STEPS FOR INCORPORATING A NEW, INDEPENDENT

NEBRASKA NON-PROFIT CORPORATION:

THE NEBRASKA NONPROFIT CORPORATIONS ACT

To incorporate as a new, independent nonprofit corporation requires that the steps provided by the Nebraska Nonprofit Corporations Act be taken.

As creatures of state law the creation of non-profit corporations in Nebraska is controlled by the Nebraska Nonprofit Corporations Act (Neb. Rev. Stat. §21-1901 et seq.) And this law describes that steps that must be taken to create a new independent non-profit corporation in Nebraska.

Under the Nonprofit Corporation Act, the following steps must be taken to create a new non-profit corporation:

1. Articles of Incorporation Must be Draft and Filed with

the Nebraska Secretary of State.

The first step in incorporating will be to draft Articles of Incorporation. Doing so will require that a few questions first be answered. Namely, incorporators, directors and officers will need to be identified to the extent possible. A name will be needed for the corporation.

Next, an initial office, where the corporation’s records and minutes will be kept and made available when required, needs to be identified, as well as an initial agent for service. A person may perform more than one of these roles. The organization will need to determine whether it will be a “membership” organization which allows members voting rights and requires the payment of dues.

Finally, the organization will need to define its public or charitable purpose; ideally this will be done in a way that will satisfy Federal Tax considerations to the largest extent possible.

Once these decisions are made, then the articles of incorporation may be drafted and filed with the Nebraska Secretary of State’s office.

The statute requires that the articles contain the following:

a. The corporation’s name

b. A statement that the corporation is either –

i. Public benefit corporation,

ii. Mutual benefit corporation, or

iii. Religious corporation

(NOTE: These statements should be drafted to comply with IRC 501(c)(3) requirements, discussed below, if the organization plans to seek tax-exempt recognition.)

c. Name and address of the initial registered office and agent for service.

d. Name and address of each incorporator.

e. Whether or not the corporation will have members.

(NOTE: Membership requires additional considerations regarding membership benefits and tax implications, as well as standing issues if the corporation is involved in advocacy.)

f. Dissolution clause. State corporate law and federal tax law requires non-profit corporations to distribute assets upon dissolution to non-profit corporations.

g. In addition, the Articles may include –

i. Purposes and powers clause. This describes the purpose for which the organization is incorporated, although the Act does not require that corporate powers be stated.

(NOTE: This statement is required for tax-exempt designation under the I.R.C.)

ii. Names and addresses of initial board of directors.

iii. Provisions relating to management of the corporation, including member rights and classes of members.

iv. Any provision that is required to be contained in the by-laws under Nebraska law.

Articles must be signed by each incorporator and director named in the Articles.

Filing fees of $10.00 plus $5.00 per page are required.

The Corporation exists as of the date of filing of the Articles of Incorporation with the Secretary of State.

Articles may be amended after being filed, although the organization should not amend its articles frequently.

2. Steps Required After the Articles of Incorporation Have Been Filed

After filing (incorporation) the following steps must be taken to complete the organization of the non-profit corporation.

Preparation of By-laws.

The organization is not complete until By-laws are prepared and adopted. After by-laws are prepared, they will be adopted by the Board at the initial organizational meeting, discussed below.

The By-laws will contain the rules for the governance of the corporation, including establishing offices and management for the corporation.

Any action taken by the Board which is consistent with the By-laws binds the corporation.

The By-laws may contain any provision for regulating and managing the affairs of the corporation that is not inconsistent with law or the articles of incorporation.

By-laws typically:

a. Create offices, i.e. Chair, Treasurer, Secretary.

b. Provide terms for serving in an office.

c. Limit the ability of officers and the board to bind the corporation.

d. Provide for regular, annual and emergency meetings of the board, and members.

e. Provide for succession of Board members.

f. Describe rules for membership.

g. Provide membership classes

h. Provide for termination of membership.

i. Provide Board’s governance responsibilities.

j. Create or provide for staff to manage day-to-day operations.

By-laws may be used to memorialize structural matters that will govern the organization.

