NAO Nonprofit Start-up Packet Page # Pros and Cons of forming a Nonprofit Organization 2-4 Steps to Becoming a Nonprofit Corporation in Oregon 5-8 Fiscal Sponsorship Overview 9-10 About NAO & NAO Resources 11

Additional Resources

OREGON SECRETARY OF STATE (SOS) NAO RESOURCES (see back page for more) Nonprofit Startup Resources The Oregon Nonprofit Corporation Handbook (Articles of Incorporation/Business Registration Info) Principles & Practices for Nonprofit Excellence Choosing A Business Structure Oregon’s Charitable Organizations Map Funding Opportunities OREGON DEPARTMENT OF JUSTICE (DOJ) Directory of Nonprofit Service Providers Starting a Charity in Oregon ORS Chapter 65 - Nonprofit Corporations NATIONAL COUNCIL OF NONPROFITS Rights, Roles & Responsibilities as a Nonprofit Officer Nonprofit Tools & Resources Guide to Nonprofit Board Service in Oregon (pdf) Boards and Governance Good Governance Policies for Nonprofits INTERNAL REVENUE SERVICE (IRS) Financial Literacy for Nonprofit Boards Compliance Guide for 501(c)3 Public Charities Form 1023 BOARDSOURCE Board Service & Resource Library FORMATION DOCUMENTS Forming the Nonprofit’s First Board Nonprofit Formation Documents (NOLO) Oversight & Accountability Nonprofit Bylaws & Samples (GrantSpace) Structure, Committees & Meetings Nonprofit Bylaws Template (Harbor Compliance) FINANCIAL RESOURCES (Wallace Foundation) LEGAL & FINANCIAL SERVICES Nonprofit Financial Management Rational Unicorn Legal Services Nonprofit Fiscal Policies & Procedures Guide Other Attorneys/Legal Services Governance Resources for Financial Management Certified Public Accountants (CPAs) GRANTSPACE ADDITIONAL STARTUP RESOURCES A Grant Checklist for New Nonprofits SCORE Portland (Free Startup Business Planning) Legal Duties of the Nonprofit Board Writing a Nonprofit Business Plan (DonorBox) Establishing a Nonprofit Organization (Webinars)

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PROS AND CONS OF FORMING A NONPROFIT ORGANIZATION

Nonprofit organizations can be used for any type of entity, but are specifically intended to support activities or benefit the following: • Charity • The Environment • Humanitarian Aid • Education • Animal Protection • The Arts • Wildlife Conservation • Social Issues • Health care • Medical aid • Religion • Research • Science • Sports • Any other admirable or public purpose

The term “nonprofit organization” does not simply refer to an organization that cannot generate a profit; it means that an organization can only earn a profit at the entity level and the profit may not be passed on to the organization’s board of directors, officers, or members. The profit reorganization must be used for a charitable or public purpose. A nonprofit entity may legally and ethically run a trade or business that generates a profit, or hold investments; however, the profit must be used exclusively for attaining the organization’s goals. A nonprofit entity is generally exempt from taxation, with certain exceptions.

Common 501(c)(3) Rules and Regulations (BoardEffect)

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Advantages & Benefits Tax exemption is one of the principal benefits for nonprofit organizations. Tax exemption enables the organization to operate without federal (and perhaps state) income tax. This benefit often enhances the organization’s ability to accumulate income and assets and can, therefore, lead the organization to be more productive over the long-term. A second primary benefit to a tax-exempt entity is that charitable contributions to a 501(c)(3) organization are tax deductible. If an organization has obtained IRC Section 501(c)(3) tax-exempt status, an individual or company’s charitable contributions to this entity are tax-deductible. Organizations must apply to the Internal Revenue Service for such status as not all nonprofit organizations qualify for tax exemption. Qualification as a nonprofit organization is defined by state law, while qualification for tax exemption is largely determined by federal tax law. Tax exemption does not apply to employment or payroll taxes. Conditions such as the tax-exempt purpose, complying with limitations on spending, and an internal safeguard for a charity must be met for the IRS to issue an authorization letter of tax-exempt status. Failure to maintain operations in compliance with the law may result in an organization losing its tax-exempt status.

