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									Section 2

Controlling
Documents of
Florida Nonprofit
Organizations
The Controlling Documents of Florida Nonprofit Organizations

There is a great deal of paperwork that must be prepared and filed with
state and federal agencies in order for the nonprofit to be recognized as a
legitimate nonprofit with tax exempt status. The nonprofit organization
has many interactions with the IRS as well as state and local agencies.
Various documents must be prepared and filed with the appropriate
agency. The order in which the documents are filed and process for
preparing each document will be explained in this section of the Guide.
Examples of completed documents are attached to this Guide. These
documents and forms are known as the controlling documents of the
organization because they provide the guidelines and identification for
legitimate interaction with the organization and its members as well as
with various federal and state agencies. The controlling documents
typically include:



              The Employer’s Identification Number (IRS Form SS-4)

              The officers of the organization

              The bylaws

              The articles of incorporation (Florida)

              The letter of tax exemption (IRS Form 1023)

              The Consumers Certificate of Exemption (Florida)

This section of the Guide will explain the document and the steps for
successfully completing it. Sample documents are included along with the
IRS and Florida forms.




                                                                              2
                    The Employer’s Identification Number (EIN)

A certain amount of paper work is required to operate as a legitimate nonprofit
organization. These include a Federal Employer's Identification Number and required
Form SS4. This number is equivalent to an individual' s social security number and is
used on the organization' s tax returns, application for letter of exemption and any
correspondence where identification is required. The EIN must be acquired before any
bank account can be opened in the name of the organization. In other words, the EIN
number is the nonprofit organization' s identification number. Nonprofits are not the
only entities that require EINs. All organizations of any type that operate in the United
States require some form of identity and the EIN is for organizations just as the Social
Security Number is for individuals. A copy of the IRS Form SS4 is attached and the
instructions for completing the document.

The EIN is a nine-digit number assigned to corporations, partnerships, sole proprietors,
trusts and other entities for tax filing and reporting purposes. An EIN is for business
activities. Do not use an EIN in place of an individual's social security number. The SS4
form must be filed if you have not been assigned an EIN before and:

   (a) You pay wages to one or more employees including household employees.

   (b) You are required to have an EIN to use on any return, statement, or other
       document, even if you are not an employer.

   (c) You are a withholding agent required to withhold taxes on income.

You are required to have an EIN even if you do not have employees if you are a
nonprofit organization




                                                                                            3
                              Officers of the Organization

Before the nonprofit organization can be incorporated which is the next step in the
process of obtaining a tax-exempt status; officers must be chosen or elected. At least
three officers are needed although it is possible to have more. The minimum number of
officers are president, vice president, and secretary-treasurer which can be one
combined position or two positions.

The first set of officers are typically chosen from among those persons who are founders
of the organization. When the organization is incorporated and tax-exempt status
obtained, the procedures outlined in the bylaws will be followed to select or elect
officers. There are various methods that include nomination and election by members
or directors or the use of a nominating committee to select appropriate candidates for
each office. The members or directors then vote on the nominating committee's slate to
elect officers. Staggered terms may be useful so that all the officers are not all replaced
at one time. Whichever method is used, it should be consistent with what is written in
the bylaws and with parliamentary protocol.

Officers may also be members of the board of directors although until the organization
is incorporated, officers are all that is needed to manage and direct the organization.
The board of directors will be covered in the governance section in this guide.




                                                                                          4
                                         Bylaws

Every organization needs guidelines that are used in the governance and the activities
of the organization. These are the bylaws of the organization and it is the responsibility
of the individuals who started the organization to prepare the bylaws and see that they
are appropriate for the mission and the members. That may sound like a simple task
and it need not be difficult but careful attention to the written rules for the organization
will make a great difference for the first set of officers as well as succeeding generations.

Bylaws should include certain key elements in order to provide an effective guide:
   1. The name of the organization and location of principal office.
   2. The mission or purpose for which it is being founded.
   3. The vision of the organization. The vision is the long-term view of what will be
       the significance of the organization or what changes will occur because of it. This
       is typically a lofty statement as to what the organization aspires to be or aspires
       to make happen.
   4. Number of Directors, how they are selected, length of term, liability, notice of
       meetings, and replacement. This must be consistent with Florida Not for Profit
       Corporation Act.
   5. Officers, how they are selected, and responsibilities. (f) Committees, how they
       are selected, responsibilities.
   6. Members, qualification for membership, dues, voting rights (if any). (h) Annual
       meeting notification.
   7. Review of financial records, how often and by whom.
   8. Amendments to bylaws.
   9. Terms of compensation (if any) to directors
   10. Dissolving organization, terms, and financial obligation.

Most bylaws are written by looking at copies of other organization's bylaws. This is
acceptable and it is a good way to determine how your bylaws should be worded. The
important thing is to include all the elements listed above and to be specific and clear in
the wording. A committee is often assigned the task of drafting the bylaws. It is always
useful to have a professional parliamentarian review the bylaws draft before it is
submitted to the organization for approval. Each part of the bylaws should be crafted
with enough clarity and specificity so that if it is lifted out of the context of the
document the meaning is still clear and unambiguous.

The term bylaw is often used interchangeably with constitution, charter, articles, etc.
These are not the same; in fact, there are vast differences in meaning among these terms.
Oscar Williams (1989) studied the terminology used, and misused, to describing the

                                                                                            5
governance of organizations and the following excerpts from his work clarifies the
meaning of these terms.


             Bylaws are not Charters or Articles of Incorporation,
             Constitutions, Rules of Order or Standing Rules. A charter is
             a certificate granted by a higher authority that allows a
             subordinate organization to operate. Charters are
             sometimes referred to as articles of incorporation or
             corporate charters. The information required in a charter or
             articles of incorporation is not the same as required in
             bylaws.

             Bylaws are not constitutions. It is easier to amend the
             bylaws than it is to amend a constitution. A simple notice
             and majority vote is all that is required to amend a set of
             bylaws whereas a vote greater than a majority is required to
             amend a constitution.

             Bylaws are not the same as rules of order. These are
             typically how the business of a meeting is conducted and
             typically Robert's Rules Of Order Newly Revised or The
             Standard Code Of Parliamentary Procedure) are used for
             situations that are not covered in the bylaws. The adoption
             of one of these guides is known as the parliamentary
             authority of the organization.