Emergency provisions. By-laws may contain provisions that apply only in cases of emergency and provide special procedures for calling a meeting, quorum and additional or substitute directors powers during the emergency meeting.

Amendment. By-laws may be amended over time with a vote of the board. Although they may not be used to amend the articles of incorporation. As a practical matter, amendments should be rare to prevent confusion among the board regarding their provisions.

The Organizational Meeting.

Once the by-laws are drafted, they must be adopted by the corporation, or on behalf of the corporation. This occurs at the organizational meeting, which is called by a majority of the incorporators of directors identified in the Articles of Incorporation.

Initial Meeting of the Board. The initial board members, if identified in the Articles, shall hold an organizational meeting to complete the organization of the corporation by:

Appointing officers.

Adopting by-laws.

Carrying on any other business before the Board.

If the Articles do not identify Board members, then the incorporator/s shall hold the organizational meeting for the following purposes.

Elect the Board of Directors.

Appoint officers.

Adopt by-laws.

Carry on other business.

Minutes of the organizational meeting must be made and maintained to assure a record of when By-laws were adopted and the election of directors and officers.

C. Publication of Notice.

Once the articles have been filed with the Secretary of State, a public notice must be published for three consecutive weeks in some legal newspaper of general circulation in the county where the corporation’s principal office is located. Notice must show:

a. Corporation’s name.

b. Whether the corporation is a public benefit, public welfare or religious organization.

c. The street address of the initial office and registered agent.

d. The name and street address of each incorporator.

Amends and dissolution are also required to be published.

CONSIDERATIONS WHEN INCORPORATING A NEW NON-PROFIT CORPORATION

Any organization considering whether to incorporate should look at a range of concerns that touch on organizational capacity and structure. Organizational concerns relate to the history and operations of the organization up to today. These are practical concerns that depend on the organization’s mission, goals, resources and stakeholders.

Structural concerns are those concerns that stem from the use of the “corporate” entity. In many cases, structural concerns overlay organizational concerns. There are, however, unique questions regarding tax and governance issues that only come up when a particular entity is used.

The following considerations attempt to identify these structural issues in the context of a Nebraska non-profit corporation.

Board Capacity:

If incorporated, the new non-profit will be governed by its Board of Directors. As with any corporation, the Board will have certain responsibilities that will require time, meetings and energy.

The Board will be required to meet on a regular basis for quarterly and annual meetings. At these meetings the Board will be required to make decisions regarding the overall operations of the organization, including finances, program development and management.

The Board will have greater responsibility for record keeping regarding its actions, a Secretary will be required to make and maintain records of all decisions and the ‘book’ of those decision will have to be kept on file and available.

After incorporation the organization will be required to prepare IRS and state filings on a regular basis. (Discussed below). The Board will be responsible for making sure that this occurs.

The Board will also be responsible for program development, fundraising, finances and other activities that are necessary to achieve the organization’s mission.

Ultimately, the Board is responsible for the organization. In deciding whether to incorporate, consider your ability to assemble a Board with the capacity to engage in governance, specifically holding quarterly and annual meetings where decisions will need to be made regarding the corporation’s direction, use of assets and management.

Consider the additional time and responsibility required from a board and whether resources exist to establish and maintain a Board that will work to achieve your mission.

Decision Making and Authority:

The corporate entity provides a clear mechanism for making decisions that bind the organization. Because of this, the form adds efficiency to managing the organization on an overall and daily basis.

The board is responsible for making decisions that affect the organization’s overall operations and long-term plans. The board’s officers are given well-defined authority to bind the organization, for example with contracts and bank accounts, while day-to-day decisions are placed in the hands of the Executive Director.

This division results in a very efficient use of resources. Talented people who bring specific skills to the organization can be tapped to serve on the Board and will bring these skills and resources to the organization by doing so. At the same time, these individuals are not burdened by making the day-to-day decisions that keep the organization operating, which are given over to an executive director. As such, the organization gains from the corporate structure.

Because the decision making process is well defined within the organization’s structure, the corporate form provides certainty for how decisions are made and when the organization becomes bound by those decisions.

