Generally, there are not many restrictions on for profit entities (either limited liability companies or corporations) regarding the activities conducted, so long as such activities are not illegal.  For profit entities generally sell goods or services to the public and it is anticipated that those individuals or organizations that own such for profit entities will benefit in some way from the operation of the entity’s business.

However, with nonprofit entities, there are strict restrictions on benefits accruing to individuals or organizations.  Specifically, 501(c)(3) public charities are required to offer programs which benefit the entire public.  Treasury Regulation 1.501(c)(3)-1(d)(1)(ii) provides that  “[a]n organization is not organized or operated exclusively for one or more of the purposes specified in subdivision (i) [i.e. charitable purposes] of this subparagraph unless it serves a public rather than a private interest.”  Further, as provided in the Internal Revenue Manual Section 7.25.3.16.7, an “organization must demonstrate that it is not organized or operated for the benefit of private interests such as designated individuals, the creator or his family, shareholders of the organizational or persons controlled directly or indirectly by such private interests.”  However, the IRS generally allows for an exception to the benefit of private individuals or organizations.  As provided in Internal Revenue Manual Section 7.25.3.16.7.1, “If an organization serves a public interest and also serves a private interest other than incidentally, it is not entitled to exemption under IRC 501(c)(3). 

However, to be incidental, the private benefit must be a necessary concomitant of the activity which benefits the public at large and accomplishes exempt purposes.  In other words, the benefit to the public cannot be achieved without necessarily benefitting certain private individuals.”  For example, if a public charity hosts certain events in furtherance of its purposes, such as a fundraising dinner, it is anticipated that the organization may need to engage the services of a for profit business or an individual to assist with putting on such an event.  It is further anticipated that this individual or organization will be compensated by the nonprofit for performing such services.  Therefore, even though an individual or company is receiving a benefit (i.e. compensation for the services performed), such benefit accompanies the larger focus of the actual charitable activities (i.e. the charity may be benefitting a certain cause, and by engaging an event planner the charity is able to put on a high profile event and raise funds to support its cause).  As such, it seems fairly certain that a 501(c)(3) organization that engages the services of a for profit event planning corporation is not at risk of violating the rules regulating private inurement.  Therefore, it appears that your charitable goals can be accomplished through the establishment of a nonprofit public benefit corporation exempt under Section 501(c)(3) of the Internal Revenue Code.

The final and arguably most important component of this structure relates to the relationship between the for profit company and the nonprofit organization in the event that there are common directors, officers, etc.  As far as the 1023 application, which is submitted to the IRS for 501(c)(3) approval, the arrangement between the two organizations must be disclosed, and any oral or written contracts must be described (and copies attached, in the case of a written agreement).  The IRS will also require disclosures regarding the precautions taken to ensure that the agreement was negotiated in good faith and at arm’s length (i.e. how it is ensured that both parties have equal bargaining power). 

In addition, under Section 4958 of the Internal Revenue Code, there are strict excise taxes imposed upon what are known as “excess benefit transactions.”  For purposes of these taxes, an excess benefit transaction is defined as “any transaction in which an economic benefit is provided by an applicable tax-exempt organization directly or indirectly to or for the use of any disqualified person if the value of the economic benefit provided exceeds the value of the consideration (including the performance of services) received for providing such benefit. For purposes of the preceding sentence, an economic benefit shall not be treated as consideration for the performance of services unless such organization clearly indicated its intent to so treat such benefit.”  Essentially, if a nonprofit were compensating a for profit, in which one of the nonprofit’s directors or officers had an interest, at a level above fair market value, the nonprofit and its directors may be taxed on such amount.

Note also, that in addition to the above, in the event the entities are formed in California, there are also some requirements under California regarding a nonprofit organization’s entering into contracts where one (or more) of its directors or officers has a material financial interest.  Specifically, under Section 5233 of the California Corporations Code, the following facts must be established:

(A)  The corporation entered into the transaction for its own benefit;

(B) The transaction was fair and reasonable as to the corporation at the time the corporation entered into the transaction;

(C) Prior to consummating the transaction or any part thereof the board authorized or approved the transaction in good faith by a vote of a majority of the directors then in office without counting the vote of the interested director or directors, and with knowledge of the material facts concerning the transaction and the director's interest in the transaction.  Except as provided in paragraph (3) of this subdivision, action by a committee of the board shall not satisfy this paragraph; and

(D) (i) Prior to authorizing or approving the transaction the board considered and in good faith determined after reasonable investigation under the circumstances that the corporation could not have obtained a more advantageous arrangement with reasonable effort under the circumstances or (ii) the corporation in fact could not have obtained a more advantageous arrangement with reasonable effort under the circumstances.