             “The average organization seldom finds it necessary to modify or
             amend the rules in its parliamentary authority. However, when
             they do, they adopt what are called special rules of order. These
             rules are supplements to the organization's parliamentary authority
             and supersede rules in the parliamentary authority if they conflict.
             Generally, rules of order pertain to special housekeeping matters
             such as the number and length of speeches, limits on honorariums,
             etc. They seldom are required for the average organizations that
             have adopted an up-to-date parliamentary authority. Rules of order
             may be adopted or amended at any meeting after notice and two-
             thirds vote-usually in the form of resolutions. When adopted, the
             words whereas, therefore, and resolved, are deleted. ...

             Bylaws are different from Standing Rules. Standing rules are those
             rules or resolutions that are of a continuing nature but actually
                                                                                     6
      pertain to matters of administration rather than matters of
      parliamentary procedure. They specify such things as the hour of
      regular meetings, the day of the week that regular meetings will be
      held, and /or the frequency or duration of an activity or event.
      Standing rules may be adopted without notice and passed with a
      majority vote, just as any main motion” (Williams, 1989, p. 3).

Williams, O.M. (1989). Bylaws: The laws {rules) for everyday organizations.
Virginia Institute of Technology: Institute for Leadership and Volunteer
Development, Blacksburg, Virginia. SREV, January 1999
http://sref.info/publications/online




                                                                              7
Articles of Incorporation1

The next step in the process of obtaining tax exempt status is to form a corporation.
Incorporation is a relatively easy process if the previous steps have been taken – the EIN
has been obtained, the bylaws are written and include the necessary language and
items, and the officers have been selected.

The Florida Department of State, Division of Corporations provides a form and a guide
for submitting the required information for incorporation in the State of Florida. A copy
of the form and the instructions are attached to this fact sheet. The State of Florida
forms are revised on occasion and it is important to check the web site
http://www.dos.state.fl.us/doc/cor_form.html for the latest version.

It is necessary o show that the non-profit is incorporated before applying for a letter of
tax exemption from the Internal Revenue Service. The basic information needed on the
form includes:

Article I. The name of the corporation must include a corporate suffix such as
Corporation, Corp., Incorporated, or Inc.: "Company" or "Co." may not be used as a
corporate suffix by a nonprofit corporation.

Article II. The principal place of business and mailing address of the corporation.

Article III. The specific purpose or purposes for which the corporation is organized. A
general statement of "any and all lawful businesses" will not be sufficient.

Article IV. The manner in which the Directors are elected or appointed. (This must be
consistent with the bylaws).

Article V. The name and Florida Street address of the initial registered agent. The
registered agent must sign in the space provided accepting the designation as registered
agent. (This may be a lawyer, accountant, or one of the founding members who is
reliable and responsible,

Article VI. The Incorporator must sign and type or print his/her name in the space
provided. (Instructions for Not for Profit Articles of Incorporation: Florida Department
of State, Division of Corporations: Tallahassee)



1Florida State Department of Revenue. “Articles of Incorporation: Not-for-
Profit<http://www.dos.state.fl.us/doc/pdf/cr2e006.pdf >

                                                                                             8
A transmittal letter format is provided with the articles of incorporation form and the
instructions for submitting them to the Florida Department of State that includes the
schedule of fees for filing, certificate of status and certified copy.

Following is an example of Articles of Incorporation as described in Publication 557 2 of
the Internal Revenue Code.

Note the format from the Florida Department of State follows very closely the sample
for the IRS publication.

Draft A.

Articles of Incorporation of the undersigned, a majority of who are citizens of the
United States, desiring to form a Non-Profit Corporation under the Non-Profit
Corporation Law of <state name>do hereby certify:

First: The name of the Corporation shall be <Name> .

Second: The place in this state where the principal office of the Corporation is to be
located in the City of <City Name>, <County Name>

Third: Said corporation is organized exclusively for charitable, religious, educational,
and scientific purposes, the making of distributions to organizations that qualify as
exempt organizations under section 501 (c) (3) of the Internal Revenue Code, or the
corresponding section of any future federal tax code.

Fourth. The names and addresses of the persons who are the initial trustees of the
corporation are as follows:

Fifth: No part of the net earnings of the corporation shall inure to the benefit of or be
distributable to its members, trustees, officers, or other private persons, except that the
corporation shall be authorized and empowered to pay reasonable compensation for
services rendered and to make payments and distributions in furtherance of the
purposes set forth in Article Third hereof. No substantial part of the activities of the
corporation shall be the carrying on of propaganda, or otherwise attempting to
influence legislation, and the corporation shall not participate in, or intervene in
(including the publishing or distribution of statements) any political campaign on
behalf of or in opposition to any candidate for a public office. Notwithstanding any
other provision of these articles, the corporation shall not carry on any other activities
not permitted to be to be carried on (a) by a corporation exempt from federal income tax

2U.S. Internal Revenue Service. " Publication 557 (Revised 12/2004) Tax-Exempt Status for Y our
Organization ." December 2004 http://www.irs.gov/publications/p557.>
                                                                                                  9
under section 501 (c) (3) of the Internal Revenue Code or the corresponding section of
any future federal tax code, or (b) by a corporation, contributions to which are
deductible under section 170 (c) (2) of the Internal Revenue Code, or the corresponding
section of any future federal tax code.

Sixth. Upon the dissolution of the corporation assets shall be distributed to one or more
exempt purposes within the meaning of section 501 (c) (3) of the Internal Revenue Code,
or the corresponding section of any future federal tax code, or shall be distributed to the
federal government, or to a state or local government, for a public purpose. Any such
assets not so disposed of shall be disposed of by a Court of Competent Jurisdiction of
the county in which the principal office of the corporation is then located, exclusively
for such purposes or to such organization or organizations, as said Court shall
determine, which are organized and operated exclusively for such purposes.

In witness whereof, we have hereunto subscribed our names this <date> day of- 20_.




                                                                                        10
                                  Exemption Requirements

To be tax-exempt as an organization described in IRC Section 501(c)(3) of the Code, an
organization must be organized and operated exclusively for one or more of the
purposes set forth in IRC Section 501(c)(3) and none of the earnings of the organization
may inure to any private shareholder or individual. In addition, it may not attempt to
influence legislation as a substantial part of its activities and it may not participate at all
in campaign activity for or against political candidates.

