09:01:39 Okay, so we have 32 people in the room it's a minute or two after nine and I know we're still kind of letting people in the room. but I don't want to. 09:01:48 I know that you've all set aside time to take part in this webinar today and I want to be respectful of your time. So just for those of you so, so for those of you who don't know me I'm Alicia pier I'm the director of the Connecticut office of the arts 09:02:04 Tamar Demetri who is the coordinator on the art staff with volunteer lawyers for the arts is in the midst of taking her kids to school because they have snow delay this morning I know we've had this no delay, a little bit of us no delay across Connecticut, 09:02:18 you've noted that we are recording this webinar. 09:02:23 And so thank you for your permission to do that. 09:02:26 Just as a reminder before I introduce our presenters, if people can remember to be unmute. 09:02:34 For most of the webinar. If you have a question, feel free to type it into the chat box. And I am going to be working on monitoring that we may not interrupt immediately to get to your question but we'll take a couple of breaks it logical points to get 09:02:50 to the questions and I will be sort of talking behind the scenes with our presenters throughout the webinar, to make sure that we get to everything that comes up today, there will be a lot of time for question and answers at the end though so do not worry 09:03:05 about that. 09:03:07 So I It is my pleasure to introduce my colleague, Luke and yen. 09:03:14 Luke and yen are from volunteer lawyers for the arts in Massachusetts, and they have been the two who are have been instructed in starting our volunteer lawyers for the arts and Connecticut. 09:03:26 And so this is the second of two initial kickoff webinars and I'm hoping that everybody finds today's discussion, really useful and because I have a platform of people who are interested in this idea of nonprofit versus for profit. 09:03:42 I'm going to have to say, what I'm going to have to say what I always get on my high horse and saying is that for profit and nonprofit. That's a tax status. 09:03:51 Those are their, their people think of them as you operate a business differently if it's a for profit and nonprofit, but I would urge you to think that no matter what your tech status, you are operating a business. 09:04:05 And that is like what I have been saying for the last 20 years of my life to my colleagues in nonprofit organizations, there's no excuse for not operating your nonprofit, as it is a business because it is a business, and Luke and again we'll be talking 09:04:21 a little bit more, I think in depth about maybe clarifying some of my comments. So I'm going to turn it over to Luke and yeah thank you everybody for being here and I am going to go on mute and I'll start watching the chat. 09:04:35 Thank you so much less. 09:04:38 Morning everyone as Liz said my name is Luke Black Star I am Deputy Director of the Arts and Business Council of Greater Boston and we run the volunteer lawyers for the arts in Massachusetts and now also in Connecticut. 09:04:48 I'm joined by my art law fellow and staff attorney un un. 09:04:52 And both of us are working on building out this volunteer lawyers for the arts program and delivering legal services to arts and cultural organizations here in the lovely state of Connecticut. 09:05:03 So today, as I said, this is the second of to kind of kick off workshops that we've done surrounding business entities and business organizations and, you know, what type of entity is appropriate for me, for creative enterprises, be it for profit nonprofit 09:05:19 independent collectives. So the point of this workshop today is to talk about nonprofit. 09:05:27 Last month we did one covering different common types of for profit enterprises that video was recorded it will go. 09:05:33 Connecticut offices the arts will will share it. As soon as it's ready and make that available for for reference. 09:05:40 This video as well as recorded. 09:05:42 But now we're talking about instead of for profit enterprises now we're talking about nonprofit. So for the purposes of this workshop we really are talking about nonprofit tax exempt charitable organizations and I'll talk about what all those designations 09:05:58 mean. 09:06:00 And I'm glad that Liz pointed out, right at the top that you need to remember like that really is an important distinction because we think of nonprofit and the term. 09:06:10 When we just think of what the plain language of that means is that oh I can't turn a profit no you still have to operate at a surplus in order to stay in business because it is a business if you're operating at a deficit for too long, then you will find 09:06:23 yourself going bankrupt and running out of business. 09:06:26 What we really mean when we say nonprofit is no private profit that named individuals or interests or enterprises are getting a share of the profits from this organization's activities. 09:06:38 The point of those profits really are to go back into the mission, and the organization's purpose and that could include things like paying salaries and we'll talk about what all that means. 09:06:46 So this is really it's going to be a pretty dense introduction, there's a lot of material to cover and a lot of vocabulary words, but that's the point it's really to introduce you to the language to give you some of the shared language that folks like 09:07:01 yen and myself use and other, you know, accountants and tax professionals and business advisors, so that you can have a productive conversation about starting your nonprofit organization starting your charitable organization, determining if this is the 09:07:15 right enterprise for you if this is the right option or maybe you want to do something for profit or something a little bit looser. 09:07:23 So don't agonize too much about you know memorizing all this stuff understanding exactly what all of it means, again, we're really here to give you the, the language, so that you can have a productive conversation with your business advisors. 09:07:39 So without further ado, let's get started. First of all, I feel like I have to acknowledge that we are here on Valentine's Day so thank you for, for taking time out of your exciting Valentine's Day Morning to talk about nonprofits. 09:07:54 I'm going to see this presentation again the future and I asked why did I put this picture in here and that's going to be really fun later for me. 09:08:09 So, generally what we're going to talk about this morning is for profit versus nonprofit, again, referred to once it's available the for profit video on, you know, sole proprietorship, corporate for profit corporations LLC isn't that kind of thing. 09:08:18 But we'll talk about the general distinction. We'll talk about what does it mean to be a nonprofit, really specifically, what does it mean to be a 501 c three tax exempt charitable nonprofit will talk about, you know, what are the general steps for incorporating 09:08:32 incorporating and structuring the nonprofit that tends to be more state specific than the actual charitable tax exempt designation. 09:08:40 So we'll talk about it with kind of an eye toward some Connecticut distinctions. 09:08:45 We'll talk about ongoing reporting requirements will talk about tax exemption obtaining it what it means. 09:08:52 How to sustain it. And then we'll talk about some kind of miscellaneous tax issues and other IRS concerns that come up. 09:09:01 So, again, it's pretty dense. 09:09:05 Like what says we'll make time at logical points to stop for q amp a and we'll both be taking and taking a look at the chat to see if any questions have come up. 09:09:16 But generally, I would just say you know if you have a situation that's really specific to you or a question that's really really unique to your personal situation. 09:09:24 That's a point where you can contact us directly afterwards and our contact information is at the end of the presentation. 09:09:30 So let's get started with, what does it even mean to be a for profit versus a nonprofit. 09:09:37 What are the general benefits and disadvantages of each structure. So in the for profit context. 09:09:42 Again, the purpose of the organization is ultimately to maximize profit for the owners be shareholders members in an LLC partners in a partnership that kind of thing. 09:09:54 main advantages are, there's not a whole lot of government oversight, other than you know your annual filings just to remind the secretary of state where you live, that the business is still alive and paying your taxes every year, there aren't really 09:10:08 a whole lot of general requirements you might have some other you know licensing issues and things like that, depending on what type of business you're in, but for the most part in the for profit sector. 09:10:20 There aren't really a whole ton of strict oversight by different offices of the government. 09:10:25 They're pretty easy to set up and dissolve. I could set up an LLC in the next 10 minutes if I wanted to. In Massachusetts, at least in likely in Connecticut as well, because it's simple to page filing doesn't require a whole lot of process. 09:10:41 There isn't a specific purpose requirement, most Secretary of State's, which are the office in the state that govern nonprofit organizations in business organizations. 09:10:52 They're not really going to strictly scrutinize, what the purpose of my businesses they want to know generally what are you about, are you a music organization, are you a retail organization Are you a restaurant that kind of thing. 09:11:04 Other than that, they're not really that interested in the specifics of what your business does. 09:11:10 You're not subject to certain IRS regulations and that's really going to come down to tax exemption which we'll talk about again that 501 c three charitable organization designation for fundraising you have access to traditional capital markets so you 09:11:24 want traditional for profit investors. 09:11:27 For example, if you're a film producer, and you want to bring on an executive producer to fund your documentary film. 09:11:33 Maybe you'll give them. 09:11:46 Ownership sake, share of the company that you're building of your film production company. 09:11:40 So you can get that kind of traditional for profit. 09:11:45 You know, access to capital. 09:11:49 And also, there is this kind of new middle ground if you determine after this workshop that, you know, maybe we don't want to be, you know, we don't want to be a nonprofit. 09:12:01 We want to stick with for profit we want something a little bit more flexible, there's this kind of relatively newer structure called benefit corporations which is generally a for profit enterprise that is organized for the purpose of, you know, whatever 09:12:14 your for profit businesses but also for the purpose of providing some type of general public benefit which is defined by law, generally, some type of societal environmental good, that is measurable by some third party criteria. 09:12:30 And this is also kind of where you hear about benefit corporate or B corporations. 09:12:35 low profit limited liability companies, those kinds of things. 09:12:39 So advantages are generally, it's pretty flexible it's you're given a lot of discussion around the business the way you want. 09:12:47 Disadvantages. On the flip side, you have limited access to charitable fundraising, unless you're working through what's called a Fiscal Sponsorship. 09:12:56 For the most part, as a for profit, you're not going to really have access to charitable donations government grants charitable grants from private foundations that kind of thing. 09:13:04 So on the one hand you have this access to this huge 09:13:09 traditional capital markets. But on the other hand, you lose the philanthropic sector. 09:13:17 You do have to be filing fees you do have to play a regular. 09:13:22 You know, organizational filing fees in order to keep the organization sustained and that can that can add up. 09:13:29 And another big one is you have to pay taxes, you have to pay income taxes you have to pay sales tax, you have to pay property taxes for any physical real estate that your business occupies so you do have some financial disincentives in exchange for a 09:13:44 lot of very. A lot of discretion and breath in terms of how you manage yourself. 