In addition, note that even if the entities are not formed in California, there may be laws similar to the above in other jurisdictions which govern relationships between entities such as those herein-described.

Based on the above discussion, it is possible that your goals may be accomplished by the formation of a hybrid structure based around a for profit entity and a nonprofit organization.  However, it is important to note that certain safeguards must be taken along the way to ensure that the agreements between the parties and the operations of the two organizations are carried out in a manner consistent with the laws of California as well as the IRS guidelines regulating 501(c)(3) public charities.

Unrelated business income (“UBIT”) is defined as the gross income derived by any organization from any unrelated trade or business (as defined in IRC 513) regularly carried on by it (less certain allowable deductions) which are directly connected with the carrying on of such trade or business.  Section 512(b)(2) of the Internal Revenue Code specifically excepts from UBIT royalty payments:  “There shall be excluded all royalties (including overriding royalties) whether measured by production or by gross or taxable income from the property, and all deductions directly connected with such income.” 

Discussion of Sierra Club Case

Courts have created differing opinions regarding the definition of royalty, which seems to hinge on whether the monies are earned passively or actively.  In Sierra Club v. Commissioner IRS (86 F. 3d 1526 (1996)), the court considered whether the payments received by the Sierra Club in connection with the licensing of their name and trademark to a credit card company for use on the credit card were royalty payments.  In this case, Sierra Club also had the option to generate higher royalty payments if the organization elected to pay production and mailing costs associated with the card.  In its decision, the court laid out the basic framework surrounding royalty payments and nonprofit organizations: 

A tax-exempt organization under I.R.C. § 501(c) must pay taxes at normal corporate rates on “unrelated business taxable income.” UBIT is defined as “the gross income derived by any organization from any unrelated trade or business ... regularly carried on by it, less the deductions allowed ... both computed with the modifications provided in subsection (b).” Section 512(b)(2) provides that “[t]here shall be excluded all royalties (including overriding royalties) whether measured by production or by gross or taxable income from the property, and all deductions directly connected with such income.” …

“Royalties” as used in § 512(b

501(c)(6) organizations are defined as “Business leagues, chambers of commerce, real-estate boards, boards of trade, or professional football leagues (whether or not administering a pension fund for football players), not organized for profit and no part of the net earnings of which inures to the benefit of any private shareholder or individual.”  (Internal Revenue Code Section (“IRC”) 501(c)(6)).  More specifically, a 501(c)(6) organization must meet certain basic tests in order to be exempt under 501(c)(6):

A.     It must be an association of persons having some common business interest, and its purpose must be to promote this common business interest.

B.     It must not be organized for profit.

C.     It must be a membership organization and have a meaningful extent of membership support.

D.     No part of its net earnings may inure to the benefit of any private shareholder or individual.

E.      Its activities must be directed to the improvement of business conditions of one or more lines of business as distinguished from the performance of particular services for individual persons.

F.      Its purpose must not be to engage in a regular business of a kind ordinarily carried on for profit, even if the business is operated on a cooperative basis or produces only sufficient income to be self-sustaining.

Associations that are organized for profit or financial gain are usually called partnerships.^[3] A special kind of partnership is a co-operative which is usually founded on one man-one vote principle and distributes its profits according to the amount of goods produced or bought by the member. Associations may take the form of a non-profit organization or they may be not-for-profit corporations; this does not mean that the association cannot make benefits from its activity, but all the benefits must be reinvested.

According to WestLaw, all states have adopted extensive statutory schemes relating to nonprofit corporations. As such, the use of the nonprofit corporation provides an immediate advantage over unincorporated associations due to the greater body of statutory and case law available for review in the area of nonprofit corporations. However, this gap is closing as states begin to consider and adopt statutes that codify and/or reverse the common law principles traditionally applicable to unincorporated associations. Other factors to consider are:

• The liability of members and directors is more limited for nonprofit corporations than unincorporated associations; however, recent statutory changes have clarified and expanded the limited liability of members, directors and agents of unincorporated associates.
• Traditionally, the formalities required of incorporated organizations were thought to be too burdensome on small unincorporated associations and thus this became a common reason for avoiding the corporate form. The current trend, however, is for growing unincorporated associations to adopt formalities similar to corporations, such as detailed bylaws, member meetings, selection of a governing board and officer duties.
•  Individuals and organizations tend to be more familiar with corporations than with unincorporated associations and organizations likely to have substantial cash assets or own real property may be better advised to incorporate since banks and title companies are more accustomed to dealing with corporations.

