Non-Profit Series: 10. Applying for a Liquor License as a Non-Profit

Written by Sagan L. Carman-Downer

It is common for non-profit organizations to host events or fundraisers where they wish to serve alcohol. State laws will dictate what the organization needs to do to be able to serve alcohol at these events. This article will focus on the requirements in Nebraska for certain non-profit organizations to apply for a liquor license.

In Nebraska, an organization that is planning to have alcohol available at an event is required to get a liquor license, with only a few very limited exceptions. In the vast majority of situations, if there will be alcohol available for consumption or sale at the event, a license is required. Obtaining a traditional liquor license can be a very involved and costly process. Nebraska, though, provides a less intensive process for certain non-profits that are seeking a liquor license for only one or a few events throughout the year.

Non-profits that qualify, can apply for a Special Designated License (SDL), instead of a more traditional liquor license. Normally, a liquor license allows an organization to serve alcohol on an ongoing basis. The SDL, though, approves liquor service for only a single event.  In order to qualify for this less intensive application, the non-profit organization must be 1) formed as a corporation under state law, and 2) exempted from paying federal income tax (this is commonly achieved by receiving 501(c)(3) status as explained in installment 6 in this series).

If the non-profit meets these two requirements, they are able to apply for the SDL. The application is submitted to the Nebraska Liquor Control Commission to determine whether it will be approved. In order for the application to be approved, the non-profit must show that they are taking certain precautions to ensure that alcohol is being served only to people aged 21 or older, and being served in a safe and responsible manner.

For more detailed information on what specific precautions are required, and to access copies of the forms required to be submitted for the SDL application, this website is a great resource, https://lcc.nebraska.gov/special-designated-license-applications.

Non-Profit Series: 9. Additional Applications and Accounts for Non-Profits

Written by Sagan L. Carman-Downer

Once you have made the decision to start a non-profit organization and completed the steps to officially form an entity (filing Articles of Incorporation, for example), there are additional steps that may be necessary. This article will explain some of those additional steps.

Apply for Federal Employer Identification Number

One of the next steps will be applying for an Employer Identification Number (EIN or federal tax id). This is a unique number assigned to the organization by the IRS. An EIN will be used for things like opening bank accounts and identifying the organization for tax purposes. The organization will complete a form called an SS-4, which can now be completed online through the IRS website. If completed online, the organization can receive the EIN immediately after the application is submitted.

Set Up EFTPS Account

Your organization may also need to set up an account with the Electronic Federal Tax Payment System. This is a system for the organization to deposit tax money withheld from any employees the organization may have. This will include money withheld from employees’ paychecks for FICA taxes and income taxes. The organization should automatically receive instructions in the mail for setting up this account after they have received their EIN.

Apply for State Identification Number

Even if you have received an EIN through the IRS, you may still be required to obtain an additional tax identification number through the state where your organization is located. Many states require the organization to apply for this additional identification number for state tax purposes. This is likely necessary if you will have employees that the organization will be required to withhold state income tax for, or if you will be required to collect a sales tax or other state tax. This can typically be done by submitting an application for an identification number through the state’s department of revenue.

Additional State Requirements

There may be additional requirements that vary by state. For example, in Nebraska, the organization may have to purchase a workers’ compensation insurance policy. This is an insurance policy that provides benefits to employees who are injured during their employment. Unless the organization meets certain exceptions, they may have to provide this type of insurance for its employees or officers. Another example in Nebraska, is the requirement that the organization complete an application through the Department of Labor for unemployment insurance. If the organization will have employees, they may be required to complete this to provide unemployment benefits to employees.

This list provides information on some of the next steps that the non-profit organization will need to take once they have officially formed an entity. There may be additional requirements depending on the state in which the organization is located, and the type and size of the organization. To ensure that you have completed the necessary steps, submitted the necessary applications, and created the necessary accounts, it is best to speak with an attorney in your state.

Non-Profit Series: 8. Tax-deductible Contributions

Written by Sagan L. Carman-Downer

The previous article in this series explained that one of the benefits of a non-profit organization obtaining 501(c)(3) status, is that contributions made by others are tax deductible. This means that the person or business that donates (the donor), can deduct that amount from their taxable income, which may help lower their tax burden. The non-profit that is receiving the donation (the donee), and the donor, must comply with certain federal rules regarding disclosures and recordkeeping. This article will explain some of those requirements for cash contributions. It’s important to note that the requirements discussed in this article are for cash contributions, and will differ if the contribution is in the form of goods or services.