09:13:51 On the other side we have nonprofit organizations, which, you know, you see the list of pros and cons are kind of inverted but the pros for a nonprofit are very very strong compared to very very powerful tax exempt financial incentives. 09:14:06 So the big one. you have tax exemption. You are excused under federal law from having to pay federal income tax state income tax state sales taxes and oftentimes property taxes depending on your locality where, you know, if your business does occupied 09:14:22 physical real estate, you have access to charitable funding charitable grants charitable donations from members of the public government grants, things like that. 09:14:32 And you have special liability protections. We'll talk a little bit about limited liability protection and we go to that in a little bit more depth in the for profit workshop. 09:14:42 But in addition to the benefits you get of limited liability protection that you get in virtue of being a corporation or some type of registered business entity that separate from the people. 09:14:54 You also typically for nonprofit organizations have a limitation on the extent of your liability for certain injuries caused statutorily in the interest of, you know, we really want to support good charitable social good and social work like that. 09:15:11 Disadvantages of a nonprofit though, are you have very strict government oversight. You're regulated by two different offices within the state, you're regulated by the Secretary of State, which manages all corporations and oversees all business entities 09:15:23 in the state. Your operate your observed are regulated by in most states as the attorney general's office in Connecticut I believe it's the Department of Consumer Protection, basically to make sure that if you're operating as a charitable institution 09:15:38 and members of the public are donating to you. So you're not defrauding them that you're not using those charitable funds for untoward purposes or again to privately earn a profit, and then you're pretty strictly reviewed and regulated by the Internal 09:15:54 Revenue Service the federal the United States tax authority for purposes of your tax exemption so you have to be very transparent about your income your finances your operations your staffing and your leadership. 09:16:10 So, while you have these very powerful incentives liability protection, access to charitable funds and excuse from paying income taxes. You do have to be a lot more transparent and forthcoming about how you're running. 09:16:25 And you do see a little bit of control as to how you operate your business. 09:16:29 There are purpose restrictions, so where in the for profit sector government doesn't really care a whole ton about what your stated business activities or business purposes. 09:16:40 On the nonprofit side, we care deeply we want to know exactly what it is that you're doing. And there are limitations and criteria that you have to meet in order to even be tax exempt to be considered a charitable organization, there are certain types 09:16:53 of business activities that you can't do. If you want to be a tax exempt charitable organization. 09:17:00 And where a for profit is pretty easy to start and dissolve nonprofits, take a little bit more of a process to dissolve. You can't just shut down the business, especially if the organization has public assets, you have to make sure if you determine at 09:17:15 some point that you know the nonprofit is going to close down or for whatever reason has to shut down. 09:17:22 If your nonprofit organization hold assets of any kind, then you have to make sure that those assets go to another tax exempt mission aligned charitable organization, because again, you have your stewarding resources assets money that was given to you 09:17:37 by the public, either through grants or donations. 09:17:40 And you promised to use those funds for you know your charitable purpose operating a nonprofit theater or something like that. So, because I in good faith donate it to you expecting you to provide theater services, if you dissolve and you have any outstanding 09:17:53 assets, you have to make sure that those assets go to another theater that my intention is still honored. 09:17:59 Even though your organization no longer exists. So dissolution that's a long way of saying, the solution is a little bit more complicated as well. And there are restrictions on political activity for nonprofits, you can't participate in any political 09:18:10 campaign activity you can't support, you know, this political candidate you can't oppose this political candidate. And there are some limitations on what you can do for lobbying influencing legislation, there's usually a little bit of activity that's 09:18:24 allowed, depending on what your organization's mission is what you're not allowed to do too much, and we'll talk about what that means. 09:18:31 So that's the general framework that we're operating in for profit versus nonprofit one alternative in addition to benefit corporations and these kind of middle ground organizations. 09:18:43 We also have this notion of Fiscal Sponsorship, which is essentially a contract, it is a relationship between an existing tax exempt charitable nonprofit and either a program, you know, an independent creator, someone or some organization that is doing 09:19:00 some type of charitable work. 09:19:03 It's a contract, whereby the fiscal sponsor, at minimum will usually allow their sponsor or re the recipient of the sponsorship services allow that sponsor to use their tax exempt status in order to collect charitable donations for some type of some type 09:19:23 of charitable program. So, the context in which I see it a lot is, we might have an independent artist who operates in art studio for profit. 09:19:32 That's the main livelihood, but they're doing you know a local educational program or their, you know, applying for a government grant to do an art installation or something like that. 09:19:42 And, you know, they don't have intention to switch to being a for profit and enterprise but they do need some type of charitable kind of umbrella or some type of charitable organization to help them get access to those grants. 09:19:56 So, for the limited purpose of, you know, your charitable work. 09:20:00 We're going to allow you as your sponsor to use our tax exempt status to collect donations and grants from the public doesn't require any separate taxes and filing. 09:20:11 The most important thing is that the organization that is a sponsor, and the organization that is the recipient of the sponsorship services the sponsor a. 09:20:20 They have the same charitable mission, so you can't have a Fiscal Sponsorship fight like if I'm a muralist and I'm going to go to a public art installation in Boston Common. 09:20:31 I can't be fiscally sponsored by animal rescue league here in Boston because it's not mission aligned. 09:20:39 So it is a very powerful. It's a very valuable tool, oftentimes where I see it is in the instance that I gave you, independent artists doing a short term project that's charitable or public. 09:20:51 I also see it a lot for new nonprofit organizations that need a bridge between when they initially incorporate, and later on when they get tax exempt status, so they have a nonprofit corporation it exists, they're not yet tax exempt. 09:21:07 And they just need some type of coverage so they can get charitable donations while they're waiting for their designation there are 501 c three status from the IRS. 09:21:17 So it's a pretty valuable tool. 09:21:20 What is the sponsor getting return often they'll get a small proportion a small fee. 09:21:26 Often a percentage of the gross charitable revenues that you bring in, usually between five and 10% it varies. 09:21:34 But that's that's the main nature of the relationship. 09:21:39 One thing to remember with the Fiscal Sponsorship is that technically, because you as a sponsor a are not tax exempt. The funds that you get, even if you're the ones soliciting them and you're the one you know they're donated to you for the program, the 09:21:52 checks the charitable money is actually going to the sponsor the checks are made out the sponsor so it's ultimately within the sponsors control to determine how to use those funds and how to allocate them. 09:22:05 And usually, how exactly they will allocate those funds and distribute them is going to be under a written contract or written Fiscal Sponsorship agreement. 09:22:14 So again, to set up a Fiscal Sponsorship again you have to have mission aligned if you're a nonprofit theater company, then you're you're a, you know, theatre artists and you're doing a Theater Project then you'll want to be sponsored by a theater company 09:22:27 or, you know, a venue or something like that, you'll want some type of written agreement, indicating, you know, what is my project, what is the scope of the sponsorship. 09:22:38 What is the percentage what is the the fee that I'm going to pay the sponsor that they're going to collect from my gross charitable revenues. And, you know, when does the relationship and under what circumstances does it end, and what are the events that 09:22:52 have to occur for you to distribute the funds to me. 09:22:56 So, usually if you work with a fiscal sponsor. 09:23:00 If they're familiar with the relationship then they should have a sample Fiscal Sponsorship agreement Fractured Atlas is I think the biggest fiscal sponsor for the arts, so they're a good resource and they have some information on Fiscal Sponsorship as 09:23:13 well. 09:23:15 And just make sure you understand what it means what the contract terms mean that you and your sponsor on the same page if that's the path you want to go down and just bear in mind that it is going to be generally, because it's still is a charitable relationship, 09:23:30 there's still going to be some oversight by, you know, the IRS the attorney general's office the Department of Consumer Protection to make sure that again, all of these charitable funds that are going to your fiscally sponsored project are being used 09:23:41 for the charitable purpose that donors have promised to give to you for. 09:23:48 So that's, again, just a really short you could do a whole separate workshop on Fiscal Sponsorship. 09:23:54 But that's just a, an alternative, a kind of. 09:24:01 Another option for charitable work charitable programming and things like that. 09:24:09 So, let's move on to what does it mean to be a nonprofit specifically what does it mean to be 501 c three. So there's a couple terms that we're going to talk about we're going to talk about what it means to be a nonprofit what it means to be charitable 09:24:22 what it means to be 501 c three. They're all related but they're very different things. When we talk about charitable we're talking about generally what is the purpose of the organization. 09:24:32 When we are talking about nonprofit we're really talking about the legal structure, nonprofit corporation as opposed to a traditional C Corp S corp Limited Liability Company, something like that. 09:24:46 The name is different in different states in Connecticut, I believe, nonprofit corporations are technically referred to as non stock, corporations, it's the same idea. 09:24:56 So when we talk about nonprofit we're really talking about the type type of business entity that type of legal entity. And then when we talk about 501 c three we are talking about a type of tax exemption. 09:25:07 There are like 30 or so different types of tax exemptions granted under the IRS or the Internal Revenue Code the tax code. 09:25:17 You know there are lobbying organizations your 501 c four is which you might have heard of, there are you know pension plans, there are certain unions there are, you know, professional associations that are tax exempt. 09:25:31 but one of the unique qualities about 501 c three is one, it's a tax exemption for charitable organizations, and to not only is your income exempt from taxation, but also your donors your charitable supporters be at private foundations, or individual 09:25:49 donors, their contributions their charitable contributions to your organization are tax deductible to them as well. That is the only of the 30 different types of tax exempt organizations, 501 c three is the only type that confers a financial benefit on 09:26:06 both the recipient the organization tax exemption, and the donor, the tax deduction. 