The Charitable Organizations and Solicitations Act, 1975 PA 169, as amended, MCL 400.271 et seq., MSA 3.240(1) et seq. requires an organization to obtain a charitable solicitation license if it solicits or receives contributions in Michigan in excess of $8,000 or if it compensates any person for fund raising services, including employees or independent contractors. Under section 13 of the Act, some organizations are exempt from licensing requirements. The determination of whether any one of those exemptions applies is to be made by the Charitable Trust Section, not presumed by the organization. The same statute also requires professional fund raisers to be licensed and bonded before soliciting on behalf of a charitable organization or a religious organization.

To obtain a determination whether a license or registration is required, charitable organizations must file an Initial Charitable Trust/Charitable Solicitation Questionnaire either online or by mail, along with all requested attachments. The attachments must include copies of creating documents. Incorporated entities are required to submit copies of their articles of incorporation, including all amendments and certificates of assumed or fictitious names. Submitted copies must show evidence that the documents were properly filed with the appropriate state agency. In Michigan, that agency is the Department of Labor and Economic Growth, Corporation Division. A constitution and/or bylaws must be submitted by unincorporated entities and by corporations if those documents exist. If the organization has received tax exempt status from the IRS, a copy of that determination letter should be included. (More information about obtaining tax exempt status from the IRS is available at their website.) A recent financial accounting should be sent along with the Questionnaire for those organizations that have had financial activity. If it is determined that a charitable solicitation license is required, then the organization will need to submit a properly completed Application for License to Solicit Donations. Alternatively, organizations that solicit in more than one state may file the Unified Registration Statement that is accepted by many states.

The charitable solicitation license expires each year either six (6) or seven (7) months following the end of the organization's fiscal year. The expiration date is stated on the license sent to each organization at the time it is issued. To renew the license, the organization should submit an Application at least thirty (30) days prior to the expiration date, along with all necessary attachments.

On January 1, 2007, a new California law (AB 839)  [PDF 58 kb / 4 pg] passed allowing eligible nonprofit organizations to hold "charity poker night" fundraisers. Nonprofit organizations and suppliers of equipment and/or services for such fundraising events must submit an application for registration to the Bureau of Gambling Control for approval.

Controlled games which are an approved funding mechanism for these fundraisers are specified in the California Penal Code section 337j(e)(1) as “any poker or pai gow game, and any other game played with cards or tiles, or both, and approved by the Bureau of Gambling Control, and any game of chance, including any gaming device, played for currency, check, credit, or any other thing of value that is not prohibited and made unlawful by statute or local ordinance.”

A detailed listing of provisions outlined in AB 839  [PDF 28 kb / 1 pg] can be found at: Charitable Gambling Fundraisers At-A-Glance.

Nonprofit organizations must register with the Bureau to host one event per calendar year. In addition to nonprofit organizations, businesses that supply equipment and services for fundraising events will be required to register annually with the Bureau. A business that supplies equipment and/or services to an event must register annually.

No one under the age of 21 is allowed to participate at these fundraising events. Nonprofit organizations are required to post problem gambling information at each fundraising event.

The new law does not allow the use of slot machines or Internet gaming for fundraising purposes. Other fundraising restrictions apply to charity bingo and raffle events. The Attorney General’s Charitable Trust Section regulates raffles (Raffles - Charitable Trusts - California Dept. of Justice - Office of the Attorney General). Nonprofit Organizations must register with the Attorney General’s Registry of Charitable Trusts prior to conducting a raffle and file financial disclosure reports on each raffle event. Please contact your local city, sheriff, or police department for inquiries regarding bingo.

Bureau staff work directly with the Franchise Tax Board to assist in providing required documents to determine tax exemption. A process has been implemented which allows nonprofit organizations to obtain written documentation necessary to process applications in a very minimal waiting period.

During the 2007* calendar year, the Bureau of Gambling Control has monitored and tracked all applications received by the Charitable Gambling Program. Based on the research of both Nonprofit Organizations and Gambling Equipment/Service Suppliers the total number of applications received for Nonprofit Organizations in 2007 was 322 and the total for Gambling Equipment/Service Providers was 90 as shown in the chart above.

As shown in the chart below, 59% percent of the Gambling Equipment/Service Suppliers are located in Southern California, 28% percent in Northern California, 2% percent in Central California, and 1% percent out of other locations

The free online workshop – Stay Exempt – Tax Basics for 501(c)(3)s – consists of five interactive modules on tax compliance topics for exempt organizations:

• Tax-Exempt Status – How can you keep your 501(c)(3) exempt?
• Unrelated Business Income – Does your organization generate taxable income?
• Employment Issues – How should you treat your workers for tax purposes?
• Form 990 – Would you like to file an error-free return?
• Required Disclosures – To whom do you have to show your records?