The organizations described in IRC Section 501(c)(3) are commonly referred to under
the general heading of "charitable organizations." Organizations described in IRC
Section 501(c)(3), other than testing for public safety organizations, are eligible to
receive tax-deductible contributions in accordance with IRC Section 170.

The exempt purposes set forth in IRC Section 501(c)(3) are charitable, religious,
educational, scientific, literary, testing for public safety, fostering national or
international amateur sports competition, and the prevention of cruelty to children or
animals. The term charitable is used in its generally accepted legal sense and includes
relief of the poor, the distressed, or the underprivileged; advancement of rel igion;
advancement of education or science; erection or maintenance of public buildings,
monuments, or works; lessening the burdens 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.

To be organized exclusively for a charitable purpose, the organization must be a
corporation, community chest, fund, or foundation. A charitable trust is a fund or
foundation and will qualify. However, an individual or a partnership will not qualify.
The articles of organization must limit the organization's purposes to one or more of the
exempt purposes set forth in IRC Section 501(c)(3) and must not expressly empower it
to engage, other than as an insubstantial part of its activities, in activities that are not in
furtherance of one or more of those purposes. This requirement may be met if the
purposes stated in the articles of organization are limited in some way by refe rence to
IRC Section 501(c)(3). In addition, assets of an organization must be permanently
dedicated to an exempt purpose. This means that should an organization dissolve, its
assets must be distributed for an exempt purpose described in this chapter, or to the
federal government or to a state or local government for a public purpose. To establish
that an organization's assets will be permanently dedicated to an exempt purpose, the
articles of organization should contain a provision insuring their distribution for an
exempt purpose in the event of dissolution. Although reliance may be placed upon state
                                                                                             11
law to establish permanent dedication of assets for exempt purposes, an organization's
application can be processed by the IRS more rapidly if its articles of organization
include a provision insuring permanent dedication of assets for exempt purposes. For
examples of provisions that meet these requirements, download Publication 557, Tax-
Exempt Status for Your Organization.

An organization will be regarded as "operated exclusively" for one or more exempt
purposes only if it engages primarily in activities which accomplish one or more of the
exempt purposes specified in IRC Section 501(c)(3). An organization will not be so
regarded if more than an insubstantial part of its activities is not in furtherance of an
exempt purpose. For more information concerning types of charitable organizations
and their activities, download Publication 557.

The organization must not be organized or operated for the benefit of private interests,
such as the creator or the creator's family, shareholders of the organization, other
designated individuals, or persons controlled directly or indirectly by such private
interests. No part of the net earnings of an IRC Section 501(c)(3) organization may inure
to the benefit of any private shareholder or individual. A private shareholder or
individual is a person having a personal and private interest in the activities of the
organization. If the organization engages in an excess benefit transaction with a person
having substantial influence over the organization, an excise tax may be imposed on the
person and any managers agreeing to the transaction.

IRC section 501(c)(3) organizations are restricted in the amount of political and
legislative (lobbying) activities they may conduct. For a detailed discussion, see Political
and Lobbying Activities. For further information regarding lobbying activities by
charities, download Lobbying Issues; for more information regarding political activities
of charities, see the FY-2002 CPE topic titled Election Year Issues.



http://www.irs.gov/charities/charitable/article/0,,id=96099,00.html




                                                                                         12
      Putting Together a Complete Do-It-Yourself Exemption Application
      Package3

Forms
    1. Form 1023, Application for Recognition of Exemption Under Section 501(c)(3).
       Make certain that all applicable parts of the form are completed, including any
       schedules required for your type of organization. The form must be signed by an
       authorized person.

    2. Form 8718, User Fee for Exempt Organization Determination Letter Request.
       Attach your check, made out to the IRS, for the applicable fee. Enter "Form 1023"
       and, if possible, your organization’s EIN, in the memo area of the check.

    3. Form 872-C (two copies), if the organization is requesting an "Advance Ruling,"
       signed by an authorized person.

    4. Form SS-4, Application for Employer Identification Number. This form is not
       needed if the organization has already had a federal employer ID number
       assigned.

    5. Form 5768, if the organization has decided to elect to make expenditures to
       influence legislation under section 501(h) of the Internal Revenue Code.

These materials are required; if they are not included, it may delay processing of your
application:

    1. A copy of the Articles of Incorporation; (if your group is
       incorporated...otherwise, submit your constitution, articles of association, or
       other governing document - Bylaws alone are not enough). Articles of
       Incorporation should have the Secretary of State's stamp in the upper right hand
       corner of the first page. The IRS usually asks for three signatures on the



3Deja, R. (2002) .Putting together a complete Do-It-Yourself Exemp tion Application Package. Retrieved
February 2005 from http://members.aol.com/irsform1023/misc/commis.html
                                                                                                         13
       governing instrument of an unincorporated association.

   2. Bylaws. These should be signed and dated.

   3. Actual financial data, including income statement(s), and a recent balance sheet,
      if the organization has had any financial activity.

   4. A two-year projected budget, showing both expected sources of income and
      anticipated expenses. Sometimes the IRS asks for a projected budget even when
      the applicant can provide a full year of actual financial data.

The following materials are often requested by IRS agents reviewing exemption
applications:

Printed materials describing: the history of the organization, its activities, and its plans
for the future. This might include brochures, pamphlets, descriptive literature,
published materials, etc. If you don't have any, it is a good idea to say so somewhere in
the application. If you have some in draft form, go ahead and submit them, if that is all
that is available.

      If the organization publishes a newsletter, sample copies.

      If the group is a membership organization, any materials prepared for members -
       membership application forms, promotional materials, sample membership
       certificates or identification cards, sample copies of member-only publications,
       etc.

      If you have received media coverage: copies of newspaper clippings, transcripts
       of interviews, etc.

      Any documentation you have regarding grant monies. This might include grant
       applications, grant contracts, or correspondence between your organization and
       the grantor organization.

      If appropriate, a "schedule of events," showing where and when your
       organization has held informational or other events during the last 12 months.
       Include approximate attendance.