09:26:13 So that's, that's one of the big advantages of being a 501 c three. Again, the exemption is set by federal law, it's not set by state law, it's not determined by the individual states it really is the Internal Revenue Service that determines whether or 09:26:28 not you can be recognized as a tax exempt nonprofit. 09:26:32 And it depends on what your charitable purposes or, or what exactly it is you're doing. 09:26:37 So the key factor and being a 501 c three is, what am I doing, and the, the tax code is very narrow about exactly what it is you can be doing that constitutes charitable work. 09:26:49 You have to be organized for a religious charitable Educational, Scientific literary purpose. 09:26:57 More specifically, it is any corporation community chess fund foundation organized and operated exclusively for religious charitable scientific testing for public safety literary educational to foster national or international amateur sports competition 09:27:13 the Prevention of Cruelty to Children or animals. 09:27:18 So all of those are very specific but they're also very broad you'll find that a lot of a lot of nonprofits fall into these first couple categories of either religious charitable, educational, or scientific. 09:27:32 So generally, as long as you fall within those criteria you're generally going to be okay and you're going to be at least past the initial kind of sniff test for. 09:27:40 Are we doing charitable work that is worthy of being exempt from tax. 09:27:46 And the other important factor is about who your constituents are tax exempt charitable nonprofit cannot serve a specific named individual again the point of a nonprofit is to confirm no private profit on any private individuals or interests. 09:28:02 So, your organization must benefit a broad and indefinite class of people. So, you know, if you know, for example, if a family has a house fire that damages their property. 09:28:15 You know, you can't set up a nonprofit organization to support the Smith family who are victims to, you know, a house fire or, you know, some other type of natural disaster or something like that. 09:28:28 What you can do is you can set up a nonprofit organization that provides financial support financial aid to, you know, families in Hartford, Connecticut, who have been victims of natural disasters who've lost their, their property and house fires or things 09:28:42 like that so key tenant is, you're doing charitable work and your charitable activities are not benefiting a specific named interest. 09:28:55 So it's, it's both brought in specific. 09:29:00 Another key that you know we talked about is this sense of no private profit, again, a nonprofit organization has to earn a profit in order to sustain itself. 09:29:28 What it can't do is the profits itself themselves cannot endure to the benefit of a private shareholder or a private individual. 09:29:19 So again, unlike the for profit we're not directly giving the profits earned by the company to, you know, a name to owner. Instead, the profits of a nonprofit have to go back into the charitable purpose and must advanced the charitable mission, and that 09:29:36 can include paying reasonable salaries paying, you know, benefits to your employees and things like that. It just can't mean that someone is getting a financial benefit out of the organization, just in virtue of being affiliated with that are being, you 09:29:51 know, a leadership. 09:29:55 So in addition to restrictions on you know the limitation against any private profit for any named individual. 09:30:05 You also have a pretty, pretty strict limitation on what type of political activity you can engage in. So these are things like again lobbying and political campaign activity for all 501 c three for all charitable nonprofits, there is an absolute restriction 09:30:20 absolute prohibition against participating in political campaign activity. So your organization can come out and say, you know, we support this candidate for office we oppose this candidate for office. 09:30:33 That is strictly disallowed, again, the idea being people are donating to your organization for your charitable purpose, not for you to support and rich, a specific you know political candidate. 09:30:45 There is a limited degree of lobbying that's allowed. So, again, influencing legislation so things like, you know, if you are a, for example, a lot of arts organizations we were very interested in Mackerras Act and the American rescue plan. 09:31:03 And, you know, all of the benefits of it conferred for individuals who lost their jobs and artists who are self employed and expanding on employment to independent contractors and that kind of thing and good workers. 09:31:18 So, that was an instance where a lot of us were, you know, doing some advocacy and lobbying to some extent. 09:31:26 That is permissible as long as you're not doing too much of it and there are a couple different measures of how much is too much. it's either based on you know the amount of staff time that's dedicated to at the proportion of staff time that of your total 09:31:39 operations that you're dedicating to lobbying activities or funding, how much of your actual budget how much of your expenses are you spending and using for political campaign activity. 09:31:53 So, a couple different measures. 09:31:56 As long as you're not doing too much lobbying too much puddle. 09:32:02 You know, advocacy, then that's okay. And you can do education, you can. 09:32:07 There's no limitation on how much you know legislative education you can do just teaching, you know, your constituents about this is a bill that's coming down the pipeline. 09:32:16 This is an act of Congress that's being considered. You know, you have to consider are you being neutral are you presenting both sides about it, but that is allowed education is allowed, that's acceptable. 09:32:31 So this next slide is going to be a little bit confusing we're, we're getting into what I promise is the most difficult concept of the morning. 09:32:44 And this is all to say there are two types of 501 c three is remember we are talking about the narrow subset of nonprofits that are tax exempt for charitable purposes, so we're still in 501 c three land. 09:32:59 There are two varieties. The default type of 501 c three is a private foundation, private foundations are traditionally things of what you are organizations that are usually funded by a small group of wealthy individuals, and oftentimes their main purpose 09:33:15 is to re grant, their funds to other charitable organizations that are actually doing you know boots on the ground. Good work. And then we have public charities, which are what we mostly think of when we think of 501 c three years and we think of charitable 09:33:29 nonprofits, you know, your churches, your schools, your, you know, your small organizations that are doing actual, you know, again, boots on the ground charitable work you know they're go, they're doing, you know, eliminating homelessness and serving 09:33:48 the poor and providing expanded education services that kind of thing, the people who are doing the work. 09:33:55 You might hear of something called private operating foundations, their private foundations that do some programming as well as just re granting, but in the traditional architectural sense, private foundations mostly exist because they have a large endowment 09:34:09 a large body of wealth that passively earns you know interest income and dividends, and they regret the proportion of their total assets to other charitable organizations. 09:34:21 Think of the Bill and Melinda Gates Foundation, you know, they have, you know, 10s of millions of dollars and assets and principal. 09:34:31 And they usually regret that money to other science organizations and public health organizations that are, you know, eliminating diseases and things like that are public charities are again your small, small organizations maybe your small scientific 09:34:41 organizations that are actually doing the boots on the ground research, like, you know, Tufts Medical School or something like that. 09:34:53 So, by default, if you apply for tax exemption, and you don't specify what you are then the IRS will automatically sort you into private foundation, you generally don't want to be a private foundation, unless again, you have boatloads of money and your 09:35:08 goal is to support other organizations that are doing charitable work. The reason you don't want to usually be a private foundation is because one. There are even further restrictions on political activity for private foundations to, you do have to distribute 09:35:27 at least 5% of your total net worth every year as a private foundation. So unless you have multiple millions of dollars in assets, that can be a big chunk of change every year to potentially lose. 09:35:39 And there are other types of limitations on self dealing and things like that and additional filing requirements and the IRS is generally stricter on private foundations and on public charities. 09:35:49 So typically you want to be if you're an organization that is doing actual work actual charitable work and programming and service, then you generally want to be treated as a public charity. 09:36:01 And within the world of public charities there were a couple different ways to qualify to be considered a public charity. Again, this is a question that the IRS will determine for you. 09:36:11 Certain types of organizations are automatically considered public charities, schools, so traditional day schools with curricula, staff, faculty, regular programs are regular cohort of students. 09:36:27 Those qualify, churches, organizations that are doing religious services. 09:36:33 Those usually automatically qualify, and then hospitals, if you are actually treating ill and injured, then those automatically qualify as public charity is just in virtue of the work that they do. 09:36:44 Then there are two other ways. One is this one on the right being what's called a supporting organization which basically means your nonprofit exists really to support, another tax exempt public charity. 09:36:55 These of our most commonly like your friends have organizations like you know maybe your Alumni Associations for certain universities that really just exist to support programs at the university, you know, your friends of environmental organization that 09:37:09 just you know raises money to do charitable work for other environmental advocacy groups and things like that. 09:37:17 The most common way though to qualify as a public charity is what's called the public supports us, and it's a mathematical test, it's kind of a pain in the butt. 09:37:28 But basically, the short version is at least one third of your total revenue has to come from either contribute contributions from the public or actual revenue from earned revenue from your exempt function. 09:37:45 So for example, if you're a nonprofit theater company ticket sales if you're a nonprofit Art Gallery admission. If you're a nonprofit educational program tuition workshop fees that kind of thing. 09:37:57 Or, you know you got a third of your contributions from small donations from individual members of the public. 09:38:06 Again, Think of public charity as where the private foundation was a small group of wealthy donors, a public charity is supported by a large a very wide breadth of ordinary donors who might make small contributions $15 a year, $100 here, maybe have one 09:38:23 contributor who donates 1000. 09:38:26 Maybe you get public grants government grants from your city or state, you know the NEA that kind of thing. 09:38:33 So that's the general principle. The, the calculation of the public support test whether you qualify through this one third test is a little bit more complicated because in order to demonstrate that you are getting a lot of donations from a wide variety 09:38:54 of sources. The IRS actually puts a cap on what proportion of each donation you receive actually counts towards your that one third that numerator amount. 