Starting Your Nonprofit Corporation
Nonprofit Law Series
By Adrienne B. Haynes, Esq.
Managing Partner, SEED Law
The decision to start a nonprofit generally comes from a heart of service. Formalizing your efforts by officially launching your organization and scheduling regular reviews to ensure compliance is a responsible step for a nonprofit leader.
When working with nonprofit clients, our focus is on the following primary objectives:
Firm Foundation. Even if you know that the purpose of this new organization will be for a charitable purpose and public benefit, it’s still important to go through the choice of entity process. Once it makes sense to formalize as a nonprofit, the nonprofit can be formalized at the state level as a Nonprofit Corporation and at the federal level as a 501(c)(3) Tax Exempt Organization.
Structured and Diligent Leadership. A nonprofit corporation is not “owned” by any one person. A board, by its statutory nature, is governed by a board of directors and when appropriate, members. In Missouri, there is a requirement for a minimum of three members of the board of directors.
When developing a board, expectation setting is key. Be clear with your board members about the support you need, from time and financial commitment to committee engagement. An organization’s bylaws should be crafted to the way the organization will operate and communicate board governance and expectations.
We also recommend that members of a board of directors reflect the population that the organization is created to serve. This can help ensure authenticity and mission consistency, which can boost the organization’s bottom line and overall impact.
Clarity on Impact & Income. Nonprofits are to be created for a charitable purpose and public benefit, and this does not mean that the business should not make a profit! It does mean that the funds generated will be used solely in pursuit of the mission and not for the benefit of any organizers. This is affirmed at filing and maintained throughout the life of the organization (and beyond! See below re: exit planning).
For nonprofit sustainability, a revenue generating plan is important. If an organization is funded solely by external funders, the organization is subject to the priorities of funders and the availability of their funds. For most nonprofit organizations, the board of directors is responsible for defining the organization’s goals and ensuring the financial and operational health of the corporation. Developing a plan for diversified revenue streams allows directors to do this more effectively.
Documented Relationships. Just as the relationship with the board of directors is documented in the bylaws, a nonprofit should document each relationship it develops. This includes everything from MOUs to leases, to fiscal agent and donor documentation, to employee documentation like job descriptions, onboarding agreements, handbooks, and manuals. The more organized your relationships, the easier it is for a funder to trust that you will receive and administer any charitable grants or donations in a responsible manner.
Nonprofit Compliance. To keep the nonprofit organization in good standing, a nonprofit’s leadership should take great care not to jeopardize the tax exempt status. For our clients, this means timely responses to required State and Federal filings, including annual registration reports and the IRS annual information report, Form 990. Failure to do so could result in an administrative dissolution, which results in no longer being able to conduct business in the State.
When an organization is determined to be tax exempt, this generally means that the organization is exempt from federal income tax under Section 501 of the Internal Revenue Code. To be exempt from paying state or local business sales, income, and property taxes, the organization must receive a separate tax exemption from the governments involved. In most cases, receiving the federal tax exemption makes it much easier to receive sales and property tax exemptions from state and local governments.
An Exit Plan. When you fail to plan, you plan to fail! For nonprofit corporations, the law outlines certain requirements that must be handled before the nonprofit closes. First, upon dissolution, the assets of a nonprofit corporation must be handled appropriately. This means that the transfer or conveyance of any assets must be distributed to another nonprofit that operates exclusively for one or more purposes described in section 501(c)(3) of the Internal Revenue Code.
Next, appropriate notices must be filed with the Secretary of State’s office and the Attorney General. If there will be assets transferred or conveyed, additional documentation is required.
Lastly, when winding down any business, the news should be shared with any necessary creditors, stakeholders, vendors, and asset recipients. Giving your community and constituents adequate notice helps to facilitate a smooth exit.
A Pro Team. Running an organization or a business does not mean you have to have it all figured out. If you’re doing it well, it means you have a network of advisors that can help you with compliance, foresight, and governance. If you’re curious about what pro team you need, review this article.
This article is an overview of nonprofit law considerations, including formation requirements, documentation, and compliance considerations and does not cover every legal right or obligation, consideration, exception, or restriction. These decisions are complex and should be well researched and discussed with a professional before being made.
To schedule a consultation with a SEED Law attorney, you can give us a call at (816)945–4249 or schedule your consultation today here.
Additional Resources:
Nonprofit Corporations, https://www.sos.mo.gov/business/faqs#NonprofitCorporations
(last visited April 15, 2020).
