Legal Aspects of Non-Profit Organizations

Introduction |  Why Incorporation? |  Secretaries of State | Achieving 501(c)(3) | Maintaining a Legal Entity |  

Introduction

This chapter of the Resource Manual focuses on the creation of a corporation for a non-profit organization. Non-profit corporations are organized for religious, educational, charitable or public service purposes. MAEOPP and its Chapters fit into the non-profit category. Topics addressed in this chapter are: how to create a corporation, establishing and maintaining IRS 501(c) 3 status, and where to access state-specific laws. It should be noted that a comprehensive analysis of incorporation laws for any one state is beyond the scope of this chapter. The following information is meant to be a starting point for any organization wishing to create a non-profit corporation.

Why Incorporation?  

Below is a list of the different types of businesses and organizations, each a legal entity with advantages and disadvantages.

1. Sole Proprietorship- business owned by one person.

2. Partnership - business enterprise entered into for profit, which is owned by more than one person, each of whom is a "partner." A partnership may be created by a formal written agreement, or may be based on such informal contracts as an oral agreement or even a handshake.

3.  Corporation - an organization formed with state government approval to act as an artificial person to carry on business or other activities. A corporation can sue or be sued, and - unless it is non-profit - can issue shares of stock to raise funds with which to start a business or increase its capital. 

There are several reasons a state or regional chapter of TRIO program personnel should form a corporation. One benefit is that a corporation's liability for damages or debts is limited to its assets, so the shareholders and officers are protected from personal claims, unless they commit fraud. Even with this benefit it is advisable that an organization purchase a Board of Directors’ insurance policy, to further protect from liability claims.

To create a corporation the articles of incorporation must be filed with the Secretary of State of the incorporating state and must include such information as the name of the responsible party or parties (incorporators and agent for acceptance of service), the amount of stock (if any) the corporation will be authorized to issue, and its purpose. In some states the purpose may be a general statement of any purpose allowed by law, while other states require greater specificity. Additionally, some states may require a copy of the organization’s constitution and bylaws in the application for incorporation. A state’s laws of incorporation may further require the constitution and/or bylaws include: a minimum number of Board members, a basic Board configuration, or a provision for disposal of property on dissolution of the association.

Following is a list of web links to the Secretaries of State for each of the states in MAEOPP. Specific information on incorporation can be found at these offices:

In addition to issues of liability, incorporation of a non-profit organization is beneficial in that it makes the organization eligible for exemptions under Section 501(c)(3) of the Internal Revenue Code, giving the organization what is commonly know as 501(c)(3) status.

Achieving 501(c)(3) Status

Although an organization can gain 501(c)(3) status without being a corporation, it is nonetheless advisable for an organization to become a corporation for matters of liability for the Board of Directors. Internal Revenue Service form 1023 is the Application for Recognition of Exemption. It can be found on the IRS web site at: http://ftp.fedworld.gov/pub/irs-pdf/k1023.pdf. A copy of the Articles of Incorporation or the association’s Constitution must be included with the application.

Having 501(c)(3) status affords a number of benefits to the association. The association/corporation gets public recognition of tax-exempt status, exemption from certain state taxes, exemption from certain federal excise taxes, non-profit mailing privileges, and, perhaps most notably, advance assurance to donors of deductibility of contributions.

Maintaining a Legal Entity

In order to retain both incorporation and 501(c)(3) status, documents must be filed annually with both the IRS and the Secretary of State for the state in which the organization is incorporated. IRS form 990 is the Return of Organization Exempt from Income Tax. Each state then has its own filing requirements regarding incorporation status and state tax exemption, if applicable. Check with the individual Secretary of State’s office for specific requirements.

Creating and maintaining a corporation with tax-exempt status can seem a complicated task. However, with careful planning and the assistance of an attorney or accountant who is familiar with non-profit entities, an organization can establish a regular routine of record collection and reporting to satisfy IRS and state government requirements. This will help ensure continuity of administration within an organization that has regularly scheduled turnover of its Board members.