Requirements of Donor

To take the tax deduction, the donor is required to keep a record of the contribution. For a cash contributions (which includes cash, checks, electronics funds transfers, debit cards, credit cards, and payroll deductions), the donor must keep one of the following: a bank record (canceled check, bank statement or credit card statement); a receipt from the donee; or a payroll deduction record. Simply keeping track in a check register will not be enough, one of the above records must be retained in order to deduct the contribution from the donor’s taxable income.

If the donor makes a cash contribution of $250 or more, they must also get an acknowledgment from the donee. This acknowledgment is explained in more detail below.

Requirements of Donee

If the donee receives a contribution of more than $75 from one individual or business, they must provide a disclosure statement to the donor. The disclosure must be written, must note the value of the contribution, and must inform the donee that the contribution is tax-deductible. If the donee does not provide this disclosure statement, the IRS may impose a fine on them.

As mentioned above, if the donee receives a cash contribution of $250 or more, they must provide an acknowledgment to the donor. The acknowledgment must meet the following requirements:

·         It must be written;

·         It must include the amount of cash contributed;

·         It must indicate whether the donor received goods or services for the contribution (including the value of the goods or services); and

·         It must be received by the donee before their tax return for that year is due.

This article provides a general guideline of the disclosure and record keeping requirements for cash contributions to non-profit organizations that have qualified for tax-exempt status under 501(c)(3). There may be additional requirements for larger cash contributions, and the requirements for contributions of goods or services will differ significantly. There are also additional rules on whether the donor can deduct these contributions, and if they can, how much can be deducted. The extent to which contribution is deductible will depend on each individual’s circumstances, so it would be best to speak with an attorney or other tax professional to discuss your specific situation.

Non-Profit Series: 7. Benefits of 501(c)(3) Status

Written by Sagan L. Carman-Downer

The previous article in this series explained what the term 501(c)(3) means, and briefly which organizations can qualify for tax-exempt status under 501(c)(3). As explained in that article, many non-profit entities seek tax-exempt status under this provision as charitable organizations.

In order to qualify under the charitable portion of 501(c)(3), your organization must be operated for a purpose that is recognized by the federal government as “charitable.” Purposes that are recognized include:

• Relief of the poor, the distressed, or the underprivileged;
• Advancement of religion;
• Advancement of education or science;
• Erecting or maintaining public buildings, monuments, or works;
• Lessening the burdens of government;
• Lessening neighborhood tensions;
• Eliminated prejudice and discrimination;
• Defending human and civil rights secured by law; and
• Combating community deterioration and juvenile delinquency.

When seeking tax-exempt status, the non-profit organization must go through an application process to be recognized as having 501(c)(3) status. During this process, the organization must ensure that they operate for one or more of the purposes listed above to qualify as a charitable organization.

If the organization’s application is approved, it will be considered tax-exempt for purposes of federal law. There are two major tax benefits to obtaining 501(c)(3) status. First, the organization is exempt from paying federal income tax. Second, the organization can receive tax deductible contributions. This allows people who donate to the organization to deduct their contribution from their income, which may lower the income tax they would otherwise owe. This provides a direct benefit to the donors, and an indirect benefit to the organization. Because the donors’ contributions may help lower their tax burden, it can encourage donors to contribute to an organization that has 501(c)(3) status over one that doesn’t.

If you believe your organization could benefit from having status as 501(c)(3), it is best to speak with an attorney in your state to discuss the requirements further. This article provides general guidelines, but you should seek advice specific to your situation to determine whether this is the best option for your organization.

Non-Profit Series: 6. What is a 501(c)(3)?

Written by Sagan L. Carman-Downer

The term 501(c)(3) is commonly used to refer to a non-profit organization. But what, exactly, is a 501(c)(3)? This goal of this post is to explain what this term means, and what types of organizations have 501(c)(3) status.

