Getting Started: Non-Profit 101

What is a non-profit organization?

A non-profit organization is simply a corporation that has applied for and received tax exempt status from the IRS under Section 501(c) of the Internal Revenue Code. This exemption status is granted under one of the sections in 501(c) of the Internal Revenue Code – i.e., 501(c)(3) for charities and foundations or 501(c)(6) for trade associations.

The IRS grants these exemptions to organizations that are formed for a common interest, provided that no part of the profit or surplus benefits the private shareholder or individual and the purpose is not one ordinarily carried on for profit.

The term “non-profit” DOES NOT mean that the organization is prohibited from generating a surplus. In the commercial sector, that surplus (revenue minus expenses) is called a profit. The tax exemption means the surplus is not subject to federal taxes by the IRS, provided it meets a few conditions.

How do I start a non-profit?

The IRS provides specific guidance and forms required to create a non- profit organization. In addition to completing the IRS form, the application must also include the Articles of Incorporation or some other organizing document. Without this document, the entity will not qualify for tax exempt status. Each state sets forth its own requirements for creating a legal entity. For example, in Virginia, the State Corporation Commission is the lead organization for creating an entity and filing Articles of Incorporation.

Types of non-profit organizations

Section 501(c) of the Internal Revenue Code sets forth the conditions and requirements for non-profit organizations. Non-profit organizations fall within one of three subsections of 501(c):

501(c)(3) – Organizations described in section 501(c)(3) are commonly referred to as charitable organizations. This section includes charities as well as religious and some educational institutions. Section 501(c)(3) organizations are restricted in how much political and legislative (lobbying) activities they may conduct. Examples of 501(c)(3) organizations include United Way, Red Cross, and Boys & Girls Club.
501(c)(4) – Non-profits organized under this section operate exclusively to promote social welfare, to further the common good and general welfare of the people of the community (such as by bringing about civic betterment and social improvements). Seeking legislation germane to the organization's programs is a permissible means of attaining social welfare purposes. Thus, a section 501(c)(4) social welfare organization may further its exempt purposes through lobbying as its primary activity without jeopardizing its exempt status.
501(c)(6) – This section of the code typically covers trade and professional groups, referred to by the IRS as “business leagues.” A business league is an association of persons having some common business interest, the purpose of which is to promote such common interest and not to engage in a regular business of a kind ordinarily carried on for profit. An example of a 501(c) (6) is the National Association of Home Builders or the United States Chamber of Commerce.
(Source: IRS.gov)

Tax deductibility of donations

One of the main advantages of establishing a non-profit corporation is that donors can deduct their charitable contributions on their taxes. This applies in the case of 501(c)(3) entities. Dues paid to belong to a 501(c)(6) professional or trade group, such as membership dues, are not typically deductible as charitable contributions but may be deductible as an ordinary business expense.

Rules of operation

Within a non-profit organization, there are many decisions that need to be made daily. Some of these decisions are minor and can be made by staff while others require more board input. Regardless of the level of decision needed, it is important to have these positions documented to ensure consistent and fair application. It is a good idea to have separate manuals for each level or area of policy. At the highest level, an organization has its Articles of Incorporation and Corporate Bylaws. As you move closer to the daily management and operations of the organization, various manuals are necessary.

Articles of Incorporation

The Articles of Incorporation are the charter document of an organization. Sometimes referred to as the certificate of incorporation or the corporate charter, this document establishes the existence of a corporation within a state. The Articles include such items as the name of the entity, its corporate structure, the names of the incorporators, and the effective date of incorporation. Articles of Incorporation are typically filed with the Secretary of State’s office, or similar agency.

Bylaws

Bylaws are the rules established by an organization on how it will be governed. Bylaws set forth how many directors shall govern the non-profit, how those directors are selected, and the duration of their terms. Bylaws can also include standing committee make up, the process for filing a vacancy on the board, the number of meetings to be held, and how to change the bylaws.

As a rule of thumb, bylaws should be higher level policies that are not expected to change significantly in the short term. Programs, processes, and policies that change annually should be included in a separate policy manual.

Board Policy Manual

The board policy manual contains policies that govern your board of directors. Examples include conflict of interest statements, whistleblower provisions, and board roles and responsibilities. This manual may include provisions on how you select your board and what happens when a board vacancy occurs.

Personnel Policy

This manual is the employee handbook and discusses employee related matters such as paid time off, disciplinary policies, dress code, job descriptions, and performance review procedures. This manual should be reviewed with and provided to every employee.