Users can access this new training program at Stay Exempt. Users can complete the modules in any order and repeat them as many times as they like.  The online training website does not require registration and its visitors will remain anonymous.

• Charitable trusts recognized as tax-exempt under section 501(c)(3); and
• Non-exempt charitable trusts that are treated as section 501(c)(3) organizations for certain purposes.

The procedures will allow affected trusts to continue to file Form 990, and relieve them from paying excise tax on net investment income, for tax year 2007. 

Trusts that become private foundations by virtue of Pension Protection Act of 2006 must file Form 990-PF for tax years beginning on or after January 1, 2008.  New procedures require such trusts to highlight the change by filing a paper Form 990-PF for 2008.

Charitable organizations are frequently subject to intense public scrutiny, especially where they appear to have inappropriately benefited their officers, directors, or trustees.  The IRS also has an oversight role with respect to charitable organizations.  An important part of this oversight is providing organizations with strategies that will help avoid the appearance or actuality of private benefit to individuals who are in a position of substantial authority.  The recommended conflict of interest policy is a strategy we encourage organizations to adopt as a means to establish procedures that will offer protection against charges of impropriety involving officers, directors, or trustees.

A conflict of interest occurs where individuals’ obligation to further the organization’s charitable purposes is at odds with their own financial interests.  For example, a conflict of interest would occur where an officer, director, or trustee votes on a contract between the organization and a business that is owned by the officer, director or trustee.  Conflicts of interest frequently arise when setting compensation or benefits for officers, directors, or trustees.  A conflict of interest policy is intended to help ensure that when actual or potential conflicts of interest arise, the organization has a process in place under which the affected individual will advise the governing body about all the relevant facts concerning the situation.  A conflict of interest policy is also intended to establish procedures under which individuals who have a conflict of interest will be excused from voting on such matters.

Apart from any appearance of impropriety, organizations will lose their tax exempt status unless they operate in a manner consistent with their charitable purposes. Serving private interests more than insubstantially is inconsistent with accomplishing charitable purposes.  For example, paying an individual who is in a position of substantial authority excessive compensation serves a private interest.  Providing facilities, goods, or services to an individual who is in a position of substantial authority also serves a private interest unless the benefits are part of a reasonable compensation arrangement or they are available to the public on equal terms and conditions.

Here are some of the Key Findings of the study:

• Email open rates, click-through rates and response rates have fallen from 2006 to 2007. Open rates have fallen from 21.3 percent to 17.6 percent, and click-through rates have dropped from 4.9 percent to 3.8 percent.
• The average nonprofit sent an average of just over 4 emails per subscriber per month in both 2006 and 2007.
• The annual churn rate, or the rate at which an email list ‘goes bad’ in a year, dropped two percentage points (from 21 percent to 19 percent) between 2006 and 2007, a positive trend.
• The total amount raised online increased by 19 percent from 2006 to 2007.
• The average advocacy email response rate in 2007 was 7.5 percent. The average fundraising email response rate was .13 percent. While $1,000+ gifts made up just 1 percent of overall online donations in 2007, these gifts made up 20 percent of the amount raised online.
• A significant portion (almost 60 percent) of the participants’ subscribers did not take any online advocacy actions over the course of 2007.
• ‘Super activists,’ the subscribers taking 6 or more online actions in a year, made up just 5 percent of the total email list size but accounted for 42 percent of the organizations’ total actions.

The findings reveal email solicitations are becoming less and less effective as the technology and internet evolves, even as nonprofits saw an increase in fund raised online. Some say that social networking sites, such as MySpace or FaceBook, and advances in cell phones have stolen some of the spotlight from email solicitations. Nevertheless, nonprofit organizations should look for ways to take advantage of these technological advances and not only stick to emails.

Affluent people are increasingly likely to use the Internet to make their charitable donations, a new survey of nearly 3,500 donors has found.

But charities are turning off some of their biggest donors — people who give $1,000 or more, the survey found. Some charities send too many messages to donors who say they don't want them, while others don't take advantage of the interest many donors express in expanding their online interaction with nonprofit organizations, the survey found.

"Most charities are not paying attention," says Mark Rovner, president of Sea Change Strategies, a fund-raising consulting company in Takoma Park, Md. "The people responsible for [soliciting] larger gifts need to start taking the Internet much more seriously than they have."

Sea Change conducted the survey along with Convio, an Austin, Tex., company that provides Web-based software for nonprofit groups, and Edge Research in Arlington, Va., which does research and polling for nonprofit organizations.