There are benefits of organizing a nonprofit organization as a corporation. Limitation on personal liability is a significant benefit in organizations of the corporate form. If the corporation is found liable for damages, the liability is generally confined to the corporation. The directors and officers of the organization are generally not held liable for the wrongdoing of the corporation, whereas unincorporated associations do not have this protection available. However, organizations that are incorporated are required to file organizational documents and annual reports with the state. These documents are a matter of public record.

Disadvantages The cost of setting up and running a nonprofit organization is one of its principal disadvantages. Because a nonprofit is a legal entity, the use of an attorney or accountant is recommended as the rules and regulations are complex. While tax exemption is one of the advantages of qualified nonprofits, the fee of incorporation and application for exemption is a disadvantage. These costs are not the same for every entity. With the corporate form of nonprofit organizations, filing with the state is required. The cost of annual reporting requirements is also a disadvantage. In creating nonprofits, personal control is limited. In some cases the organization’s directors are the only people allowed to elect officers and to determine corporate policies. Nonprofits are subject to federal and state laws and regulations, and must follow its own articles of incorporation and bylaws, which again limit personal control over the nonprofit entity. As a nonprofit organization is dedicated to charity or the public, its finances are also open to inspection by the public. The public may be able to obtain copies of the nonprofit organization’s expense and salary reports as well as state and federal filings. Certain detailed documents including financial records, articles of incorporation, bylaws and annual reports, as required by the state in which it is incorporated, must be prepared in a specific manner and filed by certain deadlines.

Pros and Cons of Becoming a Nonprofit Organization (GrantSpace)

NONPROFIT ASSOCIATION OF OREGON / www.nonprofitoregon.org Page 3 Problem Areas There are many ongoing problems faced by nonprofit organizations. Congress and the IRS perceive a great deal of fraud in the area of charitable giving and have a great deal of concern about taxpayers avoiding their legal obligations. As a result, the Pension Act of 2006 details the significant changes in the laws that deals with charitable organizations. These recent tax law changes are broadly ranged into several categories: • Greatly increased information-sharing between the IRS and state governments on exempt organizations. • Greatly increased regulation and scrutiny of donor-advised funds. • Greatly increased regulation and scrutiny of supporting organizations. • Increased and more detailed reporting requirements in charitable information returns, including Form 990, with reporting requirements extended to more charitable organizations. • Increased penalties for self-dealing, excess benefit transactions, fraud and abuse. • Increased reporting and scrutiny of in-kind and cash donations, with greater requirements for appraisals and receipts.

Another problem area is the increasing cost associated with Capacity Building. Capacity Building is best described as actions that enhance a nonprofit’s ability to work towards its mission. Since most nonprofit organizations rely on outside funding (grants, government funds, and direct donations), changes in these funds may influence reliability and predictability with which the organization can hire and retain staff, create programs and maintain facilities.

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NAO NONPROFIT RESOURCE: Steps to Becoming a Nonprofit Corporation in Oregon

This info sheet gives basic information about starting a nonprofit in Oregon. NAO is not authorized to give legal advice. If you want to be certain about a proper course of action for your organization, please consult with a licensed attorney.

Being a nonprofit corporation is not the same as being tax exempt. The nonprofit corporation designation is a matter of state law, while being tax exempt is a matter of federal law. Although it is not required, if you are planning on conducting business in Oregon, you will need to become an Oregon State Nonprofit Corporation before filing for Federal Tax Exemption. The Steps to becoming both an Oregon State recognized Nonprofit and Federal Tax Exempt Nonprofit are outlined below.

STEP 1: Filing your Articles of Incorporation Below is a general guide on how to obtain incorporation from the Oregon Secretary of State’s office.