09:39:04 It's really complicated. 09:39:06 It's, I think a little bit beyond the scope of this kind of introductory workshop. 09:39:12 But generally, it's a. 09:39:15 When you're evaluating whether or not you're actually getting enough funding from public sources. 09:39:20 you might want to be working with an accountant who's familiar with kind of the public charity, the public support tasks who can help you track this both your bookkeeper and your accountant, being familiar with keeping track of how much you're getting 09:39:32 and making sure that you're getting enough, you're hitting that one third contribution, or one third exam function revenue mercifully. 09:39:42 Whether you meet the public support test is evaluated on a five year rolling basis, so you don't have to have, you know, if you earn $600,000 in five years. 09:39:53 As long as you do it as long as 200,000 of that comes from these public sources over that whole you know the aggregate of that five years, you're fine. 09:40:02 So it's not like you'd have to be meeting this milestone every year. 09:40:07 Again, it's a complicated tax topic and accounting topic. 09:40:12 We'd like to make sure that you're familiar with it so that you don't, you know, if you consider that you want to apply for tax exempt status you want to form a nonprofit, just make sure this is something that you're aware of so you don't automatically 09:40:24 get treated as a private foundation from the gecko and then it's a little bit harder for you to raise money and that kind of thing. 09:40:33 So, these next few slides are just kind of explaining what I just said. 09:40:41 Again private foundation default typically funded by a small number of sources and the main purpose of a private foundation is to make grants to other charities. 09:40:51 And then, just a brief list of some of the restrictions, private foundations generally provide they cover their own and provide their own charitable programming they do direct work, direct service work themselves, and they receive their funding ideally 09:41:05 from a very very broad array of sources, individual donors, private foundation grants public grants, kind of thing. 09:41:13 They're not usually independently wealthy, like a private foundation is that just, again, a lot of the income of a private foundation is investment income from a large, a large principal amount of money that is invested in, you know, traditional financial 09:41:28 instruments that kind of thing. 09:41:38 And then, as I mentioned before, there are about 30 or so so 29 different types of tax exempt organizations, but again, 501 c three is the only one that confers both tax exemption on the organization and tax deduction for the supporters so that's the 09:41:54 unique kind of two way financial incentive for tax exempt charitable organizations. 09:42:04 So, 09:42:04 I'm going to pause right here. Before we jump into, you know, back down to the state level, how do we form this thing and does anyone have any questions I don't see any in the chat, so I think we're good but if anyone has any questions right now I'll 09:42:19 take a second and pause and we can, you can either drop them in the chat. 09:42:26 Or you can just unmute and speak up. 09:42:33 Okay, so let's move on. 09:42:37 Oh sorry, Luke, I do have a quick question. Yeah, go for it. If our organization were to receive a large donation to set up an endowment fund say for the maintenance of our facilities. 09:42:49 Are you saying that under the tasks that public support test if the average over the five year period still leaves us over the third one third point where it's okay to take that in as income in an organization or would it be best to set up a friends of 09:43:07 that would then use that money to support the organization. So there's two things on that, if you under normal circumstances, depending on how much that money is how much the amount of the donation is to set up the endowment. 09:43:20 It's just that, that will be the amount the proportion of that endowment that counts towards your public support testing out that that one third number in the numerator numerator. 09:43:52 That will be kept, and that the the camp depends on your total revenue your total your total revenue for the year. So to put numbers to it. 09:43:43 When you get ordinary donations ordinary charitable donations. 09:43:47 The amount of the donation, that is allowable to count towards that numerator is capped at 2% of your total revenue. 09:43:56 It's a really confusing number it's kind of hard to conceptualize but, for example, if you earn $500,000 over the five year period, 09:44:08 any donations that you get will be capped at 2% of that five and $1,000 so what does that 10,000 I think. 09:44:17 So, that will count about 10,000 of that will count towards your public support test so if you get, for example, a, you know, $200,000 donation over that 505 year period that $200,000 will only count towards 10 10,000 of that $200,000 will only count 09:44:35 towards your public support test, which, you know, what is a third of 500,000. The other thing is, for instances that you're mentioning and kind of like we get a donation, you know, maybe a one time large donation, there is an exception for like unusual 09:44:51 so again if you're left in the will have some, you know, elderly supporter or you're part of a request or they set up a trust or something like that, and you suddenly come into a million dollars to support your organization that was, you know, not common 09:45:08 unusual. 09:45:11 And not expected to be repeated. Then, those are accepted from this public support test that basically the idea being if something random happens and like the nice little old lady down the street left you a $2 million. 09:45:24 $2 million. Then we don't want that to tank your public support test, because we expect that's going to be an unusual circumstance. So, answer one is depending on what your total revenues are and how much you're getting that amount will be kept the amount of the 09:45:38 the proportion of that donation that counts towards your public support test is limited. For earned exempt function income. 09:45:52 That's capped at 1% of your total revenues for the five year period. But then, and then the second answer is, there are certain limitations. 09:45:57 There are there are exceptions for those kind of weird circumstances like again, someone leaves you in a request or you come into a huge, you know, huge grants or something like that. 09:46:06 So yes, and to answer a question in the chat is a revenue from all sources, it depends. It depends if it's exempt function income, or if it's a charitable donation charitable donations from the public and charitable grants from other private foundations. 09:46:21 They're subjected to that 2%, if it's a government grant, if you get a grant from the NEA or, you know, you get a grant from the Connecticut office of the arts, you know one of their, their grants, because those are government grants, those count in full 09:46:39 they're not limited. 09:46:41 But the reason I usually don't, I don't like to get into the percentages because it's kind of counterintuitive because it's not you know it's not 2% of how much they contributed to you. 09:46:50 It's 2% of how much it's 2% of your total revenues for that five year period. 09:46:58 So I hope that answers your question, it is a it is a tricky concept. And again, I think it's, It's easiest when you're working with a accountant or bookkeeper, honestly, both who are familiar with kind of tracking nonprofit charitable donations and charitable 09:47:17 revenue, because you are going to be at some point when you're filing your annual return to the IRS yard for 990, you are going to report this at some point, they're going to evaluate it every five years. 09:47:30 So, worst case scenario, if you don't qualify for a five year period, you get dumped into public chair, public, private foundation, not great, but you can be reinstated as a, as a public charity again, it's just you have to wait for that next five year 09:47:45 cycle to go, so it does take some time. 09:47:50 So, let's move on to what it actually means to be a nonprofit corporation, so we were just talking about you know what it means to be a tax exempt charitable nonprofit under 501 c three of the federal tax law. 09:48:07 So now we're coming back down to the state level, and back down really to ground level, what it means to form this organization. 09:48:15 So a couple things you want to think about first you want to think about is this the path you want to go do you actually want to go the nonprofit corporate route is, you know, if you were you were Weren't you turned off by all of the requirements for 09:48:27 501 c three tax exempt status. 09:48:30 And then, even within that you might want to determine what is the right structure, do I want to be a traditional Corporation, a nonprofit corporation in Connecticut again I believe they're referred to as non stock corporations. 09:48:43 what that means. Do we want to be a charitable trust which is more a contractual relationship, a legacy planning tool, whereby basically as part of the, the trust makers plan, they decide to leave a portion of their assets to a nonprofit charitable purpose. 09:49:03 purpose. That's kind of more an estate planning tool, a way that often wealthy individuals, try to get kind of around gift taxes and certain state taxes. 09:49:14 So that's one option. Do you want to go the for profit route with a benefit corporation or, you know, some other type of kind of middle ground stick to Fiscal Sponsorship maybe or do you want to operate as an unincorporated Association. 09:49:30 For those of you who tuned into the for profit workshop unincorporated associations kind of the charitable analog to have sole proprietorship, or a general partnership. 09:49:40 So it's basically just one or a group of people getting together in business for the purpose of doing some charitable work. So again, no liability protection, no tax advantage. 09:49:51 It's not recognized by as kind of a legal entity, and you're not going to be able to get charitable funds from it. 09:49:59 So that's an option, it's easy, it doesn't require anything to set up, but it comes with a lot of caveats and a lot of risk. 09:50:08 So, usually we try to avoid unincorporated Association. 09:50:13 Quick question how can one change the IRS designation from private foundation to public charity. 09:50:20 Basically, you'll have to you, you have to apply for it you have to request re designation. 09:50:29 After a five year period has elapsed and you have to have met basically at the end of the five year period where you actually demonstrate that you've met the public support test, then you apply for you to have that designation changes by the IRS. 09:50:46 I can't remember if you have to basically refile your 1023 or application for exemption, or if it's something you can request in your 990 i think it's it's the former I think you have to request it. 09:51:00 So it is it is a process and it, it takes time just because you have to demonstrate you have to show over that five year period that you've qualified again. 09:51:08 So, there was just this time requirement built in. 09:51:13 So, with respect to corporations. 09:51:19 What does it mean to be a corporation. 09:51:22 It's a separate legal entity. So, it is a separate recognize legal person from the individuals who actually compose it, the board members the directors, the officers the actual staff and volunteers. 09:51:38 The corporation is governed by state law. 09:51:40 It's governed by your, your chartering document in some states if they're called your Articles of Organization, your Articles of Incorporation in Connecticut it's your Certificate of Incorporation, and you're also governed by a set of corporate bylaws 09:51:53 which is your basically your rule book, it's going to set the roles of, who are the board of directors who are the officers what is their legal authority, how do we make decisions when do we meet and kind of key terms like that how do we resolve disputes 09:52:09 among ourselves what are the conditions that have to take place for our organization to dissolve. And how do we make that decision. 