501(c)(3) is not actually a term that describes an entity itself, but instead describes its status (a non-profit corporation can’t technically BE a 501(c)(3), but it can have 501(c)(3) status). The term 501(c)(3) refers to the provision in the United States Code (federal law) that grants certain entities an exemption from paying federal income tax. Section 501(c)(3) is a specific part of Section 501. Section 501, appropriately captioned “Exemption from tax on corporations, certain trusts, etc.,” provides, with detail, what entities are exempt from paying federal income tax. Here is a link to a website that displays the actual language of Section 501 if you are interested in reading it https://www.law.cornell.edu/uscode/text/26/501.

Section 501, as a whole, includes the provisions allowing the exemption. The wording of the section is broken down into subsections, paragraphs, subparagraphs, etc. In the term 501(c)(3), 501 is the section, (c) is the subsection, and (3) is the paragraph. Subsection (c) provides a specific list of what entities are allowed the exemption, each one explained in a separate paragraph. There are 29 categories of entities (and thus 29 paragraphs) listed under Subsection (c) that are allowed the exemption; Paragraph (3) is just one of those 29.

Although there are 29 categories, many non-profit organizations fall under the category in Paragraph 501(c)(3), which provides that the following entities are exempt, “Corporations, and any community chest, fund, or foundation, organized and operated exclusively for religious, charitable, scientific, testing for public safety, literary, or educational purposes…” The explanation of entities included in this paragraph continues, but many non-profit corporations fall under the “charitable” portion of this paragraph. Thus, if you are a charitable non-profit corporation, you are exempt from having to pay federal income tax pursuant to paragraph 501(c)(3).

Simply stating that a non-profit corporation’s activities are charitable, though, isn’t enough to qualify for this tax exemption. To be exempt under this provision, your activities must meet the federal government’s definition of “charitable.” To learn about what activities are considered “charitable” check back for the next article in this series.

Non-profit Series: 5. What Happens at Meetings?

Written by Sagan L. Carman-Downer

There are a few different types of meetings that can be held by a nonprofit corporation. Some meetings are required under state law, and others can be held at the discretion or need of the corporation.

The first meeting that will be held will be an organizational meeting. This meeting is typically held after the articles of incorporation are signed and filed with the State. This meeting is held by the initial directors if they are named in the articles of incorporation, or by the individuals that started the corporation if there were no directors named in the articles of incorporation. The purpose of this meeting is to elect directors (if there are none yet), appoint officers and adopt bylaw. Other matters can be addressed at the meeting as necessary.

Corporations are typically also required to have annual meetings. The time and place of these regular annual meetings should be stated in the bylaws. The directors, officers and members are all invited to attend the annual meeting. At this meeting, the president and treasurer will report on the activities of the corporation and the financial condition of the corporation. Other matters that will usually be addressed include re-electing directors and officers if their term has expired (the term of directors and officers should be set in the articles of incorporation or bylaws). Past and future activities of the corporation will also be discussed at these meetings, and decisions can be made about what activities or transactions the corporation will pursue. What actions the corporation takes will be determined by taking a vote of the directors or members. Whether the directors or members are authorized to vote will depend on the proposed action and any provisions included in the articles of incorporation or bylaws specifying voting authority. For example, state law may require that some actions be authorized a two-thirds majority vote in favor by the directors, or the bylaws may provide that certain actions can be authorized by a 51% vote in favor by the members.

Additional meetings, usually called special meetings, can also be conducted in between annual meetings. These meetings are usually held when the corporation needs to make decisions about whether to engage in activities that need to be addressed before the next scheduled annual meeting. To hold special meetings, there must be proper notice provided to those that are allowed to attend. This notice must include the purpose of the meeting (what will be discussed), and the time and place of the meeting. There are usually specific requirements regarding how far in advance of the meeting notice must be provided. This will depend on state law, so it is important to make sure you check your state’s requirements to make sure you provide adequate notice.

Meetings are where individuals involved in non-profit corporations make decisions about what activities they will pursue and how they will spend their money to further their purpose. Annual meetings provide an opportunity to have regular updates about how the corporation is performing. When matters come up throughout the year that need to be addressed before the next annual meeting, corporations can use special meetings to address those things, but they need to ensure that proper notice is provided.