Staff Capacity:

Although not required, in order to take full advantage of the corporate entity, you will need to consider hiring staff to run day-to-day activities. As a corporation, the organization will have certain filing and administrative obligations, all in connection with operating an ongoing concern. These include day-to-day responsibilities, such as office space, tax filing issues and filing other documents with state and federal agencies as required. In general, an organization will benefit from having a manager who will run the day-to-day business of the organization while the Board works on larger issues that heavily impact sustainability and mission.

The corporation’s staff is the primary resource for accomplishing the organization’s goals on a day-to-day basis. Program activity runs through the staff. For most organizations, staff members run fundraising campaigns and leverage the Board’s time and energy by doing so.

Consider the need for staff, particularly whether a staff position would enable to Board to use its time more effectively on long-term issues affecting the organization. Salary requirements and the unique skills that will be required to fill the position, which will include administrative skills as well as the specialized skills that are needed to fulfill the organization’s mission.

Mission:

Because the point of a non-profit is not to make a profit, the organization is formed to fulfill another purpose as described in the corporation’s mission.

In many cases, the corporate entity facilitates the organization’s mission. First, the organization may be able to access resources and funding that could not otherwise access. In addition, an independent corporation allows for talented people to be brought into the organization through the board of directors.

Funding and Financing:

The corporate entity can provide benefits for funding and financing. Many banks and businesses find it easier to work with a corporate officer who has clear authority than to work with an unincorporated association.

As a non-profit corporation, you can do direct fundraising. The organization may be able to attract funding that isn’t currently available.

Community Image:

Independent corporations do have unique community images. There is value to a corporate image. The image communicates stability, presence and a certain degree of credibility. Similar to a “brand”, many non-profits have established value as a result of being independent, non-profit corporations. By establishing yourself as an independent non-profit corporation, you may gain in achieving its mission and attract funding and support that it is unable to in its present structure.

Liability:

The corporate form provides the best protection to board members and officers from liability associated with the organization’s activities.

Generally, non-profits, including associations that have not incorporated, may be sued. These suits could include personal injury, contract disputes and tax issues.

In most cases, members, directors and officers of a non-profit corporation are protected from liability. (In addition, the corporation may provide liability insurance coverage to its board members and employees.) Meaning that their personal property isn’t at risk. This protection does not extend to unincorporated associations. With an unincorporated association, it is possible that the members and officers could face personal liability, or at the very least the expense of having to defend a lawsuit brought against the organization.

Potential liability should be a significant concern the organization, and particularly its members and directors. The corporate entity provides a very significant benefit to the organization and its board.

Provides Perpetual Existence for the Organization:

Corporations are created in perpetuity. This provides many benefits to non-profit associations.

In many organizations, the founders provide the energy and vision the keeps the organization moving. The corporate form provides a benefit that enables the organization to continue to serve its mission after the founders are no longer involved. Perpetual existence allows the organization to continue even after the original members are no longer involved. This allows for succession planning, and for the organization to adapt to changing needs over time while continuing to serve the public interest.

PROS AND CONS

Benefits of Incorporating as a Non-profit Corporation

1. Provides organization with autonomy.

2. Allows for direct fundraising.

3. May increase effectiveness in achieving mission.

4. Creates identity and promotes public relationship.

5. Provides for perpetual existence and succession plan.

6. Provides 501(c)(3) tax benefits.

7. Protects directors and members from liability.

8. Provides “sustainability.”

Concerns with Incorporating as a Non-profit Corporation

1. Requires on-going management that must adhere to rules of governance.

2. Requires developing Board capacity.

3. Change of control to Corporation’s Board.

4. May require a paid staff person to be most effective.

5. May increase organizational complexity.

6. Costs associated with preparing and filing documents.

BECOMING A PUBLIC CHARITY FOR PURPOSES OF

THE INTERNAL REVENUE CODE §501(c)(3)

The next consideration is whether you should work to obtain §501(c)(3) status under the Internal Revenue Code (IRC).

The IRC recognizes a number of different types of tax-exempt organizations, although §501(c)(3) is the most common for community-based non-profit organizations.

