain the programming?
  3. Apply for a PO Box. A business address is needed for all official paperwork. Using a post office box will give the organization a consistent address through administrative changes.
  4. Determine which type of nonprofit your organization will be. Did you know that there are twenty-three types of nonprofits? This organization reference chart from the IRS will help you identify which type your nonprofit is.
  5. Apply for Nonprofit Incorporation at the Indiana Secretary of State website. This is an ONLINE application.  You will need to create an IN SOS account, or you can ask your friendly local CPA or attorney to submit the application for you. The cost is $30 (plus nominal “convenience” fee) You must include this language in Article VI of the Articles of Incorporation in order to qualify for IRS tax exempt status.
  6. Apply for an Employer Identification Number using the SS-4 Application. Every organization needs a Tax ID Number. You cannot open a bank account without it. You can review the SS-4 application here and then apply online instantly through the IRS website.
  7. Select a Board of Directors. The State of Indiana requires a minimum of 3 directors, but the IRS requires a minimum of 5 “unrelated” directors (no family or business relationship between the directors).
  8. Write the bylaws for your nonprofit organization. Here’s a template to get you started.
  9. Create a budget.  Every nonprofit needs to create a budget to show all income and the source of the income, and all expenses and where the funds go.  This is required by the IRS and is important for new nonprofits to know how they are cash-flowing the new organization.
  10. Apply for IRS Exempt Status. Follow these steps [link to another 10-step plan] to receive IRS Exempt Status.
  11. Receive your sales tax exemption certificate. Nonprofits may be exempt from paying sales tax. If your organization qualifies, you’ll receive a federal determination application letter after your Articles of Incorporation has been approved. If you qualify for federal exemption, you must complete Form NP-20A to receive your exemption certificate.
    1. NOTE: This is not always necessary. If you have applied for IRS Exempt Status as a §501(c)(3) organization, you should also completed this step.
  12. Congratulations! You’ve created a nonprofit organization. Each year hereafter you must complete IRS Form 990N (or one of the other “990” series forms) and Form NP-20, Indiana’s required “tax return” for nonprofit organizations.

Frequently Asked Questions

Can a nonprofit organization make a profit?

What you do with that profit determines whether you maintain your nonprofit status. If you use leftover funds to further the purpose of the nonprofit, then yes! You are still a nonprofit organization. You can lose your nonprofit status if leftover funds go to individuals, members, or personal gain.

We’re not incorporated yet. Can we accept donations?

Yes, but those donations are not tax-deductible to the donor. If you need to accept donations before you are incorporated, ask another §501(c)(3) organization to accept the donations on your behalf as a fiscal sponsor.

We’re incorporated, but we don’t have §501(c)(3) status. Can we accept donations?
    1. Yes. If your annual income is less than $5,000 per year or you are a church, you can accept donations and those donations will be tax-deductible to the donor.
    2. Yes. If your income is greater than $5,000 per year, you should seek §501(c)(3) status. While the paperwork is pending you can “act like” a §501(c)(3) organization, but you may not be eligible for grants.
What do we need to tell the State of Indiana?
    1. You must file the Business Entity Report with the IN Secretary of State annually.
    2. You must file the NP20 with the Indiana Department of Revenue annually.
    3. If you receive any state funding, you must file the E-1 with the Indiana Department of Local Government Finance annually.
    4. If you have employees, you must keep up with employment taxes!
What must we share with the public, if asked?
    1. Your application for Tax Exempt Status.
    2. Your bylaws.
    3. Your 990 tax return.
    4. Any public grant applications where the funding is from a government agency, or any private grant application if the granting organization requires it.
Do we have to allow the public to attend board meetings?

No. You don’t even have to let your members attend meetings unless your bylaws or board policy requires it. However, it’s a good idea to be as open-door as possible to avoid the appearance of unfair or illegal dealing – especially when government money is involved.

Can a nonprofit charge for services?

Yes. Many nonprofits count on fees for services rendered as part of their annual income. But be sure these services are related to the mission of the organization. If they are not, you may be charged with Unrelated Business Income Tax (UBIT). For example, if you are a Child Advocacy nonprofit and you own and lease an apartment building, the rental income is not related to the purpose of the nonprofit and may be subject to UBIT.