      If your organization will have a scholarship or grant program:
           o A description of how potential applicants will hear about your program
           o A description of eligibility requirements


                                                                                          14
        o A sample (draft will do) of the application form(s) you will require
            applicants to submit
        o A description of the selection process, including a description of the
            selection committee itself, and how the selection committee is selected
        o Any guidelines prepared for the selection committee's use
        o Conditions placed upon grants or scholarships, including any
            requirements for grade notification, etc. and a description of action that
            will be taken if the terms of the grant are violated
   In the absence of the several kinds of printed materials described in items 1, 2, 3
    and 4 above, it is sometimes useful to have selected letters from your
    correspondence files, such as letters between your organization and potential
    members or board members, letters of appreciation from groups where you have
    made presentations or otherwise helped out, or perhaps even letters from public
    officials commenting on your efforts.
   Any or all of the following:
        o Advertisements
        o Actual samples of items you have for sale
        o Copies of contracts, rental agreements, leases, and loan agreements
            involving the applicant organization
        o Copies of Federal, State or local legislation, if any, regarding the creation
            or continued existence of the organization
        o Resumes of board members and/or key employees, if readily available,
            and/or copies of licenses, certificates, etc.
        o Independent appraisals of assets the organization is renting or purchasing
            from related parties
        o Anything else you may have which would give the IRS insight into your
            organization's mission or operations.




                                                                                     15
      The New Form 1023
      IRS Form 1023, (Revised October, 2004)
Sandy Deja

       Page 1 - Part I - Identification of Applicant 4

...           Page 1 - Part I, Question 2
If you are using the home address of an officer or board member, including that
person's name in the "c/o" line of Form 1023 may prevent mail for your non-profit
organization from going astray.

...           Page 1 - Part I, Question 3
Be sure to use an address where you know a responsible person will be checking the
mail regularly for the next several months. For IRS purposes, a post office box is
acceptable.

...             Page 1 - Part I, Question 4
Your organization is required to have a Federal ID number before you submit your
501(c)(3) application. Apply for this using IRS Form SS-4. Complete the form and then
call the toll free number in the Form SS-4 instructions.

Note: It is never a good idea to use anyone’s personal social security number on a non-
profit’s bank account, even for a short period of time.

...          Page 1 - Part I, Question 9
You are not required to have a website. If you do not have a website, enter "No
website."




4Deja, Sandy. " Form 1023, Part I" Exemption Advisory Services. January 2005
<http://www.form1023help.com/_wsn/page5.html >.
                                                                                        16
...            Page 1 - Part I, Question 10
If gross receipts are expected to be less than $25,000, you can check the "yes" box and
write “GR <$25,000” either on an attachment or in the tiny space available.

       Page 2 - Part II - Questions 1 through 4 5

501(c)(3) status cannot be granted to an individual, a partnership, or a "formless
aggregation of individuals." If you want (c)(3) status for a limited liability company or
other less common type of organization, you should probably seek professional
assistance.

...           Page 2 - Part II - Question 5
Although IRS Form 1023 allows an applicant organization to indicate that it has not yet
adopted bylaws, at one time the IRS website listed lack of Bylaws as a leading reason
for delays in processing 501(c)(3) applications. Many IRS agents prefer not to issue a
determination letter to an organization without Bylaws.

       Page 2 - Part III - Required Provisions 6

Federal tax law requires specific wording, which limits an organization’s purposes and
disposition of assets, to be included in the governing instrument of all 501(c)(3)
organizations.

For incorporated organizations, this wording must appear in the Articles of
Incorporation. Unincorporated entities may include the wording in the Constitu tion,
Articles of Association, or other primary organizing document. Wording in the Bylaws
will not meet this requirement unless the IRS considers your Bylaws to be your group's
primary governing document.

If an organization fails to include the required wording in its original articles, the IRS
will ordinarily accept an amendment. The IRS will want a copy of the amendment
which has been stamped by state authorities.

...            Sample Wording

       This corporation* is organized exclusively for religious, charitable,
       scientific, literary or educational purposes within the meaning of section

5Deja, Sandy. " Form 1023, Part II" Exemption Advisory Services. January 2005
<http://www.form1023help.com/_wsn/page6.html >.

6Deja, Sandy. " Form 1023, Part III" Exemption Advisory Services. January 2005
<http://www.form1023help.com/_wsn/page7.html >
                                                                                             17
       501(c)(3) of the Internal Revenue Code, including, for such purposes, the
       making of distributions to organizations that qualify as exempt
       organizations under section 501(c)(3) of the Internal Revenue Code or the
       corresponding section of any future United States Internal Revenue law.

       Upon the winding up and dissolution of the corporation,* after paying or
       adequately providing for the debts and obligations of the corporation,* the
       remaining assets shall be distributed for one or more exempt purposes
       within the meaning of section 501(c)(3) of the Internal Revenue Code, or
       the corresponding section of any future federal tax code.

(*Unincorporated associations may use "association," "society," "club," or some similar
word in place of "corporation." The underlined words are from section 501(c)(3). Use
one or more of these.)

Form 1023 only asks for these two provisions. In the past, however, many IRS agents
have asked applicants to include the following paragraphs, which appear in IRS
Publication 557.

No part of the net earnings of the corporation* shall inure to the benefit of, or be
distributable to, any of its members, trustees, officers or other private persons, except
that the corporation* shall be authorized to pay reasonable compensation for services
rendered and to make payments and distributions in furtherance of the exempt
purposes.

No substantial part of the activities of the corporation* shall be the carrying on of
propaganda, or otherwise attempting to influence legislation, and the corporation* shall
not participate in, or intervene in (including the publishing or distribution of
statements) any political campaign on behalf of or in opposition to any candidate for
public office.

Notwithstanding any other provision of these articles, the corporation* shall not carry
on any other activities not permitted to be carried on (a) by a corporation exempt from
federal income tax under section 501(c)(3) of the Internal Revenue Code, or the
corresponding section of any future federal tax code, or (b) by a corporation,
contributions to which are deductible under section 170(c)(2) of the Internal Revenue
Code, or the corresponding section of any future federal tax code.




                                                                                            18
       Page 2 - Part IV - Narrative Description of Your Activities 7

1. This is the heart of your application.
2. I like to start with the formula:
[Name of organization] was organized exclusively for religious, charitable, scientific,
literary or educational (choose one or more) purposes. Specifically, [Name of
organization] (and then describe in one sentence what the organization does).