09:52:17 A corporation again enjoys limited liability or the constituents of the organization enjoy limited liability because again, a corporation is separate it's a separate legal person it's a separate legal entity from the actual individual personnel. 09:52:33 So those individual personnel. If they commit some type of injury, you know, negligence or cause some type of damage or harm, just in the regular course of conducting their business. 09:52:45 Then, the business the corporation will bear responsibility, financial for that harm. 09:52:51 And in theory, they exist perpetually as. And what that means is the organization out lasts the turnover of the individual people who make it up. So, your board of directors change your officers change your staff your executive director, comes and goes 09:53:07 as those people turn over the organization doesn't necessarily, at least from a legal perspective, it doesn't fundamentally change it continues to exist. 09:53:17 So, one point I want to just mention is being incorporated as a nonprofit or non stop Corporation, having the legal entity setup, at the state level, does not mean you are tax exempt it doesn't even guarantee tax exemption yet. 09:53:33 There are different processes. 09:53:44 And we have a question what carrot what language needs to be in the bylaws to satisfy the IRS 501 c three requirements that is an excellent question, I promise, I think that's in like two more slides so we will get to it. 09:53:48 Look, there's another question about a 501 c three having a de ba and I'm not sure if you're going to get to that. Yeah, can so DB A is, it's DVDs are a little bit weird because it's basically it's a fictitious name registration so if your organization 09:54:04 is operating under a different name than its legal name, then yes you can have a DPA or trade name you can you can register a different name for your business. 09:54:13 Oftentimes, where you might see DBS required for business entities might be if you're operating in a city that requires you to be registered with the city. 09:54:24 So here in Massachusetts like if you're a business and you're operating in Boston, meaning if you have like a physical location in Boston. They usually want you to be registered in the city of Boston, even if you know the DB, you're not operating under 09:54:36 a different name but they do want some type of record that you're registered there. 09:54:40 So the short answer is yes, a nonprofit or non stop corporation can have a BBA. 09:54:48 I would usually go you know where is are you required to have a TBA, are you required to have like a business certificate. 09:54:56 In order to open a bank account, then yeah I got the BBA, but if you're if you're mostly concerned about operating under a different name, then you might just want away. 09:55:06 Do we just change the name of the, of the organization, which is a process it's a pain in the butt, especially if you have the infrastructure setup, maybe have a trademark maybe have bank accounts, maybe you have all these other accounts your, your AI 09:55:17 n number. 09:55:19 number. You know if you change the legal name of the entity, then you have to change all those accounts and registrations. 09:55:25 But yes, the short answer is a 501 c three can have a BBA. 09:55:30 And depending on where you are, you might have to cap one. 09:55:33 But that's a very good question. 09:55:43 So we're gonna talk about really two constituency groups and a nonprofit organization. But there are potentially three. 09:55:45 So I'm just going to back up really quickly to the slide here. So, you saw that this, this kind of sub question with, you know, do we want to even be a nonprofit corporation. 09:55:57 There's a question of do you want to have voting members, or do you want to have a self perpetuating board. So what that means is traditionally at least here in the northeast. 09:56:06 Most nonprofit organizations really have two levels of governance they have board of directors that are really the final say so on most virtually all the matters of the corporation, and then you have officers, your president your treasure VP secretary, 09:56:19 that kind of thing, who are really responsible for like implementing the corporate policies and day to day management. 09:56:26 In some nonprofits, you have this third tier up top of membership, and they're not colloquial members like you know your members of like the Museum of Fine Arts type thing where like, I pay $100 a year and I get unlimited free passes, it's more members 09:56:43 in a legal sense of, I have the right to vote on certain corporate matters, oftentimes, when you have a nonprofit organization that has a membership class. 09:56:55 They're usually going to actually be the ones who will elect to the board of directors. 09:56:59 The alternative is where you just have this two tiered system. We have board of the board of directors and they really just elect and relax themselves. 09:57:18 get together and you know maybe someone nominates a new board member and the board, takes a majority vote. Yeah, we want to elect this person, versus when you have a membership but nonprofit corporation, those members have the right to vote, and oftentimes 09:57:28 they'll be the ones who will elect the board of directors at their annual meeting or something like that. 09:57:34 So, I don't, you don't see membership nonprofits very often. 09:57:41 Oftentimes where I've seen them are organizations that want their leadership to be a little bit more representative and a little bit more democratic they do want maybe members of the constituency they serve to be somewhat represented. 09:57:53 I see this in orchestras I've seen this and professional, you know, professional development organizations like for artists that are allowed. This is a support organization. 09:58:03 This is a, you know, we do professional development and education and we're also, you know, our members who might get some type of benefit they also vote on corporate matters that kind of thing. 09:58:14 It's pretty uncommon. 09:58:16 I generally counsel against having members in your nonprofit just because it can be difficult to manage. If you have a organization that has 50 members, and you know you need a simple majority of them to vote on any given matter, you know elected board 09:58:33 members are making financial decisions. 09:58:36 You know how likely are you, you know, what if you have an organization where you have 50 members but only 15 of them ever show up to a meeting, well then we can't legally do anything because we can never get enough people to participate. 09:58:48 So, it can be sometimes too many cooks, and it could just be difficult to manage sometimes. So typically most attorneys I think you work with at least in this in this geographic region. 09:58:58 They're usually going to advise that you have what's called a self perpetuating board where we just have a board of directors, no members, and the board. 09:59:08 Relax itself and perpetuates itself. 09:59:11 So what is the board do they are usually the final say. For most policies so they set organizational policy they're often going to be the ones who decide on the mission, vision, values of the organization. 09:59:24 They're going to have final financial responsibility and decision making. 09:59:46 They're usually gonna have oversight on the officers they might even be the ones making certain hiring decisions at least with respect to executives like your executive director and executive compensation and things like that. 09:59:41 How many should we have odd numbers definitely preferable in the case that you have a tie, you don't have to worry about that. 09:59:50 And then, you know, at least three is recommended. I can't recall I think Connecticut might require you to have at least three board members to have a nonprofit organization. 10:00:04 Send some states that are a little bit more flexible, you find some startup nonprofits that really only have one, they have one person, one board member one officer. 10:00:24 Who do you choose, ideally a majority of disinterested directors, meaning they do not have a personal financial stake in the organization. So your board members shouldn't be people like staff, they shouldn't be main like a key contractors, people who 10:00:38 are getting some type of financial incentive, ie payment compensation from the organization. 10:00:44 If those are the people on your board, you do have to make sure that at least when they're acting in their capacity as a board member, that, that is separate from the capacity they work in which they get compensation. 10:00:57 Most of the time you're not going to have staff, serving on the board paid staff anyway. 10:01:03 Traditionally your, your board of directors are usually going to be volunteers. 10:01:08 And if you don't want. If you want to have people who support the organization, but either you or they don't necessarily want the legal responsibility of sitting on the board. 10:01:17 Most organizations have advisory groups advisory boards, they don't vote on corporate matters, they don't attend board meetings but, you know, maybe they're just, they have educational experience or they have hospitality experience or they have connections 10:01:29 and, you know, you know, homelessness and service organizations like that and they're just, they're good resource to have but they don't want the legal responsibility. 10:01:39 You can have non voting board members. Um, let's see. 10:01:48 So then, contrast the board of directors with the officers. The officers are, again, your day to day managers. 10:01:58 They are the folks who are responsible for, you know, General program management, oftentimes they're going to be ones who are directly overseeing staff and volunteers. 10:02:08 They're going to be the ones keeping track of day to day financial health of the organization. 10:02:15 And And again, these are the people who implement the policies of the organization so where the board of directors, set the policy and decide what our purposes, it's often the officers at least in theory, who are the ones who put it into action. 10:02:28 Most states require at least three some type of Chief Executive treasure, and either a clerk or a secretary. 10:02:36 So usually president Treasurer clerk, you'll see some frame them as CEO CFO CIO, that kind of thing. 10:02:45 Sometimes you can have vice presidents and the roles of both the officers and the directors of the organization, they're defined in your bylaws. 10:03:00 And, you know, they're usually going to be subordinate to the oversight of either the board of directors or some cases if you have members, the membership of the organization. 10:03:10 And I see that we have a couple questions, I will say, kind of, one last thing on this, and then I'll hit some of these questions. 10:03:20 So, most important thing about officers and directors are they have legal duties legal duties that are subject to scrutiny, often by your state's attorney general's office. 10:03:32 And the two key legal duties our duty of care and duty of loyalty duty of care is basically the legal terminology is you have a duty to act as a reasonably prudent board member. 10:03:47 What that really means is if you're a member of the board, you have an obligation to be informed about your organization that you serve on. So, informed about really all senses of the, the organization. 10:04:00 What is it that we do, what is the general business health of the organization, what is the financial health of the organization, if I'm being asked to vote on a business matter, what are the consequences of my vote, what does it mean. 10:04:15 And, you know, it means being an active participant that means not just passively, you know, checking into your board meetings and then not paying attention. 10:04:22 You actually have a legal obligation to keep yourself informed to keep yourself abreast if the staff or the leadership of the organization give you information to review review it. 10:04:33 You know if you sit on a board and you get a quarterly statement of financial information review it, if you don't understand what that means. that's okay. 10:04:41 not all of us are accountants. 