Can a nonprofit sell adspace on its newsletter or website?
  • For the most part, yes. A nonprofit will not jeopardize its nonprofit status by putting advertisements on its newsletter or other mailings. There are two considerations:
    1. Unrelated Business Income: If the advertisements are unrelated to the mission of the nonprofit organization, or if the unrelated advertisements exceed a certain threshold of the organization’s total income, the organization may have to pay Unrelated Business Income Tax.
    2. US Postal Service Regulations for Nonprofit Mailing: Nonprofit mail stamps cannot be used for certain types of advertising, including advertisements that promote credit, debit, or charge cards, offers for travel or insurance policies, and mailings that are more than 75% advertising.
There is pending legislation that will affect my nonprofit. Can we talk to our legislators about it?
It depends. §501(c)(3) organizations are prohibited from engaging in political activity. However, you can provide information about pending legislation to your members and let them know how the legislation will affect the organization. Your members can be personally active in promoting or opposing particular legislation, as long as they are acting as individuals and not as your representatives.
Can we reimburse expenses to our Directors?
Yes, for the most part. The Board can approve policy which permits reimbursement of reasonable expenses incurred by Directors, including mileage for attending events as a Board representative, reimbursement of registration or admission fees to workshops, events, etc., and overnight accommodations. Care must be taken to be sure the Director is not receiving undue benefit from the reimbursement. For example, the organization can reimburse the Director for dinner, but not a night of bar-hopping at an event.
Can the Directors be personally liable for liability of the Nonprofit?

  • It depends. Indiana Nonprofit Law protects Directors from most action done in the course of their service as nonprofit directors. However, a Director can become liable for the Nonprofits actions under certain circumstances:

 

    1. If the Director personally and directly injures someone
    2. If the Director personally guarantees a bank loan or business debt on which the organization defaults
    3. If the Director fails to deposit taxes or file any necessary tax returns, or knows that the returns are not being filed and does nothing about it
    4. If the Director does something intentionally fraudulent, illegal, or clearly wrong-headed that causes harm, or
    5. If the Director co-mingles nonprofit and personal funds.

The Nonprofit Toolbox

Once you have your nonprofit up and running, review these free worksheets and resources to ensure you are complying with federal and state nonprofit requirements as well as honoring a nonprofit’s duty to use its resources responsibility.

Disclaimer: While the author of these documents is an attorney, she is not YOUR attorney.  Any materials presented on this website are yours to use, but at your own risk. The author recommends that you (a) review any forms carefully and modify them to suit your particular circumstances and (b) have your attorney review the materials before implementation to be sure that they are legally appropriate for your organization.

 

Further Reading

Are you ready to dive deeper? Below, you’ll find additional reading related to managing a nonprofit organization. 

Boards Can’t Just Abandon an Insolvent Nonprofit

Deceiving Donors and Putting Victims at Risk: a Recipe for Trouble

Embezzlement Happens. It’s What Charities Do Next That Matters

Nonprofits Face Internal Threats

NPR Debacle Raises Questions for All Nonprofits

Our Executive Director Is Embezzling

Report to the Nations, 2014 Global Fraud Study

Transparency Can Keep a Nonprofit Out of Trouble

Additional Resources

 

IRS Exempt Organization Headquarters
Your one-stop-shop for all of the legal information, requirements, and forms for nonprofits.

BoardSource

BoardSource regularly shares new articles and how-to’s for nonprofit organizations on their blog.

Blue Avocado

This is a bi-monthly newsletter that distributes practical know-how from those who lead and serve nonprofit organizations around the country.

Indiana Nonprofit Resource Network

Subscribe to their newsletter to stay up to date about the nonprofit workshop and training opportunities they host across the state.

TechSoup

The technology place for nonprofits, where nonprofits can get discounted computer systems, phones, and software for the organization. The TechSoup forum also has interesting and relevant discussion about the intersection of technology and nonprofits.

GuideStar

GuideStar is the premier resource for information about nonprofits — both yours and others. All 990 Tax Returns end up here eventually for public viewing.

The Chronicle of Philanthropy
The newspaper for the nonprofit world.

The Fundraising Coach
Marc Pitman, the Fundraising Coach, hosts a website where he answers questions, shares advice, and moderates discussion about nonprofit organizations.

Idealist.org
A networking site for nonprofit volunteers, members, staff members, board members, and professionals.

Nonprofit Blog Exchange
An aggregation of everything everyone is writing about nonprofits.