3. If possible, define the problem your organization hopes to solve, using statistics if
available.

4. Try to cover WHO, WHAT, WHEN, WHERE, HOW, etc.

5. Although Form 1023 asks for a description of planned activities, it is premature to
mention activities if your planning has barely begun. If you cannot adequately describe
an activity, the IRS may have no choice but to say you cannot engage in that
activity.You will have a chance to let the IRS know about any new activities your
organization has started every year when you file the annual Form 990 or 990-EZ.You
will have a chance to let the IRS know about any new activities your organization has
started every year when you file the annual Form 990 or 990-EZ.

6. Sometimes it is useful to sprinkle your narrative with a list of other attachments that
describe the activities in greater detail, such as a mission statement, list of goals and
objectives, grant applications, and so forth.

7. The instructions for Form 1023 say that any alternate names used for your
organization should be explained in your Part IV Narrative.

       Pages 2 through 5 - Part V - Compensation of Board & Others 8

On an inch-by-inch basis, questions about compensation and insider transactions take
up about one fourth of the whole Form 1023! There can be no doubt that those who
designed this Form 1023 believed that excessive compensation and abusive insider
transactions are a serious problem in 501(c)(3) organizations. Part V of the Form 1023
appears to have been designed partly to identify possible problem areas and partly to
educate applicants about how to avoid problems.



7 Deja, Sandy. " Form 1023, Part IV" Exemption Advisory Services. January 2005
<http://www.form1023help.com/_wsn/page8.html >.
8 Deja, Sandy. " Form 1023, Part V" Exemption Advisory Services. January 2005

<http://www.form1023help.com/_wsn/page9.html >.
                                                                                           19
...            Page 2 - Part V - Question 1a - Officers/Directors/Trustees
There is no law or regulation setting a minimum number of board members for a
501(c)(3) organization, but the IRS must be convinced that your board will have public
interests at heart, rather than private interests. The unspoken IRS rule of thumb seems
be at least three unrelated people on the board of a 501(c)(3) organization.

...           Page 3 - Part V - Questions 1b and 1c - Employees and Independent
         Contractors Receiving More Than $50,000 per year.
If your organization can afford to pay employees and/or independent contractors more
than $50,000, it may be penny wise and pound foolish to use a free public service
website to prepare your 501(c)(3) application.

...           Page 3 - Part V - Question 2 - Family and Business Relationships
If you have related individuals on the board, such as a husband and wife, the related
persons should hold less than half the voting power. For example, with two related
people, you would need at least three additional, unrelated, people on the board,
making it possible for the husband and wife team to be outvoted. The IRS is not shy
about asking groups to expand their boards if they feel it is necessary.
...
...           Pages 3 and 4 - Part V - Questions 4 and 5 - Best Practices
The IRS has kindly made it clear what provisions they would like 501(c)(3)
organizations to adopt.

...             Page 4 - Part V - Question 6 - Non-fixed Payments
"...the use of a method of compensation based upon a percentage of the income of an
exempt organization can constitute inurement of net earnings...[which can]...destroy the
organization's exemption under section 501(c)(3) of the Code."

Any organization using or planning to use non-fixed methods of payment should seek
professional help for both the compensation arrangements and preparation of the
501(c)(3) application.

...           Pages 4 and 5 - Part V - Questions 7 through 9 - Insider Goods, Services,
         Leases, Contracts, and Loans
Additional questions designed to reveal certain types of possibly abusive insider
transactions.




                                                                                        20
       Page 5 - Part VI - Members and Beneficiaries9
...
...           Page 5 - Part VI - Questions 1a and 1b - Providing Goods/Services to
         Individuals/Organizations
It is important, when answering this question, to make it clear how providing goods,
services or funds contributes to the accomplishment of your non-profit organization's
exempt purpose. How are your operations, or the goods, etc. themselves,
distinguishable from what is available commercially?>

...            Page 5 - Part VI - Question 2 - Limitations
Charitable organizations may limit their services to individuals who are members of a
"charitable class." This term includes persons who are aged, ill, handicapped,
unemployed, or otherwise distressed, children and, of course, the poor, indigent, and
underprivileged. A charity established to benefit a specific person cannot qualify for
501(c)(3) status, even if that person is in need. To have a true "charitable class," the
specific individuals who will benefit cannot be known or selected ahead of time.

       Page 5 - Part VII - Your History 10
       (Including information about Form 1023, Schedule E)
...           Page 5 - Question 1 - Successor organizations
If your organization is a successor to a for-profit entity, you should probably have your
application professionally prepared.

...           Page 5 - Question 2 - 27 Month Rule
New organizations normally have only 27 months to submit a Form 1023, 501(c)(3)
Application, to the IRS.

When a Form 1023 application is filed late, the IRS grants 501(c)(3) status
"prospectively" - that is, effective beginning with the date postmarked on the
application envelope, forward. This can adversely affect both the taxes owed by the
organization, and deductibility by donors.

An organization that missed the 27-month deadline is required to Complete Form 1023,
Schedule E.

       Page 20 - Schedule E - Questions 1 through 4



9 Deja, Sandy. " Form 1023, Part 5" Exemption Advisory Services. February 2005
<http://www.form1023help.com/_wsn/page9.html >.
10 Deja, Sandy. " Form 1023, Part VII" Exemption Advisory Services. February 2005

<http://www.form1023help.com/_wsn/page11.html >.
                                                                                           21
The 27 Month Rule is waived for churches, small publicly supported organizations,
subordinate organizations covered by a Group Ruling, (more) and organizations
created before October, 1969.

...           Page 20 - Schedule E - Question 5 - Extension
An organization that missed the 27 month deadline, and needs 501(c)(3) status for prior
periods, should check the yes box in Question 5 and prepare the statement that shows
that you acted reasonably and in good faith and that granting the extension will not
prejudice the interests of the government. The instructions to Form 1023 provide some
assistance, but you might want to seek professional help.

...           Page 20 - Schedule E - Questions 6 and 7 - Projected Revenue
If you do not want to apply for an extension, you may be required to provide a
projected budget here.