10:04:42 But that means, ask the person in your organization who can tell you what this means can teach you can translate it for you. 10:04:58 So you have a duty to be informed to be an active participant, and to ask questions when you don't know, it's okay. Um, most nonprofits understand that not everyone knows everything, but you are expected to have a baseline level of participation. 10:05:05 And if you find that you are falling below the standard of care, you can potentially be personally liable for breaching that legal duty. 10:05:13 And again, it really just means that you're not really a participant and you're kind of just being negligent and fulfilling your obligations, you're not you're not participating you're not staying informed, you're maybe not making educated decisions, 10:05:25 you're making decisions without really considering the consequences, oftentimes we're not really going to have this problem but it does happen, and the other duty is the duty of loyalty, and that is a fiduciary duty meaning it has a duty of absolute loyalty 10:05:37 and what that means is you put your own financial interests below those of the organization, you put the needs and the financial stakes and the health and wellness of your nonprofit organization that you serve above your own personal financial duty personal 10:05:56 financial interests. So, if you are a board member who does potentially get, you know, maybe a contract or some other type of financial benefit from the organization. 10:06:06 You're not allowed to participate in any decisions related to that benefit, you have to defer to someone else. 10:06:12 Because it raises a conflict of interest and it's a potentially a breach of your duty of loyalty, again, kind of a restatement of no private benefit no private profit know private environment. 10:06:23 So again, usually, your State Attorney General's office or your department of consumer protection but it's usually vag. 10:06:30 They have jurisdiction over the conduct of directors and officers of a nonprofit organization, and there are certain types of insurance policies to protect against this you know your directors and officers liability insurance that if you just an extra 10:06:46 exercising your, your good business judgment make a bad call, you know, and harm comes from it, insurance policy will cover the damages of the claims from that are the, the cost of that, you know, there are certain waivers you know does the company wave 10:07:01 certain claims and liabilities against the directors the board of directors and officers that kind of thing. 10:07:08 But it's really important understand what these two what these two duties mean and, and that this is something where you are potentially. This is an area where your liability protection from the organization doesn't really defend you because if you breach 10:07:22 these breach any of these obligations. You really are breaching a duty to the organization itself and the public. 10:07:32 So I see, there are a couple questions. 10:07:38 Oh, is there a link to the ages Office website where you have to register. 10:07:47 And I have a lady I am one of the slides there is the link to the Department of Consumer Protection that has all the information like the link to where you register what it means what the requirements are so yes that is in the slideshow it's in a couple 10:07:59 slides. 10:08:01 And I will share this slide show as a PDF with Liz and Tamra and the Office of the art so that you know all these hyperlinks are alive and you can click them and they'll bring you to the web page. 10:08:12 So yes, that is there. 10:08:15 And then we'll talk about the language when we get to the Articles of Organization firms that help nonprofits find board members. we do a workshop. 10:08:28 We do a workshop, every you know quarter or so called Get on board that trains, both business professionals and kind of members of nonprofits on how to serve on nonprofit boards and talking more specifically about these issues here. 10:08:42 It's not so much a recruitment program but I can, I can share a link to it to the event. 10:08:49 You're going to see what it's about it's not so much a recruitment program or matching program because it's just it's hard to do, but it is a typically a good place to see people who are interested in learning about this board matching is really tough. 10:09:02 There are like other Arts and Business councils and chambers of commerce and other nonprofit organizations that do provide board matching, but it's my executive directors put it really well, it's like asking someone to find you a wife, you know, find 10:09:15 you a girlfriend find you a spouse, it's like, it's a relationship that builds over time for really good board members. It takes time to develop that relationship so it's just it's tricky 10:09:26 can board members serve as officers yes it's fairly common. 10:09:31 Most. 10:09:33 They are legally distinct roles, but in practice. Oftentimes, you'll see that your officers of the corporation your president your treasure your Clark, They are also board members, and that's fine. 10:09:45 They are also board members, and that's fine. You just want to make sure if your officers are paid, and your officers also serve on the board of directors, that there is a distinction between when those officers are acting in they're compensated capacity 10:09:58 versus when they are operating as a volunteer board members, because you again. You do not want your board members being compensated for their board role because that is supposed to be voluntary and it's again for the purpose of minimizing conflicts of 10:10:13 interest in personal enrichment. 10:10:18 Um, so let me move on to the Certificate of Incorporation which gets to another question about what is the language that we need to include. 10:10:26 So this is generally your chartering document, it doesn't. Honestly require a whole lot of information and that's because there's kind of a two step process in Connecticut. 10:10:35 So, general information. What is the name of your organization and you have to include a certain type of business suffix so limited Corp incorporated that kind of thing. 10:10:45 You will designate whether your organization has members or not, whether it's a self perpetuating board or a membership organization you include your purpose statement, what is the charitable purpose for which we exist, and this gets the question that 10:10:59 was asked earlier in this section three where you articulate your charitable organization, organization's purpose. You will stay what your purpose is you know what is we do you know we provide educational programs for professional development for visual 10:11:14 artists and greater Hartford, that kind of thing. And then you will include language saying, kind of more just stock language saying the organization is also or the corporation is also organized for charitable purposes, under 501 c three section 501 c 10:11:32 three under the Internal Revenue Code. So you do have to include that statement that explicit reference to Section 501 c three of the Internal Revenue Code in your organizing document. 10:11:46 Because the IRS is going to look at that when you apply for 501 c three status so you do have to say, you know, the organization is also organized for charitable religious etc purposes under 501 c three, and that no net profits of the organization shell 10:12:15 endure to the benefit of any private individuals, so that is something, an attorney will help you come up with that language is pretty standard, and I think honestly the IRS even tells you if you don't have this language. Here's a copy of language that is acceptable. 10:12:19 You also include you know there's a space for other information. This is where there'll be a lot of boilerplate that your attorneys will put in another section, another requirement from the IRS is you have to have certain dissolution language and your 10:12:31 organizing document, basically, that says if the organization dissolves than any assets, any of the organization's remaining assets will be distributed to a another charitable exempt organization, under 501 c three of the Internal Revenue Code. 10:12:48 So those are the two things that are required by the IRS IRS purpose statement, organized for a 501 c three charitable purpose and dissolution statement. 10:12:56 If we close down, then our assets will go to a another charitable organization that is exempt under 501 c three both fairly boilerplate both standard. 10:13:06 Again, the IRS I think in the instructions I think in the form itself says, if you don't have this language, here's where to add it and here's how to add it and here's exactly what to put in. 10:13:16 So it'll ask you for corporate email address, it'll ask you for this Nic s code, it's just a federal it's I think the same Census Bureau monitors and it's just a standard six digit number, like, for what type of business you're in what type of industry 10:13:30 or services you provide. 10:13:33 You have to identify the Registered Agent. That is the person who was physically located in the state we're Incorporated, who can receive legal documents so really most commonly receive Service of Process of the nonprofit is ever sued. 10:13:45 There are companies like, you know, Legal Zoom or whoever who offer Resident Agent or Registered Agent services for annual fee. But, you know, if someone within your organization a director and officer is physically located within the state of Connecticut 10:14:00 or the state that are incorporated in that's usually fine. And then you sign under pains and penalties of perjury. 10:14:08 And then the second part is, and this is unique to Connecticut, because that within 90 days after you file your Articles of Organization or your Certificate of Incorporation you have to have an organizational meeting and you have to file a first report, 10:14:24 and this is going to have some more information, you know, this is where we're going to identify who are the directors who are the officers. Again, if you've changed the Resident Agent or the, the Registered Agent. 10:14:34 That's rude indicate that. 10:14:37 And then you identify where your principal offices, that kind of thing. 10:14:42 So, this is equally as important, and you have to be very timely about it. 10:14:49 And this is something where you'll most likely want to work with a Connecticut attorney on on making sure you're getting all these documents done right. 10:15:01 Let's see. 10:15:04 bylaws, I talked about it really briefly. 10:15:07 Again, this is your governing document this establishes, it's, it's one of your governing documents you have your Certificate of Incorporation that states what your purpose is why you exist, and then you have your bylaws which really sets the rules for 10:15:18 how you manage the internal business affairs. So, how do we elect. How do we select or a point where elect our board members, how do we elect or appoint our officers, what are the roles of the board members, what are the rights and privileges and responsibilities 10:15:35 of the board members, what are the roles rights, privileges, and obligations of the officers. 10:15:42 You know, if you're bored a certain organization a certain board committees like an audit committee of financial committee maybe they'll specify them there, it'll set their bylaws will determine, you know, when do we have meetings, when How can you know 10:15:57 when our regular meetings, when can special meetings be called what type of business can we conduct at a meeting, how do we vote, out of being at a meeting, what's a majority what's a quorum, that kind of thing. 10:16:10 And often, another important thing is your biological state, what's called an indemnification obligation and what that means is if the nonprofit is sued for some type of really any type of claims some type of injury negligence, what have you. 10:16:26 The indemnification obligation means that the nonprofit will stand in your shoes and defend you uncover any costs related to you having to defend yourself from the suit if your student your private capacity. 10:16:38 So you want to make sure that the bylaws also have an explicit indemnification obligation whereby, your nonprofit is going to defend you it's going to step in your shoes in case you're sued for again, conducting the ordinary business of the nonprofit. 