1. Go to the Oregon Secretary of State’s website (www.filinginoregon.com)

2. Click on Register a New Business and choose if you will file online, or via mail. If you file online, you will be directed to the business registry site where you will need to create an account. If you choose to print the form, click Business Registration Forms, then Oregon Business Registration Forms, and finally Oregon Nonprofit Corporation. The form to Incorporate is called “Articles of Incorporation,” or “Form 112.” NOTE: You may fill out the form, print it, and send it to the Secretary of State, along with the $50 fee ($55 if you want a confirmation copy). Or you may submit the form online (and save yourself the $5 for the copy). If you don’t have access to the Internet, you may request a copy of Form 112 from the Corporation Division by calling (503) 986-2200 (press 0 for a representative). NOTE: If you are going to file for tax-exempt status with the IRS, you will need a “confirmation copy” of the Articles of incorporation.

. Filing the Articles of Incorporation will reserve your organization's name. No other form is necessary unless you plan to use an assumed business name such as an acronym. If you want to know whether the name you want is available, visit the Secretary of State’s website and click on Business Search. . Articles of Incorporation may be filed by an attorney or any person involved in the organization that is incorporating. . Most nonprofit corporations in Oregon must have a minimum of three board members.

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. If you plan on applying for a bulk mail permit you need to include a short description of the organization’s purpose under Article 5, Optional Provisions.

STEP 2: Applying for your Employer Identification Number (EIN) Your EIN number, also called Federal Tax Identification Number, is used to identify a business entity. You may apply for your EIN online, over the phone, by fax, or by mail. The form to obtain an EIN number is called the Form SS-4. . To apply online, go to the IRS website: https://sa.www4.irs.gov/modiein/individual/index.jsp . To apply by mail, complete Form SS-4 Application for Employer Identification Number (found here: http://www.irs.gov/pub/irs-pdf/fss4.pdf), and mail it to: Internal Revenue Service Center Attn: EIN Operation Cincinnati, OH 45999

. You may also send the completed SS-4 via fax to 859-669-5987, or call 1-800-829-4933 between 7 a.m. and 10 p.m. local time (Alaska use PST) to apply over the phone. International applicants must call: (215) 516-6999. . Detailed instructions on how to file from the IRS here: http://www.irs.gov/pub/irs-pdf/iss4.pdf.

STEP 3: Developing your Bylaws Nonprofit corporations are required to have bylaws, a document that lays out the roles of board members, and outlines procedures governing your organization. There are no pre-printed bylaws or forms to fill out, but sample bylaws for Oregon for both membership and non-membership corporations can be found in the Oregon Nonprofit Corporation Handbook, available at local libraries and available for purchase through NAO at their Portland office or via mail. Oregon Nonprofit Corporation Handbook: https://nonprofitoregon.org/publications. Oregon Handbook Chapters (download): https://nonprofitpublications.net/digital-products-2 . You don’t need to file your bylaws along with the Articles of Incorporation, but you do need to file them with the application for tax-exempt status and when you register with the Oregon Department of Justice (see more below). . Once you have incorporated your nonprofit corporation, you are subject to Chapter 65 of the Oregon Statutes: http://www.oregonlaws.org/ors/chapter/65.

STEP 4: Registering with the Department of Justice Charitable Activities Section If you registered your nonprofit as a Public Benefit Corporation and plan to obtain tax-exempt status with the IRS, you must also register with the Oregon Department of Justice’s Charitable Activities Section (DOJ). https://www.doj.state.or.us/charitable-activities/starting-or-closing-a-charity/registering-a-new- charity/ . If you registered as a mutual benefit or religious corporation, you do not have to register with the DOJ.