IRC §501(c)(3) allows tax exemption to a corporation, community chest, fund or foundation which is “organized and operated” for several exempt purposes, and in which no part of the net earnings inures to the benefit of private individuals and no substantial part of its activities involve influencing legislation or intervening in any political campaign.

Before getting into the details on how to attain recognition of this status, the advantages and disadvantages of being a 501(C)(3) organization follows:

Advantages and Disadvantages

501(c)(3)
Advantages

Exemption from Federal and State Income Tax
Tax Deductibility for Donors
Eligible for Government & Foundation Grants
Eligible for Bulk Mailing Permit
Some Property Tax Exemptions
Credibility

501(c)(3)
Responsibilities

Organization Must Keep Adequate Records
File Required Returns
Provide Donor Substantiation
Obey Public Disclosure Laws
Generate Public Support
Avoid "Excess Benefit"
Prohibition of Political Activity
Limit Legislative Activity
Limit Unrelated Business Activity and Income

The chart below summarizes various kinds of tax treatment for nonprofit and for profit organizations for comparison purposes.

Type of Tax	For-Profit	Non-Profit
Income Tax	Sole proprietor files Form 1040, Schedule C, and pays income tax on net profit. Corporation files form 1120, and pays income tax on net profit; employees file Form 1040 and pay income tax on salaries received	501(c)(3) non-profit files Form 990 or 990-EZ, and pays income tax only on net profit from unrelated activities; employees of the non-profit file Form 1040 and pay income tax on salaries received
Charitable Contributions	Grantors and contributors are not able to take a charitable contribution deduction for cash or goods donated to an individual or to a for-profit organization	Grantors and contributors are permitted to take a charitable contribution deduction for cash or goods donated to a 501(c)(3) organization

Obtaining Tax Exempt Status

Form 1023

Organizations seek recognition of their tax exempt status by providing the IRS with information that will show the organization is organized for a purposes described in §501(c)(3), it is operated exclusively for that purpose, there is no private benefit and no substantial part of the organization’s activities will attempt to affect legislation or engage in political activity.

The organization makes this showing by filing IRS Form 1023.

Charitable, religious, educational and other organizations covered by §501(c)(3) of the IRC can secure IRS recognition of their tax-exempt status by filing 1023 with the IRS. To qualify, as organization must be either a nonprofit corporation, a charitable trust, or an unincorporated association of people.

Form 1023 must show that the organization meets the “Four Tests” for recognition of tax-exempt status:

1. The organization test. ( The organization is organized exclusively for charitable, religious, educational, scientific, or one of the other purposes recognized by Section 501(c)(3).)

2. The operational test. (Organization is operated exclusively for the public purpose.)

3. The private inurement test. (There is no private benefit to an individual.)

4. The political activities test. (The organization will not engage in lobbying or political activities, beyond an insubstantial level.)

The organization must disclose its activities and its funding in Form 1023. Fund raising plans must be disclosed to show the IRS that the organization receives an adequate percentage of its income (at least 30%) from public support to show that the organization is not a private foundation.

Advance Ruling

The IRS will acknowledge receipt of the Form 1023. The IRS will issue a ruling regarding the organization’s tax-exempt status prior to the start of operations, as long as the organization can provide sufficient detail regarding planned activities and sources of income.

If the organization can supply this information, the IRS will provide an “Advance Ruling” which recognizes the tax-exempt status of the organization for a five-year advance period. At the end of that period the IRS will request that Form 8734 be filed before a final ruling is made.

Required Documents

The organization must file several documents along with the Form 1023. These include:

1. Employer Identification Number

2. Power of Attorney (if an attorney is representing the organization)

3. Copy of the Organizational Document (either Articles of Incorporation or association agreement).

4. Bylaws, if they have been adopted.

5. Narrative description of the organizations activities and funding.

6. If an advance ruling is requested, the Organization must file a Consent to Extend Statute of Limitations.

7. Application fee of $500.

IRS Determination

Once the Form 1023 is received, the IRS will review the application and request any additional information it deems necessary. Once the complete application is filed with the IRS, the IRS will review the documentation and make its determination, either by issuing an Advance Ruling or Final Determination letter. This process takes between 6 and 18 months.