Non-Profit Series: 4. What is the Difference Between Articles of Incorporation and Bylaws?

Written by Sagan L. Carman-Downer

In order to form a non-profit corporation, state law requires that you file a document called the articles of incorporation. Some states, like Nebraska, also require that you create and adopt internal rules called the bylaws. Typically, provisions in the articles of incorporation are included to provide information to individuals outside of the corporation. Provisions in the bylaws, on the other hand, are included to provide information to individuals inside of the corporation.

Articles of Incorporation

The articles of incorporation will be filed with the state where the non-profit is located. The state agency where they are filed will keep them on file and have them available for the public to view. In Nebraska, the Secretary of State keeps a database online where anyone can pay a small fee to get a copy.

The articles of incorporation are often required to include the following information of the corporation: the name, the address of its office for service of legal documents, the name of the agent for service of legal documents, and the names of the people incorporating it. Depending on the state, there may be additional information required. For example, in Nebraska you must include whether or not the corporation will have members. If the corporation wants to include additional information, it can as long as it is not contrary to state law. The main benefit of including information in this document instead of the bylaws, is that because it is filed for public viewing, it can provide notice of these matters to the public.

Bylaws

Some states, like Nebraska, also require that the corporation create and adopt rules for internal operations, called bylaws. The bylaws are not filed with the state, and thus are not available for public viewing. The bylaws can contain any provision related to the internal operations so long as it is not inconsistent with law or the articles of incorporation.

Some matters commonly addressed in the bylaws include things like: voting requirements, compensation of board members or officers, authority of board members or officers, and information on how and when meetings will be held. If the corporation has members, the bylaws can include qualifications or requirements of members. For example, the bylaws may require that members pay dues or volunteer a certain number of hours to retain membership.

As always, this information is provided as a general guideline, as not as legal advice. The requirements may vary depending on the state where you are located and the type of non-profit corporation you are operating. For more detailed information on what you should include in each of these documents, it is best to speak with an attorney in your state.

Non-Profit Series: 3. Who Runs a Corporation?

Written by Sagan L. Carman-Downer

If you’ve decided to operate your non-profit organization as a formal corporation, you will need to consider how it will be structured in order to carry out its purpose. A non-profit corporation doesn’t necessarily have owners to make decisions and put them into effect, so it is important to understand how these things will get done. Typically, a corporation is run by individuals serving in one or more of three roles: on the board of directors, as an officer, or as a member.

You have probably heard these terms before, but knowing the role of each can help you decide who will fill these positions. Put in very simple and broad terms, the board of directors makes the decisions, the officers carry out the decisions, and the members vote for the board of directors. Below is a bit of a closer look at each role.

Board of Directors

The board of directors is made up several individuals that are selected by the group of people starting the corporation. Some states require a minimum number of directors to serve on the board, in Nebraska the minimum is three. The board of directors provides oversight of the corporation by making decisions that they believe will help achieve or further its purpose. The board can do this by directly making decisions about operations, or by delegating the authority to others. For example, the board of directors may choose the recipient of a scholarship they are awarding, or they may authorize a subcommittee or officer to make the decision.

Officers

Officers carry out the decisions made by the board members for which they are given authority. A key point of distinction is that they can only take actions as directed by the board or as specified in the articles of incorporation. So, while they still have authority to make decisions, it is only to the extent the board or articles allows them to. Officers often include a president, secretary, treasurer and vice president. The role of each will be defined by the articles of incorporation or the board of directors. Typically, the president presides over meetings, the secretary prepares minutes of the meetings, and the treasurer keeps track of the corporation’s funds.

Members

A corporation may choose to have members, but is not usually required to. If there are members, they are typically the ones that vote on the board of directors. Their role is to vote for directors that they believe will make decisions they agree with. Members may be required to pay annual dues, volunteer a certain number of hours for the corporation, or meet other requirements set out in the articles of incorporation or as decided by the board of directors.

Ideally, each of the three groups work together to make sure the corporation runs smoothly to provide a public benefit. Keep in mind, though, that this is a brief description of each of these roles, meant to provide a general description and understanding. Their specific authority and duties and may differ depending on your state or what type of non-profit you operate.