10:16:56 If your organization now has had an in house performing arts sector can you add on, and i na ICF codes or is it only for one code, I think it's only one, it's, it's something that's Sep again it's set by the by I think the Census Bureau so I think it's 10:17:12 only one I've honestly I've, I've admitted to practice in Massachusetts so I have not, I don't think we are required to at least not listed in our incorporating documents, so I haven't seen it, but I think it's usually only one and I think it might relate 10:17:26 to also when you get your tax ID number from the IRS I think they also it aligns with that code as well. 10:17:34 So, yeah, I think you have to choose us one. 10:17:38 Um, so just a summary of your filings. 10:17:41 You have your Certificate of Incorporation your chartering document your first report. 10:17:48 You can most states I believe Connecticut also allows it. 10:17:51 You can request a name register name reservation, if, you know, you really feel strongly about a name, you're not ready to incorporate yet but you want to put a hold on it so no one else takes it. 10:18:01 And then you're going to have to file an annual report. 10:18:05 Usually it's just going to be a statement of, again, has a lot of the key changes that will often have over the organization's lifetime, is they're changing the address is there a change in the leadership is there a change in our resident agent that kind 10:18:18 of thing. They're usually pretty routine they're usually pretty short and they usually come with a small filing fee. 10:18:26 And then, from the perspective of you operating as a charity that soliciting funds from the general public. 10:18:33 You're also going to be overstock seen by the Connecticut Department of Consumer Protection. So you have to register as a charity, there's a process for that and then you have to file an annual renewal, which basically is an information return, you have 10:18:51 to attach your tax returns your form 990. 10:18:56 And they're usually going to be a little bit more specific about questions about what was your fundraising activity, what is your financial status, you know, have you hired any professional fundraisers or solicitors or that kind of thing. 10:19:08 Again, they're looking for information that confirms that you are acting properly, and that you were using public funds if you're requesting public funds, you're using it properly and that you are not diverting public charitable donations to other private 10:19:22 or untoward purposes so again it's a it's an consumer protection tool anti fraud measure. 10:19:29 So once you understand that's kind of the goal of it it's a, it makes a little bit sense why they might ask for so much. 10:19:39 And now in the last couple minutes, told you is a really dense workshop, I want to talk through. I'm applying for tax exemption. We're not going to go through the whole form we're not going to go in a whole ton of depth but just give you an overview. 10:19:55 So you'll see you're seeing that all these levels of government, Connecticut office. 10:20:01 Secretary of State, Connecticut Department of Consumer Protection. Internal Revenue Service, you have initial filings then you have regular annual filings. 10:20:08 The same is true with the IRS, so your initial application is your form 1023 your application for recognition of exemption. 10:20:17 And then after that, once you are determined to be exempt from under 523 then you'll file annual returns, your form 999 9990 and what have you. 10:20:31 So when do I, what do I apply for tax exemption what is the process, you apply for tax exemption. After you have incorporated. So, as long as you apply for exemption within 27 months. 10:20:43 So over two years after you incorporate, then your tax exemption will be retroactive to when you Incorporated. So, if you apply if you incorporate today, you know, February 14, and you apply for exemption. 10:20:57 On February, 16 2023. Then, once you're granted exemption. It's retroactive to today, February 14 2022. 10:21:06 So it gives you a lot of time. 10:21:09 Make sure you take that. I mean, you know, the sooner the better the sooner you can start getting your own taxes and funds on your own, the better. So, generally processes, incorporate at the state level, apply for exemption, and then usually afterwards 10:21:23 once you've applied for exemption usually Daniel register as a public charity. It might be different. It depends on each state has different priorities and different timing. 10:21:33 So it might depend if there's any my new show with, Connecticut, but usually. 10:21:40 Usually you'll apply for the public charity registration. After you've at least applied because usually they're going to want to see that you've already taken steps to apply and obtain tax exemption. 10:21:49 After you incorporate you do want to set up a number, you need it in order to apply for the exemption he needed to open a bank account so it takes 15 minutes, it's doable online it's pretty straightforward. 10:22:02 They asked kind of similar questions and pretty simple questions. 10:22:16 But that is a part of the process as well. 10:22:08 There are certain attachments that are required for you and your application for exemption. you have to include your charter and document so your certificate of organization. 10:22:18 You have to include a list of your board of directors, you have to include again as we talked about your statement of your C three purpose, and then your dissolution statement. 10:22:28 There might be certain supplemental questions or answers, where you need more space. 10:22:33 You have to attach your bylaws, and there might be other collateral documents that you might want to add that just illustrate what your organization's mission is and programming and things like that. 10:22:51 Your, the application for exemption now is all filed online. It's all done through paid off of the form is taken, if they've changed the, the layout a little bit. 10:22:56 This is the current layout of it all, for the most part, a lot of these questions and a lot of these fields are sections that can be filled out by an attorney and accountant, a business advisor who's helping you. 10:23:07 I always advise clients, that there are two parts that we really can't do without your active input, and that is this part for narrative description and Part Six the financial data. 10:23:21 So the narrative description is your narrative description of your exempt activities, and it's basically asking you to describe in detail, everything that you've, you know, past, present and future activities that you believe our charitable and should 10:23:34 be exempt from income tax, and it's really important to be specific and really expansive because this is kind of going to set the boundaries for what you can do that is exempt from income tax. 10:23:47 So, be specific, but be expansive. They want to know things you've done in the past they want to know things you're doing now, they want to know things that you're doing in the future, even if it's still a pipe dream, even if it's just an ambition. 10:23:59 Put everything that you anticipate that you will want to do in your narrative. I usually say, for every program you're offering, give the who, what, where, when, why, how, and how much so who's operating it Who is the constituency, who are the beneficiaries. 10:24:21 What does the program, what is it you're doing, um, why do you do it, why is it, why do you believe it's charitable Why is it exams, why is it aligned with your mission. 10:24:30 How do you do it, you know, who do you do you use consultants, how do you run the program what type of infrastructure, do you need logistically. 10:24:41 How do you, how much does it cost for you to run it How much does it cost for you to run this program, you know, paying consultants, you know, renting venues. 10:24:51 IT infrastructure website, all of that stuff. How much does it cost and how much do you expect to earn from it. Are you going to get grant funding for it. 10:24:58 Are you going to get charitable donations for it do you charge a fee, or if you're doing educational workshops, how much is your tuition, that kind of thing. 10:25:06 Be specific. They want to know everything, but you can be expensive because it doesn't have to be everything. It doesn't have to only be things you're doing right now, it can be things that you used to do it can be things that you plan to do in the future 10:25:18 that is okay. 10:25:20 The second thing that we usually ask is, financial information. The form asks you to provide two pieces of financial information, one. They want to know at least four years, usually three or four years worth of 10:25:40 expenses revenues and expenses. And if you're a new organization they want kind of current year forecast and to to future your forecasts. If you've been in existence. 10:25:51 They want you to provide, you know, usually for years so as much of it as much prior financial data as you can provide. And then, you know, whatever the necessary forecasts are to fill in the gaps. 10:26:04 So if you've been around for three years, current year revenue expenses to prior year revenue and expenses and then a prediction for what you expect your next year to be. 10:26:15 They're not going to hold you to the numbers, they really just for all of this. They just want to see that you've been thinking carefully about what your business plan is and why you're doing it and that you've kind of come up with a plan 10:26:29 for certain smaller nonprofits with smaller revenues and smaller receipts, you can file a form, easy. 10:26:36 I usually like doing the full long form, 1023, just because it forces you to think about a lot of questions up front. 10:26:44 For me as he is kind of a self certification. It's gotten more legitimacy over time where more funders are usually comfortable with it, but oftentimes I still think most funders and foundations want to see what you've gone through the fall, 1023 process, 10:26:59 but it's it's it's a shorter form it's a lot easier. It's a little, you know, they're less strict about asking questions about like your operations and things like that and your revenues but again I think the full long form 1023 is a really good exercise 10:27:17 me see. 10:27:21 So after, you know, assuming you get through 1023. 10:27:25 It'll be a long time before the IRS actually gives you a determination. If you've applied a timely you know within that 27 months after you've incorporated great then you know your your tax exemption will be retroactive, but it. 10:27:39 The IRS says when you've submitted your application, your 1023. 10:27:43 They say don't even don't even talk to us don't even email us don't even call us before six months have passed, so they won't even answer your calls. 10:27:52 I say the timing is anywhere from like four to eight months usually on the shorter side lately, I've had I've got turned around in like four or five months for applications for exemption so it depends it varies, but it's usually pretty quick nowadays, 10:28:05 especially now that they're doing it all online. 10:28:08 And then ideally you'll get your determination letter that will specify whether you're exempt. If you're exempt under what section, 501 c three or 501 c four most commonly for many of you, and then it will also indicate. 10:28:20 Are you a public charity or private foundation. 10:28:24 And that's going to be a question that you'll, he'll answer in the 10 2031 thing to just note, if you are applying you know if you're collecting charitable donations, while you're still pending you're exempt status. 10:28:39 You just have to make sure your forthcoming to your donors just knowing. 10:28:43 We've applied for exemption were not exempt yet. 10:28:48 Once you cannot yet deduct these donations from your income taxes. 10:28:54 Once we get a determination letter we will let you know and then you can deduct it at that time, you just have to be forthcoming about it. 10:29:00 Again, this is the value of having something like a fiscal sponsor. 10:29:05 And then 10:29:08 the last thing I want to talk about really quickly, is just an awkward. 10:29:15 Just some, some weird. 