Organizing a Nonprofit Corporation & Obtaining Section 501(c)(3) Status
by William Peck, Attorney, Boardman, Suhr, Curry & Field LLP, Madison As explained in the previous article, The Case for Organization, by Henry Gempeler & Andrew Nelson, there are a number of advantages to organizing a charter school as a nonprofit corporation that is recognized by the IRS as tax-exempt under Section 501(c)(3) of the Internal Revenue Code. This article discusses the following five steps for creating a Wisconsin nonprofit, nonstock corporation and for obtaining taxexempt classifications 1: A. B. C. D. E. A. form a nonstock, nonprofit corporation, obtain federal and state employer identification numbers, apply for Section 501(c)(3) tax-exempt status, apply for Wisconsin sales and property tax exemptions, and register for charitable solicitation.
Formation of a Wisconsin Nonstock, Nonprofit Corporation.
Organizing a Wisconsin nonstock, nonprofit corporation under Wisconsin Statutes chapter 181 requires filing articles of incorporation with the Wisconsin Department of Financial Institutions, appointing the initial board of directors, adopting bylaws, appointing officers, and adopting additional organizational resolutions. Before creating the organizational documents, however, charter school organizers must determine the governance structure.
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The discussion in this article is a general overview for informational purposes, and does not discuss in detail all requirements and options available in forming a new nonprofit, tax-exempt organization. It is recommended that charter school organizers obtain legal advice and assistance in the preparation and/or review of the nonprofit organizational documents and tax-exempt status applications.
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Governance Structure.
A nonprofit corporation must have directors and officers, and it may have voting members. A nonprofit corporation will also have at least one incorporator until the initial directors are appointed. Directors. All corporate powers of a nonprofit corporation are exercised by or under the authority of the board of directors, and the management of the corporation’s affairs is under the direction of the board. A nonprofit corporation must have at least 3 directors. The initial directors may be listed in the articles of incorporation, or they may be appointed by resolution of the incorporator(s). The board has the power to appoint the officers. One of the most significant governance decisions is whether the nonprofit ’s directors will be elected by voting members, or whether the nonprofit will have no voting members in which case the board will be self-electing. Members. A nonprofit corporation can be formed with or without members. If a nonprofit corporation has members, the members will have the power to elect the directors and approve significant corporate actions such as amending the articles and bylaws, and dissolving the corporation. Members also have the power to commence a legal proceeding on behalf of the corporation to enforce the corporation’s rights and claims. Members may be individuals, government bodies, corporations or any other types of entities. A nonprofit could be formed with a single member. If a corporation has members, the members will indirectly control the corporation by virtue of their power to elect the directors, similar to the indirect control held by shareholders of a for-profit corporation. If the corporation is set up without members, the board will be self-electing. In many nonprofits, members are required to pay annual dues, which may provide a source of revenue for the nonprofit. By default, a nonprofit will have no members unless the articles of incorporation provides that the nonprofit has members. Officers. By default, a nonprofit corporation must have a president, treasurer and secretary, but it may use alternate titles (e.g., CEO, CFO, COO), and it may have additional officers, such as vice presidents and assistant officers. A person may hold more than one office. Officer positions may be held by directors and or by employees of the nonprofit. Incorporator(s). The incorporator is the person who signs and files the nonprofit articles of incorporation with the Wisconsin Department of Financial Institutions. A nonprofit may have one or more incorporators, who may be individuals or any types of entities. Typically, the incorporators are the founders, the individuals who will serve as the initial directors, or the person who prepares the articles of incorporation. The incorporators may function as the board of directors until the initial board is appointed, either in the articles of incorporation or by a resolution of the incorporators.
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Articles of Incorporation.
A nonprofit corporation is created as a new legal entity upon filing the articles of incorporation with the Wisconsin Department of Financial Institutions and paying the filing fee (currently $35, plus $25 for expedited filing). With expedited filing, the effective date of the articles will be the date received by DFI, otherwise, the effective date will be the date that the articles are processed by DFI. As indicated on the DFI form of articles (available on the DFI website www.wdfi.org), there are very few provisions that must be included in the articles, although other provisions may be included if desired. In order to qualify as tax-exempt under Section 501(c)(3), the articles must include purposes and dissolution clauses, such as the following provisions adapted from the sample provisions in the instructions to IRS Form 1023: Article __. Purposes. The corporation is organized and shall be operated exclusively for charitable and educational purposes, within the meaning of Section 501(c)(3) of the Internal Revenue Code or the corresponding provisions of any future federal tax code (the “Code”). Article __. Dissolution. Upon the dissolution of the corporation, the corporation’s assets shall be distributed for one or more exempt purposes within the meaning of Section 501(c)(3) of the Code, or shall be distributed for a public purpose to the federal government, or to a state or local government body. 3. Bylaws. The bylaws set forth the operating rules, procedures, rights and duties of the members (if any), directors, and officers. The member provisions may include qualification, eligibility, admission, removal, dues and assessments, and member meetings. The director provisions may include number of directors, qualifications, election of directors, director terms, removal, filling vacancies, and director meetings. The officer provisions may include the required offices, appointment of officers, officer terms, removal, filling vacancies, and the duties of each office. The member and director meeting provisions will discuss regular and special meetings, notice, quorum, and voting requirements. In the absence of bylaws provisions, Wisconsin Statutes chapter 181 provides default rules that will govern a Wisconsin nonprofit. Many of the default rules may be modified in the articles or bylaws. 4. Organizational Resolutions. On or after the effective date of filing the articles with DFI, the incorporators or directors will adopt the organizational resolutions to complete the organization of the corporation, including adopting the bylaws, appointing the officers, authorizing officers to open bank accounts, and selecting the fiscal year end. The organizational resolutions may be adopted at a meeting as reflected in minutes, or by a written consent signed by all incorporators or directors.
