RDVP Seminar: Scott Smith (2/9/2005)

Scott Smith is an attorney who handles corporate work, and has helped past fellows from the RDVP with the incorporation and application for tax-exempt status for organizations growing out of RDVP projects. In a conference call he explained:

Different types of non-profits

• Unincorporated Association (people working together, but not a legal entity)
  
• Charitable Trust (assets held for public benefit, such as a land trust)
  
• Non-profit corporations, further broken into
  
  
  • Public Benefit Corp. (with a charitable purpose, restricts how assets can be distributed to members, but allows tax deductions for donations)
    
  • Mutual Benefit Corp. (for benefit of members, like a trade association). On dissolution, assets may be distributed to members. Income may be tax exempt, but donations are not.
    
  • Religious Organization

Incorporation Process

1. File articles with the Secretary of State (includes name, purpose, and agent of notice) Generally a boilerplate document, with a $30 filing fee
   
2. Pass Bylaws (specify directors, officers, authority of each). Also generally boilerplate.
   
3. Hold initial Board of Directors Meeting: elect officers and directors, choose bank and fiscal year, authorize directors and officers insurance
   

Tax Exemption Process

1. Get a Taxpayer ID Number (Use form SS-4)
   
2. File exemption with IRS, for 501c3 (Use form 1023). Takes 5 to 8 months for processing. The grant is retroactive, so if the application is approved, donations received while the application is pending are appropriate deductions.
   
3. File exemption with California Franchise Tax Board (Use form 3500). While California may take guidance from the IRS decision, this is still a separate requirement.

Relations between non-profit and for-profit and overseas organizations

A non-profit may have a for-profit subsidiary, but if it's deemed the for-profit is actually "in charge", there may be problems. While it's relatively easy to change from a for-profit to a non-profit (in the extreme case, the for-profit just donates all its assets), the reverse is probably impossible. Greg pointed out that if the concern is over ideas, it's possible for the non-profit to license the IP to the for-profit.

While Scott warned us against the hazards of Unrelated Business Taxable Income (UBTI), which is subject to excise tax, it sounded as though most of our ideas to build sustainability would not be "Unrelated", and therefore not a problem. Scott cited the example of debt-financed income property as a common case of UBTI.

A non-profit can support people outside the US (charitable purpose can be anywhere in the world), and it's not uncommon for their to be a US-based organization that acts as a representative of a foreign-based organization (Dipak offered the example of Oxfam).

Factors which may cause a 501c3 application additional scrutiny

• A single donor (or a small number)
  
• A small beneficiary population
  
• International (esp. post 9/11)
  
• High compensation for board or officers