10:29:24 Just a unique tax issue. They're usually a couple that we talked through but I think this is the most common one unrelated business income taxation. There are some activities that you might actually be subject to income tax on and it's any if you do any 10:29:32 regular business activity that's not related to your charitable purpose, then you might have to pay income tax on the profits for that. 10:29:40 So, basically, is it some type of trade or business. Is it an activity that you do regularly. So, you know, pretty consistently throughout the year. And then it's, you know, not really substantially related to your charitable mission, then you might have 10:29:56 to pay income tax on it. This image is from Vanderbilt Hall at New NYU law school because this whole principle comes from NYU got a donation from one of its alarms in like the 50s of a pasta factory of like Mueller's pasta factory and the law school use 10:30:18 the revenues from the factory to build Vanderbilt Hall. So use it for the charitable purpose but you know they were ultimately undercutting and putting themselves in an unfair competitive advantage against other pasta manufacturers, so the IRS was like 10:30:29 okay, you need to pay tax on this because we want you to be using your tax exemption, you know you can't be using it to put other legitimate for profit enterprises at a competitive disadvantage so sorry. 10:30:41 So just note that if you operate other types of programs regularly. 10:30:46 Maybe if you sell merge that's not really related to your business or you do some other type of programming that's not really related to your charitable purpose, you might be subject to income tax. 10:30:56 So that is the last piece I want to talk about. 10:31:01 The only other thing is that, hopefully this is really just an illustration of why it's a good idea and why we still are strong advocates for getting help getting advice talking to consultants and attorneys and accountants, and business advisors who can 10:31:17 can walk you through this process, answer your questions give you the information you need and kind of hold your hand through it. 10:31:25 Obviously we run a volunteer program for for small organizations and and low income artists who need pro bono services. But bear in mind, depending on how complicated your organization or your needs are. 10:31:37 You might have to pay a fee to any professionals you work with. 10:31:42 We usually recommend working with, again, have a good attorney have a good accountant have a good insurance broker who you trust who can give you kind of candid and honest Council, because they honestly a lot of the questions that you can have will usually 10:31:58 be answerable by those by those constituents. 10:32:02 And you know who to ask again, our information is on the next slide we run the volunteer lawyers for the arts of Massachusetts and Connecticut so for lawyers were a good resource but also ask for referrals from people you trust and people you know like 10:32:16 like if they have a good experience working with someone, then defer to them there's the referral to a good consultant is worth its weight in gold. 10:32:26 And I recognize that sometimes a referral that I might make might not be as good as like, Oh, well my best friend or a colleague work with this attorney and they were, they were an awesome match, then go with it that's totally okay I'm friends and family 10:32:41 are often the best referrals and honestly it's where a lot of our referrals come from, we, we get point artist or pointed us from other artists that like the work that we do and and feel strongly about it so I can't stress enough building to your budget, 10:32:57 working with other consultants. 10:33:01 So here's our contact information. 10:33:05 I know we're over time was Do you want to try and knock out some other lingering questions. 10:33:11 This has to jump off for another meeting, so we can take over the chat. 10:33:17 Okay, 10:33:23 say, Well my 501 c three Crow, go ahead. 10:33:27 Go ahead. Oh no I'm just reading with you as well. You're the firewalls, you have a DVD is that we're at. 10:33:40 Um, we answered that one. So, There are a couple. If we're existing existing nonstop Corporation does an existing constitution suffice for organizing document or do we need to use a new certificate or corporation. 10:33:47 Yes, it is a new organization. If you are an existing. 10:33:52 If you're an existing organization and creating a new organization. Then, you do have to treat it as if it's a brand new process so new nonprofit, new articles, new certificate, that kind of thing. 10:34:05 And that kind of gets to the I saw the last question. Will my 501 c three across state lines if I move. 10:34:15 It depends. So, moving domesticated a corporation is tricky if you for example, if you have a New York Corporation, and you have physically relocated to Maine and, you know, your organization has kind of physically gone with you. 10:34:37 Then you have two options. One option is continued sustaining the New York Corporation and file. 10:34:43 It register it as a foreign corporation in Maine, that's one option. Now you're really maintaining two concurrent corporations, the New York domestic Corporation and the main foreign corporation. 10:34:55 So, it has the extra work and the fees and you know you're paying double the fees doing double the oversight and double the admin can be a bit of a pain in the butt. 10:35:02 But if you're an organization that have plans to have multiple locations, then that's the way you have to do it. Alternatively, if you are really thinking of picking up and transplanting yourselves and a new in a new location, then in that circumstance, 10:35:16 what you'd have to do is take your nonprofit, you'd have to establish a new domestic nonprofit corporation in the state where you're, you know personally resigning transfer the assets of the old nonprofit to the new nonprofit, and then eventually wind 10:35:32 down the old nonprofit. 10:35:36 They're all the other ways to do it kind of mergers and things like that that's a little bit more sophisticated. 10:35:41 But that is a potential option as well but if that's the case, usually with a 501 c three you will still have to reapply for exemption. 10:35:52 What will happen is that will ask you a question like are you a successor to an existing organization. They can answer yes, and you probably have to provide information relating to the private organization and you provide all that history and all those 10:36:04 historical documents, it might expedite the process, if you're already an existing 501 c three and you're creating a new see three. 10:36:13 But that is generally the processes, create the new nonprofit a new location transfer the assets of the new nonprofit to the old, the old nonprofit to the new nonprofit, you will have to apply for exemption. 10:36:25 Usually you'll want to have the exemption before you do the, the asset transfer, and then dissolve the original nonprofit and dissolution is usually going to be a process that's governed by, you know, state law might be Attorney General's policies might 10:36:40 be something else. In Massachusetts, we have to have any nonprofit dissolution blessed by the State High Court so it is a bit of a process. 10:36:52 We see existing nonprofit and corporate a sense of seven determines and so eight annual responsibilities have changed. I'm not really, you still have to file annual report, 990, and usually do your annual public charities filing as well. 10:37:10 So for the most part, the forums and the questions they might have asked might have changed, kind of a superficial level but for the most part, your obligations are more or less the same. 10:37:20 Look. Yes, me, it's Dana, that I just. So, my. 10:37:26 I'm not sure what I'm supposed to do, annually so I filed my taxes, right through an accountant for the feds but there was a time in Connecticut where we had annual reports and then based on how much you're like if you were just in a $200,000 a year organization 10:37:47 you didn't have to do anything so I don't, I know that I am established a corporate and good standing, but I haven't done anything, every year. Besides my taxes and so I'm concerned, I don't know, even know how to find out what I'm supposed to do in this 10:38:06 state. Okay, yeah, reach out to young and I, and we can talk more specific it's a good question a common issue. Yeah. Thank you. No problem, I'll email you guys. 10:38:20 Thank you. No problem. Um, let's hit. 10:38:24 One more. We see. 10:38:29 Do you see any that I missed you on this one it says how does a potential group, you're seeking a grant from know if you apply through an easy or long form. 10:38:39 I don't know if they know now It used to be a number of years ago that the determination letter you got from the easy was slightly different from the determination letter you got from the that you got from the long form. 10:38:57 so I don't know if they do that anymore. 10:39:00 I haven't. 10:39:02 I haven't filed any easy's I will see, I only file on the long form, but I don't know if they know. I mean, all of these filings are public record and you can make a public records request from the IRS for the application for exemption. 10:39:17 So if they really want it to. And depending on the grant, how much it is they might actually do that they could do due diligence and, you know, pull a copy of your 1023. 10:39:29 And they could see Was it easy or was it wasn't it. It might even come up. If you just even do a search on the IRS database, but, so you can find out. 10:39:41 I don't know if you can find out from the determination letter anymore and I don't know if there's really that super meaningful distinction like there used to be, you know, five or so years ago. 10:39:50 But if they actually want to, you know, if a funder a grant or wanted to look and see. 10:39:55 And they want to vet, how you got your app, your exemption. Then they could look that up, they could look up the easy itself. 10:40:05 And I saw one other question about what if you have a strong brand, can you file with the same name. 10:40:13 So, that is less of a corporate problem and more of a trademark problems so trademarks allow us as consumers to distinguish between competitors in the marketplace. 10:40:23 So if you are using the same name for an organization that provides the same or similar services to another one using that name then potentially you can cause consumer confusion and expose yourself to liability for trademark infringement. 10:40:38 So if you have a super strong name like you know the Komen Foundation, or St. Jude or something like that. 10:40:44 Unless you have a license your profit from them, you're not going to be able to operate under those names. 10:40:52 It depends on the depends on the name you want to use and the extent of, you know, the fame and the prestige and the strength of the other competing trademarks, but for the most part you want to avoid using a name that is the same or similar confusingly 10:41:04 similar to an existing brand and the threshold the criteria for that is, are the names confusingly similar such that you are I as ordinary consumers would mistakenly misinterpret your services to another organization or vice versa. 10:41:20 In this case, am I donating to what I thought was, you know, the Jimmy fund, whereas it was something else. 10:41:29 So I think we'll, we'll be here all morning if I, We can we can talk about this all day. 10:41:36 But these. 10:41:39 Yes, I will, I will send a PDF of the presentation itself with the links and the information to Liz and Tamra at the Connecticut office of the arts. The workshop will be a video of this will be made available at some point I know that they're right now 10:41:56 they're working with it to actually get the it set up on the website so it is pending. and I'm sure that they will send a blast email when it's available, but feel free, our contact information is here you can always reach out to us or and if you forget 10:42:11 you can always reach out to the Connecticut office of the arts, and they can they can point you in our direction. 10:42:18 We're happy to help. We're happy to help form nonprofits we're happy to get you the legal assistance you need, and also feel free to send either us or Liz and Tamra suggestions for other workshops because we do, we do expect to do two more workshops this