Deductibility of Contributions

Contributions to the organization may be deductible by the donor even before the IRS has issued its ruling. If the Form 1023 is filed within 15 months of the date of incorporation, and as long as no amendment have been made to the articles of incorporation, the tax-exempt recognition will apply retroactively to the date of incorporation. Any gifts during that time frame will be deductible for the donor. If amendments have been made to the articles of incorporation, then only gifts received after the amendments were filed are deductible.

Maintaining Tax Exempt Status

Having received the IRS’ ruling recognizing tax-exempt status, the organization then must comply with ongoing record keeping and reporting requirements.

The Four Tests that are used to recognize tax-exempt status still apply and continue to restrict the organization’s activities. If, at any time, the organization fails to meet all four of these tests, it faces the loss or revocation of its tax-exempt recognition.

The loss of the recognition would create devastating financial problems for the organization.

The IRS policies the on-going nature of these tests through the reporting requirements imposed by the IRC. These reporting requirements are outlines in the following chart.

Form #	Title	Who Must File
990	Return of Organization Exempt from Income Tax	All 501(a) organizations except: - organizations w/GR < $25,000 - organizations filing Form 990-EZ - churches - private foundations (file 990-PF) - subordinates in a group return
	Due Date: See A	Penalties: See C and D
990 Schedule A	Organization Exempt Under 501(c)(3)	All 501(c)(3) organizations required to file Form 990 or Form 990-EZ
	Due Date: See A	Penalties: See C and D
990-EZ	Short Form Return of Organization Exempt from Income Tax	Simplified form for use by organizations with gross receipts normally less than $100,000 and assets under $250,000.
	Due Date: See A	Penalties: See C and D
990-T	Exempt Organization Business Income Tax Return	All 501(c) organizations with gross income of $1,000 or more from an unrelated business activity, or with a liability for the proxy tax on lobbying and political expenditures.
	Due Date: See A	Penalties: See E and F
1120-POL	US Income Tax Return for Certain Political Organizations	501(c) organizations with at least $100 of political expenditures and at least $100 of net investment income
	Due Date: See B	Penalties: See E and F
4720	Return of Certain Excise Taxes Under Chapters 41 and 42	Public charities with excess lobbying expenditures and/or political expenditures; Disqualified Persons and Organization Managers liable for Chapter 41 or 42 taxes.
	Due Date: See B	Penalties: See E and F
990-W	Estimated Tax on Unrelated Business Income for Tax Exempt Organizations	Worksheet for determining the amount and timing of estimated tax deposits. Should be completed if projected tax liability is $500 or more. Worksheet only; DO NOT send to the IRS.

A - On or before 15th day of 5th month after close of the tax year
B - On or before 15th day of 3rd month after close of the tax year
C - $20 per day, not to exceed the lesser of $10,000 or 5% of the gross receipts for the year, imposed on the organization.
D - $10 per day, up to $5,000, imposed upon responsible persons if the return is not filed after written demand by the IRS.
E - Late filing: 5% of the tax due per month, up to 25%
F - Late payment: 0.5% of the tax due per month, up to 25%

Form 990 may be inspected by any member of the public and discloses a significant amount of information about the organization. To see how much information is publicly available, go to www.guidestar.com.

CONSIDERATIONS REGARDING §501(C)(3) RECOGNITION

Think about the following when consider whether or not to seek recognition under §501(c)(3):

1. Will having the 501(c)(3) recognition aid fundraising; that is, are there new sources of funds for the organization’s work?

2. Will the non-profit have the capacity to maintain the records that are necessary to comply with the IRC?

3. Will the non-profit engage in activities in the future that would jeopardize the recognition?

4. Will the non-profit engage in lobbying to a substantial extent?

5. Will the non-profit have substantial unrelated business income (UBIT)?

6. Is the non-profit comfortable with the public disclosure requirements?

7. Does the potential benefit of doing direct fund raising outweigh the administrative costs of record keeping and filing required forms?

In most cases, the recognition of tax-exempt status is beneficial to ongoing, non-profit organizations, provided the organization has the capacity to comply with reporting requirements under the IRC.