“Non-Profit Formation, Compliance, and UBIT Mitigation”

Nonprofit and tax-exempt organizations come in many shapes and sizes, and have many different purposes. Far and away the most commonly used form of a non-profit tax-exempt organization falls under § 501(c)(3) of the Internal Revenue Code (IRC).  In basic and general terms, section 501(c)(3) encompasses a wide range of non-profit purposes; and in terms of tax benefits, §501(c)(3) provides tax exemption. Nonprofit, tax-exempt companies are by no means limited to the guidelines of §501(c)(3); there are other sections under which a company can get the right kind of exemption for its unique purpose.

Step 1: An Idea, Vision, or Non-Profit Compliance issue

Depending on the idea, concept or operation of the organization, our attorneys can help you create the right kind of legal vehicle that is best for your vision. Many people choose partnerships or corporations for this purpose. If your plans include working with other nonprofit organizations or government units, then you likely are looking at a joint venture. Please Call for more information, 303-781-1533.

Step 2: Now that you have identified a concept, vision, or idea, the next step is to make some management decisions

Who will operate or manage the organization? How will the organization interact with normal, for-profit businesses? What about  its interaction with other nonprofit organizations? Will your organization interact with government bodies and institutions? Now, these decisions have important legal implications and can help us to determine the right kind of entity for you and for your organization.

It may be wise to think about these questions and get a general idea of what you want and then walk through the details with us. This way, we can all be sure that you and your organization will have the best legal setup that protects you personally, matches the scale of your endeavor, and also makes operating as hassle free as possible.

Step 3: Finally, the Tax Jargon

Once you have gone through the first two steps – having an idea and deciding how you want to operate your nonprofit organization – then the third phase comes into play. This third step is about the Internal Revenue Service (IRS) and the tax hoops we have to jump through to ensure your organization is tax-exempt.

Good News for Colorado Non-Profit § 501(c)(3) Organizations:

Non-Profit law is both State and Federal.  Ordinarily, state laws governs the business entity and creation of the non-profit 501(c) (3) concept.  The law that gives federal tax exemption to these organizations is federal law, the internal revenue code (IRC).   The internal revenue code is enforced and governed by the Internal Revenue Service, the IRS.    The Good News is that under Colorado law,  any non-profit organization that’s qualified for tax-exempt status federally, is also exempt for Colorado tax purposes.  This is good news because it saves an additional application for tax exemption on the state level. This reciprocity will save you money and your attorney saves time.

The IRS Non-Profit Application:

The application with the IRS can get pretty technical. The important thing is to do it correctly the first time. Our attorneys are well versed in these applications and enjoy helping you to get this done right the first time. Setting up nonprofit organizations is a lot more fulfilling for us than forming regular businesses. We like to help people that like to help people.

Here is an example of what the application process will be like:

Entities organized and operated under § 501(c)(3) must be operating “exclusively for religious, charitable, scientific, testing for public safety, literary or educational purposes.” These general categories are not mutually exclusive, nor is it necessary to try and fit your organization into one of these categories. That is, an entity can be religious, educational and charitable, or it can be intended to be educational but actually be charitable; there is no penalty or loss of exempt status under the Code. However, the organization must be in an appropriate category, and having it in the right category will save hours of phone conversations and paperwork with the IRS.

A Bit More in Depth

The United States Treasury, through the Internal Revenue Service, or “IRS,” allows for tremendous tax benefits for those organizations that qualify for tax-exempt or Non-Profit status.  The two most profound benefits are: First, exemption from federal income tax and organizations; and second, eligibility to receive tax-deductible contributions and charitable donations.  Certain qualifying organizations may also be exempt from a few employment taxes.

There are three fundamental components that an organization must achieve to be eligible for tax-exempt status under the most common, IRC § 501(c)(3) provision.  The non-profit (or not-for profit) organizations must be organized and operated exclusively for one or more exempt purposes.

How the Organization is Organized:  This means that the organization must be a legal vehicle, such as a trust or corporation etc. under State law that is eligible with the IRS for tax-exempt status.  The type of organization may be different in Colorado than it is in another State.  Fundamentally, the IRS requirements determine the type of organization on the State law level.

Organizational Operations:  Generally, a substantial portion of the organization’s activities must further its exempt purpose or purposes.  This guideline provides some flexibility in operation and maneuvering in the donor market.  Importantly, there are restricted activities from which a tax-exempt organization is prohibited.  The two major ideas is to avoid political participation (specifically campaigns); and the organization must ensure that its earnings do not inure to the benefit of a private individual.  There are many other prohibited activities, but those two are the most common and most severe prohibitions.

Organizational Purpose must be an Exempt Purpose:  The purpose or purposes of the organization must qualify as exempt, legally.  The most commonly associated purpose to a not-for-profit organization is a Charitable Purpose.  While many well know not-for-profits that qualify for tax exempt status under IRC § 501(c)(3) are driven by charitable purposes, there are other qualifying purposes (like Educational, Athletic, etc.) that are equally eligible for qualification.

Lastly, but importantly, there are two overwhelming themes in in the intersection of Government Policy and the Non-Profit sector. First, the main priority of enabling the Non-Profit tax-exempt sector to flourish is to build and expand their capacity and purpose.  Additionally, the second, theme is to ensure that Non-Profits are maintaining, demonstrating, and are accountable for their transparency.   A quick translation: Your organization must be functioning properly given its eligible purpose,  and it must be functioning properly in its transparency and accountability to society and the IRS.

Parkes Law Group, LLC has experienced and dedicated attorneys that will handle the legal compliance, and setup the organization to achieve optimal managerial practices driven by a higher, internal standard.

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Call us today at (303) 781-1533 to make an appointment. Parkes Law Group, LLC has three offices in Denver: one office in Downtown Denver and two offices in South Denver. If you live outside of Denver, do not hesitate to call. We represent clients in Denver, Fort Collins, Greeley, Loveland, Boulder, Castle Rock, Colorado Springs, all along the front-range, and throughout Colorado.

 

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Denver, Colorado