NONPROFIT ASSOCIATION OF OREGON / www.nonprofitoregon.org Page 6 . Oregon also requires your organization to file an annual report (Form CT-12) with the DOJ along with an annual fee, which is based on your budget size. The annual report form can be found here: http://www.doj.state.or.us/charigroup/pages/howtorpt.aspx . You can contact the DOJ at (971) 673-1880 to determine if your nonprofit will need to register and file annual reports. . As a nonprofit corporation, you are not tax exempt unless and until you take the additional step of applying for tax-exempt status with the Internal Revenue Service. Congrats! If you have completed steps 1 through 4, and received confirmation of your status from the Secretary of State and Department Justice, you are officially an Oregon Nonprofit! Now, if you choose, you can file for Federal 501(c)(3) tax exemption.

STEP 5: Filing for 501(c)(3) Tax-Exempt Status You may apply to the IRS for tax-exempt status once you have filed your Articles of Incorporation the Oregon Secretary of State and obtained your Employer Identification Number (EIN). There are two options for applying for 501(c)(3) tax exemption. Your annual gross receipts and assets, among other criteria, determine which form to file:

NOTE: Not all tax-exempt organizations are exempt under Section 501(c)(3) of the Internal Revenue Code. To find out whether a 501(c)(3) exemption is the most appropriate for you, talk to an attorney or CPA.

Form 1023-EZ 1. To find out if you are eligible to fill out Form 1023-EZ, you must review the instructions and fill out the Eligibility Worksheet at the end of the instructions: http://www.irs.gov/pub/irs-pdf/i1023ez.pdf. 2. If you answer “Yes” to any of the questions on the Eligibility Form, you cannot file Form 1023-EZ and should follow the instructions below for the full Form 1023 application. 3. If you answer “No” to all of the questions on the Eligibility Form, you can file the Form 1023-EZ. You can access the Form through the Pay.gov website: http://www.irs.gov/uac/About-Form-1023EZ. 4. The filing fee for the Form 1023-EZ is $400.

Form 1023 1. If you are not eligible for the Form 1023-EZ, you can still file for Tax Exemption by filling out and filing the full Form 1023 application for Tax Exemption. To apply for 501(c)(3) Tax Exempt Status you need to fill out and file Form 1023. You can download the form here: www.irs.gov/pub/irspdf/f1023.pdf 1. You can order a Form 1023 Packet from the IRS at 1-800-829-3676. 2. There is a non-refundable filing fee for the Form 1023, which depends on the applying organization's average annual gross receipts. If the organization's average annual gross receipts have exceeded or will exceed $10,000 annually over a four-year period, the fee is $850. If gross receipts have not exceeded or will not exceed $10,000 annually over a four-year period, the user fee is $400. An applicant must certify its gross receipts in Part XI of the application. 3. If the organization’s average gross receipts for the last three years is less than $5,000, the organization is considered tax exempt with the IRS without having to file for exemption. This means the organization will not have to pay income taxes to the IRS. HOWEVER, donations to the organization are not tax deductible and the state and local governments may still require tax payments unless the organization files for exemption. The organization must file the 990 form every year.

NONPROFIT ASSOCIATION OF OREGON / www.nonprofitoregon.org Page 7 . The IRS usually takes from two to twelve months to process each application. You can find out more about the timing of the application review by visiting the IRS’s website, https://www.irs.gov/charities-non-profits/charities-non-profits-a-z-site-index

. If you apply for tax-exempt status within 27 months of incorporation, your tax-exempt status will be retroactive to the date of incorporation.

. The filing address for 1023 applications from Oregon is: Internal Revenue Service PO Box 12192 Covington, KY 41012-0192

. If you receive any correspondence from the IRS regarding your application, be sure to respond within the time limit indicated, even if it is only to ask for additional time. If you fail to respond, your application file may be closed and you will have to re-apply and pay an additional filing fee.

For further clarification and guidance, we recommend you contact a licensed nonprofit attorney.