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Employer Identification and Account Numbers.
1. Federal Employer Identification Number. A nonprofit must apply for a federal employer identification number (EIN) by filing IRS Form SS-4 with the IRS, or by applying online on the IRS website (www.irs.gov). 2. Wisconsin Business Tax Registration. If a nonprofit will pay employee wages and/or if it will sell goods or services requiring a sales tax sellers permit, the nonprofit will have to apply for a Wisconsin business tax registration (BTR) number by filing an Application for Business Tax Registration with the Wisconsin Department of Revenue (DOR), or by applying online on the DOR website (www.dor.state.wi.us), and paying the registration fee (currently $20). 3. Wisconsin Unemployment Insurance Registration. A nonprofit that pays employee wages must also obtain a Wisconsin unemployment insurance (UI) account number by completing the online Wisconsin Employer Registration on the Wisconsin Department of Workforce Development website (www.dwd.state.wi.us/wiser/). A Section 501(c)(3) nonprofit may elect reimbursement financing, in which case the nonprofit would not pay the quarterly UI taxes, but it would report employee wages and it would reimburse the State for any UI benefits paid to former employees. Reimbursement financing also requires that the nonprofit furnish the State with a surety bond or other form of assurance in an amount equal to 4% of the nonprofit’s annual taxable wages. C. Section 501(c)(3) Tax Exempt Status.
In order to be classified as tax-exempt under Section 501(c)(3), a nonprofit must file IRS Form 1023 with the IRS and pay the filing fee (currently $750, or $300 for organizations that normally will not receive more than $10,000 in average annual gross receipts). Depending on the facts and circumstances, it may take 6 months (or longer) for the IRS to process Form 1023. If the IRS approves the application, it will issue a determination letter confirming the applicant’s Section 501(c)(3) classification. If a nonprofit files Form 1023 with the IRS within 27 months of the effective date of incorporation, the nonprofit’s Section 501(c)(3) status will be retroactive to the date of incorporation, in which case any charitable donations received by the nonprofit between the incorporation date and the date of the IRS determination letter will qualify for the charitable deduction. The IRS has developed a guidesheet and reference guide that provides guidance to IRS examiners who process charter school applications, with a particular focus on charter schools that are managed by for-profit management companies. Copies of the guidesheet and reference guide are available on the IRS website (http://www.irs.gov/charities/article/0,,id=174946,00.html). Section 501(c)(3) classification exempts a nonprofit from federal income taxes. In addition, a nonprofit that obtains classification as a Section 501(c)(3) organization is
automatically exempt from Wisconsin franchise tax, without any need to apply for tax exemption with the Wisconsin Department of Revenue. Notwithstanding the general federal and State tax exemptions, a Section 501(c)(3) nonprofit that has “unrelated business income” will be subject to federal and Wisconsin tax with respect to such income. For more information on unrelated business income, see IRS Publication 598, which is available on the IRS website (www.irs.gov). D. Wisconsin Sales and Property Tax Exemptions.
1. Sales Tax Exemption. A Section 501(c)(3) nonprofit may qualify for exemption from Wisconsin sales tax with respect to purchases by the nonprofit. After receiving a Section 501(c)(3) determination letter from the IRS, a nonprofit should file Form S-103 (Application For Wisconsin Sales And Use Tax Certificate Of Exempt Status) with the Wisconsin Department of Revenue (DOR). Upon approving the application, the DOR will issue a Certificate of Exempt Status (CES) with a CES number. The nonprofit will furnish the vendor with a copy of its CES at the time of purchase in order to qualify for exemption from sales tax with respect to such purchase. Section 501(c)(3) nonprofits also may qualify for certain limited nonprofit exemptions with respect to the nonprofit’s sales of goods and services. For more information regarding Wisconsin nonprofit sales tax exemptions, see Wisconsin Department of Revenue Publication 206, which is available on the DOR website (www.dor.state.wi.us). 2. Property Tax Exemption. Up to 10 acres of real estate owned and used by a school may qualify for exemption from Wisconsin property taxes. In order to qualify, the school must file Wisconsin Department of Revenue Form P-230 with the local assessor’s office by March 1 in order to qualify for exemption with respect to the current assessment year. for more information, see chapter 22 of the Wisconsin Property Assessment Manual. E. Charitable Solicitation Registration.
A Section 501(c)(3) nonprofit that solicits charitable contributions in Wisconsin and receives annual contributions in excess of $5,000 must register with the Wisconsin Department of Regulation and Licensing (DRL) by filing Form 296 (Charitable Organization Registration Statement) and paying the registration fee (currently $15). An educational institution is exempt from registration if it solicits contributions only from its students and their families, alumni, faculty, trustees, corporations, and foundations. Additional information is available on the charitable organization section of the DRL website (http://drl.wi.gov/prof/char/def.htm).