We often have clients come in wanting to set up their own non-profit, charitable group. New Hampshire ranks very high in the number of individuals engaged in non-profit work, for which we should all be proud. Although I applaud the good intentions of people wanting to create a new charity, it takes a great deal of time, effort and, yes, money to set up a new charity. Sometimes, it is more cost effective for clients to use an existing charity, such as the New Hampshire Charitable Foundation, to handle a special project they have in mind, or to create a “donor advised fund,” which gives clients the ability to direct where their donations go, tax exempt, while avoiding the cost and time of setting up their own foundations. Either way, more dollars go to “good works,” and less is spent on administrative costs.
For clients who need to set up their own public charity, an Internal Revenue Code (“IRC”) §501(c)(3) organization, it is important to understand that it will be operated with the public’s money, so most are subject to regulation and scrutiny by both the IRS and the NH Attorney General’s Director of Charitable Trusts (churches, synagogues, mosques and temples are exempt from regulation) Rule #1 for all IRC §501(c)(3) organizations is no self-dealing.
The first step in setting up a non-profit corporation is for the “incorporators” to draft “Articles of Agreement” for one of the permitted purposes under NH law, NH RSA 292:1, I-XV, and IRC 501(c)(3). Education is an appropriate purpose; so are all charitable purposes. The incorporators should draft Bylaws for how the organization should operate. It can only operate for lawful charitable purpose that meets both NH and IRC requirements, so care should be taken in drafting the Bylaws.
The “Articles” must be filed with the Secretary of State’s office (which oversees corporations operating in New Hampshire) and the Town or City Clerk for the Town or City in which you have your principal place of business. You would need five incorporators to sign the Articles, who then generally become the first Board of Directors. Under NH law, those directors may not be related by blood or marriage, RSA 292:6-a, nor should the Board include any person(s) to be employed by the organization, because that creates a conflict of interest (see Rule #1).
Once the “Articles” are filed and the Secretary of State tells you that the organization is formed, the incorporators hold an organizational meeting, at which the incorporators appoint the Board of Directors (usually themselves). The new Board adopts Bylaws, a Conflict of Interest Policy (see Rule #1), other policies required by the IRS, elects officers and sets up any committees (non-Board members can populate committees) such as programming, outreach, fundraising, etc.
The Board develops a plan for how the organization will carry out its purposes – what will its priorities and activities be? The Board develops a budget for the current year and next two years. Will there be extensive fundraising, or will the organization basically raise the funds it needs to operate through the programs it runs? The Board (or a committee) develops press releases, articles, a website, pamphlets, etc. and begins its activities. The Board must conduct monthly or other periodic meetings, and an annual meeting, at which new directors and officers are elected.
If the organization needs to qualify as tax exempt under IRC §501(c)(3), the Board (or a committee) drafts the application, IRS Form 1023. This form asks lots of questions to reveal any self-dealing (see Rule #1). The IRS may take a year or more to process application. If the organization is at risk of losing a grant or other sizeable donation if the IRS takes that long, you should request “expedited review” by the IRS.
On a parallel track, even if it does not apply to the IRS for recognition as a tax exempt organization under IRC § 501(c)(3), the organization must register with the NH Attorney General, Director of Charitable Trusts within 6 months of the organization receiving funds for charitable purposes, and, after the first year, file annual reports thereafter (4 ½ months after end of fiscal year, unless excused).
If it has filed an application for recognition with the IRS, while the application is pending and for every year thereafter, the organization must file something with the IRS. If revenues are under $50,000 per year, a form 990-N, an “electronic postcard,” needs to be filed with the IRS. If revenues are normally over $50,000 per year, you must file either Form 990 or 990-EZ with the IRS annually (generally 5 ½ months after end of fiscal year). The full Form 990, if filed, is publicly available, and it becomes a powerful tool both for communication by the organization and oversight by the public, as well as by the IRS and the NH AG.
Finally, non-profit corporations are required, every 5 years (on the 0’s and on the 5’s) to renew their corporate status by filing a renewal with the NH Secretary of State. If incorporated in 2013, the next renewal would be due in 2015.
With all of these requirements, I spend a good deal of time talking to clients interested in starting their own charitable organization, explaining the requirements. That way, our clients can make their own choices about starting their own charity or working with an existing group. I would be happy to meet with individuals or clients with questions about this process.