...            Page 20 - Schedule E - Question 8 - 501(c)(4) Status
An organization that missed the 27-month deadline, and does not need retroactive
501(c)(3) status, can usually get 501(c)(4) status for prior periods.
http://www.form1023help.com/_wsn/page11.html January, 2005.
        Form 1023, Part IX



...            Pages 9 and 10 - Financial Statements 11
I recommend you include the following financial information with your 501(c)(3)
application. (This list differs a bit from the list that appears in the Form 1023
instructions, but the aim is the same. You want to provide financial data that completely
covers all past periods for which your organization is seeking tax-exempt status, as well
as projecting two years or more into the future. There should be no gaps in your
financial information.):

     1. Statements showing actual revenue and expenditures for every completed year
        your organization has been in existence, and for which your organization is
        seeking tax exempt status. You may put two or three years in several columns on
        one sheet if that is convenient. If your group has been in existence less than one
        year, skip this.

     2. One statement showing actual revenue and expenditures for the current year.
        This statement will probably not cover a full year. Start with the beginning date


11Deja, Sandy. " Form 1023, Part IX" Exemption Advisory Services, January 2005
<http://www.form1023help.com/_wsn/page13.html >.
                                                                                        22
      of your organization's fiscal year and end on the last day of a month near the
      time you will submit the 501(c)(3) application.

   3. One statement projecting revenue and expenditures for the balance of the current
      year. Start immediately after the statement in #2 above ends. End on the last day
      of your group's normal accounting period.

   4. One statement projecting revenue and expenditures for at least two years
      following the statement you prepared for #3 above. This is sometimes called a
      budget. The time period covered will be years that have not yet started.

   5. A balance sheet showing everything that the organization owns and owes as of a
      recent date. The IRS prefers that you use the last day of a month for your balance
      sheet. If possible, make your balance sheet correspond to the ending date you
      have used for current year revenue and expenses (see #2 above). Do not provide
      projected balance sheets. Always label your financial statements clearly! The IRS
      needs to know exactly what period of time is covered.

The following pages contain simple worksheets you can use for actual financial data
and a projected budget.
      Statement of Revenue and Expenditures

               ...   Period covered from __________ to __________

         ...             Support and Revenue

         Contributions
         Dues
         Grants
         Fees for Services
         Fundraisers
         Interest
         Rent
         Sales
         Special Events
         Unrelated Business Income
         Other ______

                                           ...          Totals




                                                                                       23
                                      ...                   Expenses

         Accounting/Bookkeeping
         Dues & Subscriptions
         Contributions Paid Out
         Fundraising Expenses
         Insurance
         IRS User Fee
         Legal Fees
         Phone
         Postage
         Printing
         Rent
         Salaries
         Tax & License
         Other ______

                                             ...              Totals

                     ...            Net Revenue Over Expense


                             Projected Budget Worksheet
      A very simple worksheet, which can be used to draw up a projected budget:

...            Support and    ...             First   ...              ...    Second
               Revenue                      Year                             Year

Contributions
Dues
Grants
Fees for Services
Fundraisers
Interest
Rent
Sales
Special Events

Unrelated Business Income

Other ______
                                                                                  24
         ...          Totals            ...          ...                       ...

   ...           Expenses         ...                ...                 ...

Accounting/Bookkeeping

Dues & Subscriptions

Contributions Paid Out

Fundraising Expenses

Insurance
IRS User Fee
Legal Fees
Phone
Postage

Printing
Rent
Salaries
Tax & License

Other
         ...           Totals           ...          ...                       ...
 ...            Net Revenue             ...          ...                       ...
                Over Expense




You are not required to use the format provided on pages 9 and 10 of Form 1023. If your
organization has budget forms or treasurer’s reports that it already uses, you may use
them, as long as the information provided includes both income and expenses, and is
"classified," that is, broken down by types of income and expense. Simply write "SEE
ATTACHED" on pages 9 and 10 and insert your organization’s financial forms between
pages 9 and 10 of Form 1023.

Many organizations feel it is too difficult to predict what the financial future holds. The
IRS will, of course, require a projected budget even if you find it difficult to prepare.


                                                                                         25
Some organizations find it works best to start with the goals the group wants to
accomplish, estimating goal by goal what the planned activities will cost, and then
creating a strategy to come up with the necessary income. For other organizations, it
makes more sense to start with projected income when budgeting. For instance, a
membership group can estimate the number of people who might join, as well as the
amount of dues folks might be willing to pay.
January, 2005. http://www.form1023help.com/_wsn/page13.html

       Form 1023, Part X 12



...           Pages 10 and 11 - Part X - Public Charity Status
Current tax law divides all 501(c)(3) organizations into two broad subcategories - public
charities and private foundations. When you file a 501(c)(3) application, you are
actually asking the IRS to decide not only whether your group qualifies as a 501(c)(3),
but also whether it is publicly supported.
...
...           Page 10 - Part X - Question 1 - Are you a private foundation?
A private foundation is an organization that receives most of its support from a limited
number of sources, such as one family or one corporation.

It is generally less favorable to be a 501(c)(3) private foundation because these
organizations must pay a 1% or 2% tax on interest, dividends, capital gains, and other
investment income, and are subject to a wide variety of restrictions with respect to how
they invest their assets and conduct their operations. Percentage limits placed on the
amount donors can deduct on their individual income tax returns are also lower.

I am not including detailed coverage of private foundations in this website because I
have seen too many small groups get themselves in trouble with the "wide variety of
restrictions" mentioned above. If you are forming this type of group, I recommend you
sit down with a professional who can alert you to the potential pitfalls as well as
helping you prepare your 501(c)(3) application.

...            Page 10 - Part X - Questions 2 through 4 - Private Operating Foundation
Private Operating Foundations are outside the scope of this website. If you are forming
this type of group, you should seek professional help in preparing your 501(c)(3)
application.