Non-Profit Series: 2. How Should My Non-Profit Operate?

Written by Sagan L. Carman-Downer

When forming a non-profit organization, one of the first things you will need to decide is what type of entity you will use to operate the organization. An organization is not necessarily required to establish a formal non-profit corporation under state law. Additionally, there is no requirement that a non-profit that is formally organized under state law apply for status as a tax-exempt organization for purposes of federal income tax.

Thus, there are three options you can consider when deciding how to operate your non-profit organization.

1.  Form a non-profit corporation under state law and apply for federal income tax exemption.

2.  Form a non-profit corporation under state law and forego federal income tax exemption.

3.  Forego formal incorporation under state law and forego federal income tax exemption.

If you choose to form a non-profit corporation under state law, commonly known as incorporating your organization, you will need to look at state law to see what is required. Incorporating will involve filing a document known as the Articles of Incorporation. State law will provide guidance on what information is required in the Articles. Typically, the Articles will indicate the purpose of the organization, the address where it is located, and who is incorporating it. The Articles may, and commonly do, include additional information regarding how the organization will be managed. Once you have filed the Articles, and the state has accepted that document, you will have become a non-profit corporation.

At this point, you can either operate at a non-profit corporation that is subject to federal income tax, or you can seek tax-exempt status. To qualify as a corporation that is exempt from paying federal income tax, you will file an application with the Internal Revenue Service. In order to qualify, you will need to meet specific requirements provided by the IRS. The application will examine, among other things, the purpose for which the corporation is formed and the restrictions on how its revenue is generated and used. If the corporation meets the requirements, it will be determined to be a tax-exempt organization. If the corporation fails to meet the requirements, it will still be subject to federal income tax.

Another option is to forego incorporation under state law and federal income tax exemption, and simply operate as an unincorporated association. If the organization chooses this option, there may be tax and liability ramifications. That is not to say, though, that this option is never appropriate under certain circumstances. Depending on the facts of your situation, this option may be adequate, and would save the organization the time and money involved in incorporating and seeking tax-exempt status.

In order to decide which of these three option will work best for your non-profit organization, it is best to speak with an attorney in your state. An attorney can look at the facts of your specific situation, and advise you of the pros and cons of each of the options provided.

Non-Profit Series: 1. What is a Non-Profit Organization?

Written by Sagan L. Carman-Downer

Have you and a group of your peers started or considered starting a non-profit organization? It can be difficult when starting out to decide whether creating a formal non-profit entity is necessary in your situation. And if it is necessary, figuring out the next steps you need to take can be overwhelming. This article will start a mini-series discussing non-profit organizations and answering some common questions.

First, it is important to understand what a non-profit organization is and what differentiates it from a traditional business entity. The main distinction is that a non-profit’s goal or purpose is not to generate a profit for its shareholders. That is not to say, though, that a non-profit will not generate money. The difference lies in how that money is distributed. Non-profit organizations utilize that money to further one or more charitable purposes recognized by their state, while traditional business entities typically distribute their profit among the business’s owners.

Next, it is worth noting that the requirements for recognizing a non-profit for purposes of state law are not identical to those for federal law. Non-profit entities are creatures of state law. Thus, the requirements you must meet to establish a formal non-profit will depend on the state in which you are located. The main question the state will examine is the purpose for which the organization is formed. There are numerous purposes that state law typically recognizes as charitable. These purposes will be addressed in a later article. For now, it is enough to understand that what is charitable will depend on your state’s laws.

While this may come as a surprise to some, an organization that is considered a non-profit for purposes of state law, is not necessarily a non-profit for purposes of federal law. In fact, federal law does not expressly recognize “non-profit organizations.” Instead, federal law provides that certain organizations, meeting specific requirements, are exempt from paying federal income tax. Thus, you may sometimes hear non-profits referred to as “tax-exempt organizations” in reference to federal law.

In sum, a non-profit is an organization formed and operated for some charitable purpose that is recognized by state law. If that non-profit meets certain federal requirements, it may be a tax-exempt organization, meaning it does not have to pay federal income tax. While many of the state and federal requirements are the same or similar, they are not always identical, so it is possible that a non-profit organization recognized by a state would still be required to pay federal income tax.