The survey, which was conducted online, was based on data from 3,443 donors who had made gifts of at least $1,000 to a single cause in the past 18 months and donated an average of more than $10,896 per year to charities. Sixty-four percent of the donors were age 45 to 64, and 57 percent had incomes of at least $100,000. The donors' names were provided by 23 organizations that represent an array of causes, including advocacy groups, health organizations, international relief groups, public television stations, and Christian ministries.

Among the key findings:

• Four out of five donors said they had made a charitable gift online, and a little more than half, 51 percent, said they prefer to use the Internet for their donations. Some 46 percent said that they expect to make a greater percentage of their charitable gifts online within the next five years.

• Fifty-six percent said that charities send too many e-mail messages, and 47 percent said they do not read as many messages from charities as they did in the past.

• Seventy-four percent said it's inappropriate for a charity to obtain their e-mail address from a commercial database, while 82 percent said they don't think it's right for charities to send them messages about another organization.

• Ninety-two percent of donors like getting year-end tax receipts by e-mail, while 83 percent want to get electronic updates on a charity's finances and spending. Seventy-four percent said e-mail messages are appropriate when notifying donors that it's time to renew an annual gift or to explain how a donation has been spent.

• Eighty-one percent of donors dislike messages that take an urgent tone in seeking a repeat donation.

• Forty-six percent of donors said the charity's messages do a good job of making them feel connected to the organization, while 43 percent said the messages are well written and inspiring.

Most of the donors want more say on the quantity of e-mail they receive from charities.

There is a new trend arising in both the nonprofit and tourism industries.  Volunteer tourism, or "voluntourism", is an emerging trend that is gaining popularity.  According to a survey sponsored by MSNBC and Conde Nast Traveller, 55 percent of the participants in the survey said they were interested in volunteering on their vacation.  When asked if the participant has ever taken a volunteer vacation, the survey showed that 20 percent has taken at least one. Of the 20 percent who have taken a volunteer vacation, 95 percent of them said they would likely take another.

The following organizations file another return in lieu of the Form 990:  

• Private foundations (Form 990-PF)

• Employee benefit trusts (Form 5500)

• Black lung benefit trusts (Form 990-BL)

• Click here

• Click on "Business Data Search"

• Click "Business Entity Information"

• Type in the name of the organization or the Department number (located on the filing receipt)

• When the entity appears, click "Amendments"

• Then click the eye ball and your Articles will appear!!

Nonprofit groups are growing faster than the rest of the economy, according to figures released this month by the Urban Institute in Washington.

While the U.S. gross domestic product increased by approximately 35 percent from 1995 to 2005, after adjusting for inflation, the revenue of nonprofit groups rose by nearly 55 percent and their total assets grew by 77 percent. Nonprofit groups account for 5 percent of the gross domestic product, according to data reported in the Nonprofit Almanac, a compilation of figures about a range of trends in the nonprofit world, including the number of charities that work on specific causes, as well as information about their revenue and spending. The study also found that nonprofit groups: 

• Grew in number by more than 27 percent from 1995 to 2005.
• Contributed more than $666-billion to the economy through their activities.
• Received $1-trillion in revenue in 2006, a 5-percent increase from 2005.
• Employed 12.9 million people. Nonprofit groups pay 8.1 percent of the nation's wages, and employ 9.7 percent of its workers.

The Nonprofit Almanac 2008 is available from the Urban Institute Press for $39.50. To order, go to http://www.urban.org/uipress.

Every exempt charitable organization is classified as either a public charity or a private foundation. Generally, organizations that are classified as public charities are those that (i) are churches, hospitals, qualified medical research organizations affiliated with hospitals, schools, colleges and universities, (ii) have an active program of fundraising and receive contributions from many sources, including the general public, governmental agencies, corporations, private foundations or other public charities, (iii) receive income from the conduct of activities in furtherance of the organization’s exempt purposes, or (iv) actively function in a supporting relationship to one or more existing public charities. Private foundations, in contrast, typically have a single major source of funding (usually gifts from one family or corporation rather than funding from many sources) and most have as their primary activity the making of grants to other charitable organizations and to individuals, rather than the direct operation of charitable programs.

During its existence, a public charity has numerous interactions with the IRS – from filing an application for recognition of tax-exempt status, to filing the required annual information returns, to making changes in its mission and purpose. The IRS provides information, explanations, guides, forms and publications on all of these subjects – they are available through this IRS Web site. The illustration below provides an easy-to-use way of linking to the documents most charities will need as they proceed though the phases of their “life cycle.”

In addition to the following illustration, you can also download a graphical depiction of the life cycle, which includes functioning links back to our site.