12Deja, Sandy. " Form 1023, Part X" Exemption Advisory Services, January 2005
<http://www.form1023help.com/_wsn/page14.html >.
                                                                                        26
...            Page 10 - Part X - Question 5 - Public Charity
Some organizations are public charities solely because of the activities they carry on
(boxes 5a through 5f on page 10 and 11 of Form 1023):
- Churches
- Schools
- Hospitals
- Supporting Organizations
- Testing for Public Safety Organizations

Other organizations are public charities because they receive at least one third of their
support from the general public. Organizations whose public support is mostly in the
form of gifts or contributions would check box g on page 11 of Form 1023; organizations
whose public support is mostly in the form of payments for goods or services, such as
admissions to cultural events, fees for therapy, or payments at fundraising events,
would check box h. Many groups have a mixture of types of income. It is perfectly OK
to simply check box i and let the IRS decide for you.
...
...            Page 10 - Part X - Question 6 - Advance Ruling
Organizations that are public charities because they receive at least one third of their
support from the general public must complete a tax year of at least eight months before
they can receive a permanent public charity determination from the IRS. Because of this,
many new organizations receive a temporary or "advance" ruling rather than a
permanent, "definitive," ruling.

With an Advance Ruling, the IRS rules that an organization is likely to be publicly
supported, and agrees to treat the organization as a public charity for an initial five year
period. Because five years is longer than the normal IRS statute of limitations,
organizations receiving an Advance Ruling must complete the Consent on page 11 of
Form 1023 to extend the statute of limitations to cover the additional years.

At the end of an Advance Ruling the IRS will give the organization an opportunity to
show that it is, in fact, publicly supported. With an Advance Ruling, the 501(c)(3) status
of the organization is not in question. It is only foundation status, a sort of subcategory
under 501(c)(3), that is still up in the air.
...            An organization that...
1. Has closed at least one tax year which was at least eight full months long, and
2. Meets one of the one third tests

...can receive a permanent or "definitive" ruling that it is a public charity. If this applies
to your group, check box 6b indicating you are requesting a definitive ruling, and
provide the additional information requested.


                                                                                             27
...          Page 10 - Part X - Question 7 - Unusual Grants
Read the Form 1023 Instructions or the definition of unusual grants given in IRS
Publication 557 before deciding that any amounts received are unusual grants.
http://www.form1023help.com/_wsn/page14.html January


       Page 12 - Part XI - User Fee Information 13

The Internal Revenue Service has charged a non-refundable processing fee for
exemption applications since 1987.

There is currently a two-tier fee schedule. Organizations whose gross receipts have
averaged, or will average, not more than $10,000 per year pay $150. Larger
organizations pay $500.

The IRS does not currently have any follow-up procedures to see if the gross receipts
prediction you made for your User Fee was accurate. From time to time, however, an
agent will question an applicant that has paid the lower fee. Be sure that your gross
receipts projections are consistent with your description of your planned activities.

Some experts feel your application will be handled more promptly if you pay the User
Fee with a cashier's check or money order. Others disagree. If you pay with a personal
check, watch your bank statements carefully to make sure the IRS does, in fact, cash
your check for the User Fee. If they don't, your application may have gotten lost in the
mail.

A new IRS Revenue Procedure announcing the fees comes out each January; if you are
submitting your application late in the year, there may be some benefit to getting it in
before January 1st.

http://www.form1023help.com/_wsn/page15.html January
2005http://www.form1023help.com/_wsn/page14.htmlhttp://www.form1023help.co
m/_wsn/page14.html




13Deja, Sandy. " Form 1023, Part XI" Exemption Advisory Services, January 2005
<http://www.form1023help.com/_wsn/page15.html >.
                                                                                        28
      Top Ten Reasons for Delays in Processing Exempt Organization
      Applications14

Number 10. Is there enough financial data? See the instructions to Form 1023 or Form
1024 to determine how much information you need to provide, based on how long your
organization has existed.

Number 9. In what month does the annual accounting period end? Applications should
indicate the end of their fiscal year. It is a good idea to check for consistency. Does the
fiscal year ending date stated on the application agree with the fiscal year ending date
stated in the by-laws, on the financial statements, and on any prior returns filed?

Number 8. Did you provide the required information on the principal officers and
board of directors? Applications should list the following information concerning the
governing officials:
    Names,
    Addresses,
    Titles and positions,
    Annual compensation.


Number 7. Did you provide enough information on the activities to show us how your
exempt purpose will be achieved? Please don't restate your purpose, but explain the
specific activities you will carry on to achieve that purpose. You should consider a
"who, what, when, where and why" approach. You should explain past, present, and
planned activities. If you haven't started an activity yet, develop your plans well
enough that we can have a clear understanding of how it will operate. You are not
required to describe activities that are merely speculative at this time.

Number 6. Did you complete all required schedules? You should check the line items
on the financial statements. Some lines require supporting schedules.

Number 5. Did you complete all required pages? To make a determination, the
information contained on the pages and schedules of Form 1023 and Form 1024 is
necessary. On Form 1023, there are various schedules and pages that must be filled out
for churches, schools, hospitals, private operating foundations, scholarships, supporting
organizations, and certain other organizations.

Number 4. Did a director, trustee, principal officer, or other authorized individual in a
similar capacity sign the Form 1023 or Form 1024? Generally, a principal officer is the

 U.S. Internal Revenue Service. " Top Ten R easons for Delays in Processing Exempt Organization
14

Applications." January 2005. <http://www.irs.gov/charities/article/0,,id=96361,00.html>.
                                                                                                  29
president, vice president, secretary, or treasurer. The person signing the application
must indicate his or her title or other authority to sign. A taxpayer's representative may
not sign the application. Neither a stamped signature nor a faxed signature is
permitted.

Number 3. If you have adopted by-laws, did you submit a copy? You need to provide a
copy of your by-laws, code of regulations, or any other document that sets out the
organization's rules of operation, but only if adopted.

Number 2. Did you attach a complete copy of your organizing document and all
amendments? If the applicant is a corporation, this would be a copy of the articles of
incorporation that shows it has been filed with and approved by the state. If the
applicant is not incorporated, it should have a similar organizing document. This could
be a constitution, articles of association, or by-laws. Whatever the document is called, it
must at the minimum state: the legal name, the purposes, and the date of adoption. The
document should be signed by at least two officers of the organization. A trust
document must be signed by the trustees and show the date of formation. For section
501(c)(3) applicants, the organizing document must comply with the organizational
test for exemption.

The Number 1 reason for delays in processing exempt organization applications is . . .
INCORRECT OR NO USER FEE!

See our user fee page for more information.