Below is a link to NAO’s online Directory with legal service providers. http://directory.nonprofitoregon.org/search_results?q=Attorneys%2FLegal+Services+&location_value=

NONPROFIT ASSOCIATION OF OREGON / www.nonprofitoregon.org Page 8 FISCAL SPONSORSHIP OVERVIEW

What is fiscal sponsorship? Fiscal sponsorship is an arrangement whereby a smaller organization—either that does not have the resources to apply for tax exempt status or whose tax exempt status is pending— seeks a 501(c)(3) tax exempt organization with a similar mission to accept donations on its behalf as its “fiscal sponsor.” The mission of the sponsored organization must further the mission of the sponsor, and the sponsored organization must operate in accordance with 501(c)(3) regulations.

Why do organizations consider fiscal sponsorship? A nonexempt organization might consider seeking out a fiscal sponsor so that the organization can receive tax deductible donations. Donations would be made to the 501(c)(3) sponsor so that the donor can claim the donation as tax deductible. The sponsor would then pass the donation on to the nonexempt organization. However, in order for it to be a proper fiscal sponsorship, the sponsor must maintain complete control over the distribution of the funds.

How does an organization locate a fiscal sponsor? You can research local tax exempt nonprofits using the following resources. You should identify organizations with similar missions or areas of interest. • Oregon Department of Justice Charities Database • GreatNonprofits National Organizations: • Tides Foundation • The Fiscal Sponsorship Directory

If an organization has a fiscal sponsor, does it still need to make independent annual filings with the state and IRS? Yes, the sponsored organization, as an independent entity, must maintain its own individual annual filings with both the state and IRS.

How is a fiscal sponsorship structured? The most popular structure is the re-granting structure, whereby the sponsor accepts funds on behalf of the sponsored organization, and in accordance with expenditure responsibility, ensures that the sponsored organization uses the funds in a manner consistent with the sponsor’s mission and in accordance with 501(c)(3) regulations.

You will want to enter into a fiscal sponsorship agreement which will clearly spell out each party’s rights and obligations, including how the funds are accepted, accounted for, and distributed. Here are fiscal sponsorship resources from the National Council of Nonprofits with a sample agreement. The agreement must be tailored to your organization’s individual needs and it is recommended that you seek legal assistance in drafting your agreement.

NONPROFIT ASSOCIATION OF OREGON / www.nonprofitoregon.org Page 9 Is there an additional cost in having a fiscal sponsor? Yes, most fiscal sponsors will charge an administrative fee. You will need to check with the sponsoring organization.

Resources One of the best resources out there for quickly understanding fiscal sponsorship is Gregory Colvin’s book Fiscal Sponsorship, 6 Ways to Do It Right. This excerpt showing Fiscal Sponsorship Models is helpful to understand the relationship of the parties.

Fiscal Sponsorship FA (NAO) Guide to Fiscal Sponsorship (GrantSpace) Fiscal Sponsorship for Nonprofits (National Council of Nonprofits)

Cascade Pacific Fiscal Sponsorship Services (Oregon) Fiscal Sponsorship Directory (National)

An Overview of Fiscal Sponsorship by Avenson Hamann CPAs, LLP

NONPROFIT ASSOCIATION OF OREGON / www.nonprofitoregon.org Page 10 About Nonprofit Association of Oregon (NAO) These curated resources are brought to you by NAO, the statewide nonprofit membership association representing and supporting charitable nonprofits of all sizes, geographic locations and missions across Oregon. NAO’s mission is to serve public benefit nonprofits by strengthening the collective voice, leadership, and capacity of nonprofits to enrich the lives of all Oregonians. NAO is here to connect, improve and advance the nonprofit sector, advocating on behalf of every Oregon nonprofit.

About NAO Directory of Service Providers Funding Opportunities Membership Mission, Vision & Values Nonprofit Resource Publications (includes Oregon Nonprofit Corporation Handbook) Principles & Practices for Nonprofit Excellence Referral Service for Nonprofits Trainings, Workshops & Webinars

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