Now that you know the ten most common pitfalls in the EO application process, we
hope you can avoid them. If your application is completed correctly initially, and sent
with all required documents and schedules, there is a good chance your organization
could be recognized as exempt with no further contact. If there is contact, the agent can
address the technical issues that need to be resolved without taking up your time trying
to just get a complete application

Instructions for Form 1023 (Updated October 2004)
http://www.irs.gov/instructions/i1023/index.html

...          Tax-Exempt Organizations Tax Kit
 http://www.irs.gov/charities/article/0,,id=96774,00.html




                                                                                         30
      Frequently Asked Questions on Tax-exempt Status15
http://members.aol.com/irsform1023/misc/faq.html

How do we get a tax ID number?

Use IRS Form SS-4 to obtain an EIN (Employer Identification Number), an identifying
number for all Federal tax purposes, whether you plan to have employees or not. You
can apply for an EIN separately if you need one immediately, for banking, for instance,
or attach a completed Form SS-4 to your application for tax-exempt status. NOTE: This
number does not, in any way, indicate whether or not your organization is exempt from
tax!

What form do we file to get our tax-exempt status?

Organizations seeking 501(c)(3) status (generally, charitable, educational, scientific and
religious organizations) file IRS Form 1023. Other groups, such as social welfare
organizations, labor unions, professional associations, or social clubs use form 1024.

How much will it cost to get our tax-exempt status?

The IRS has charged a non-refundable processing fee for exemption applications since
1987. There is currently a two-tier fee schedule. Organizations whose gross receipts
have averaged, or will average, not more than $10,000 per year pay $150. Larger
organizations pay $500. A new IRS Revenue Procedure announcing the fees comes out
each January; if you are submitting your application late in the year, there may be some
benefit to getting it in before January 1st.
[Other costs you might incur when setting up a new non-profit organization include
incorporation, charitable solicitation and other registration fees to state and local
authorities, and fees to have your articles of incorporation, bylaws and exemption
application professionally prepared.]

How long will it take to get our tax-exempt status?

The IRS is currently (3/99) saying that it takes an average of 120 days to process an
application. Roughly a quarter to a third of the applications they receive do not require
further development, and are processed in six to ten weeks. The balance of the
applications they receive take closer to five or six months - hence the "average" 120
days.



15Deja, Sandy. " Frequen tly Asked Questions on Tax-exempt Status." Exemption Advisory Services.
October 2002 <http://members.aol.com/irsform1023/misc/faq.html>.
                                                                                                   31
What is the deadline for applying for tax-exempt status?

A new charitable, educational, scientific or religious organization must submit its
application to the IRS by the end of the 27th month after the end of the month in which
the organization was created. There is no similar deadline for non 501(c)(3) groups.

Can we ask for donations before we get our tax-exempt status?

If your charitable, educational, scientific or religious organization submits its
application to the IRS by the deadline described above and is approved, the "effective
date" of your group’s tax-exempt status will be the day it was originally created. This
means that contributions that your organization received after incorporation, but before
the IRS issued your exemption letter will be deductible.

Because there is, of course, a chance that your application for tax-exempt status will be
turned down, it is only fair to let your potential donors know that you do not actually
have IRS approval yet. "501(c)(3) application pending."

What are the chances of having our exemption application approved?

Recent statistics show the IRS approving tax-exempt status for a little more than 70% of
the applications they receive, and denying tax-exempt status for less than 1% of the
applications they receive. The other 29% or so are mostly organizations who become
discouraged by the numerous questions the IRS asks, and give up before they actually
get a ruling.

Does a small organization really need to apply?

Tax law does not require a 501(c)(3) application when an organization normally has
gross receipts less than $5,000 per year. A small organization may want to apply
anyway to save donors possible inconvenience in an audit, to be able to apply for
grants, or to obtain a bulk-mailing permit. An organization which no longer qualifies
for this low gross receipts exception must submit its application to the IRS within 90
days of the end of the year in which average gross receipts exceed $5,000.

Can we pay salaries to our board members? Can we rent a building owned by a board
member, or purchase equipment from a board member?

Tax law always permits the payment of reasonable compensation for goods or services
actually rendered. If the IRS finds that amounts received by insiders are unreasonably
high, however, they can fine both the insider who received the payment, and the board


                                                                                         32
members who approved the payment. In extreme cases, they can take away the
organization’s tax-exempt status.
It is a good idea, therefore, to fully document the board’s decision-making process
when any kind of payment will be made to an insider. Place copies of all relevant
information (salary surveys, job description, résumés, prior salary history, real estate
appraisals, rent "comparables") in the minutes, and never let a board member vote on
his or her own compensation, or on the compensation of anyone related to him or her.




                                                                                           33
       What Questions Does the IRS Ask Most Frequently?16

     1. Will any officers, directors, members, or their relatives, receive a salary,
        reimbursement for expenses, or any other form of payment from your
        organization? If so, explain fully, and include the recipients' names, their duties
        and the number of hours each week that they will devote to such duties. State the
        amount of compensation each will receive and the basis for arriving at the
        amounts of such payments.

     2. Please supply a chronology and complete description of all activities of your
        organization since the date of incorporation, as well as those activities planned
        for the next 12 months.

     3. Please supply copies of literature regarding your organization including, but not
        limited to, newsletters, newspaper articles, brochures, pamphlets, solicitations
        for donations, etc.

     4. Will anyone use your facility other than for the purpose of directly carrying out
        your work? Will any of your directors or employees reside at your facility? If so,
        explain fully. Is the owner of the facility related to you in any way other than as
        landlord?

     5. Will you engage in any publishing activities of any nature? (printing, publication
        or distribution of your own material or that printed or published by others and
        distributed by you)? If "yes" submit the following: (followed by a detailed list).

     6. Will you engage in the sale of merchandise? If "yes" submit the following:
        (followed by a detailed list).

     7. Will you engage in the sale of services? If "yes" submit the following: (followed
        by a detailed list).

     8. Will you engage in lectures, or seminars open to the public or to members? If
        "yes" submit the following: (followed by a detailed list).




16Deja, Sandy. "What Questions Does The IRS Ask Most Frequently?" Exemption Advisory Services.
October 2002 < http://members.aol.com/irsform1023/irspr/irsfaq.htm l >.
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