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Incorporating and Tax Exempting Procedures for Friends Incorporating and Tax Exempting Procedures for Friends Sally Gardner Reed, Executive Director, United for Libraries © 2012 by United for Libraries: The Association of Library Trustees, Advocates, Friends and Foundations. This toolkit has been developed as a benefit for personal and group members. If you wish to reproduce and/or redistribute significant portions or the entire toolkit to non- members, the charge is $5 per copy distributed and/or reproduced made payable to: United for Libraries 859 W. Lancaster Avenue, Suite 2-1 Bryn Mawr, PA 19010 Toll Free: (800) 545-2433, ext. 2161 Direct Dial: (312) 280-2161 Web site: www.ala.org/united E-mail: [email protected] If small portions of this toolkit are reproduced and redistributed, please credit United for Libraries in writing. Thank you. Revised November 2012 TABLE OF CONTENTS Introduction .............................................................................................................. iv Incorporating in Your State ..................................................................................... 1 Filing for Federal Tax Exempt 501(c)(3) Status ..................................................... 3 Appendix A – Additional Resources ...................................................................... 5 Appendix B – Sample Bylaws for Incorporated Friends ...................................... 6 Appendix C – Sample Statement of Purpose ........................................................ 9 Appendix D – Sample Dissolution Statement...................................................... 10 Appendix E – Sample Statement of Nonprofit Status ......................................... 11 INTRODUCTION Important Note: This document will help guide you through the legal process of incorporating your Friends group and applying for federal tax exempt status. United for Libraries highly recommends that you engage a tax attorney to assist you and/or review your applications prior to filing. For more information on organizing a new Friends group or revitalizing the one you have, see Toolkit #1 in the Friends & Foundations Zone. A special “Thank You” to Friends of Libraries in Oklahoma (FOLIO) and Julia Brady Ratliff for providing United for Libraries with much of the information contained here, including the Sample Bylaws included as “Appendix B” at the end of this toolkit. Sally Gardner Reed Executive Director, United for Libraries INCORPORATING IN YOUR STATE When you decide to create a Friends of the Library group you will want to consider whether or not to incorporate. This is not the same as applying for federal tax exempt status - 501(c)(3) discussed below - but it is a pre-requisite to acquiring such status. What is a Corporation? A corporation is a legal entity that exists until it is purposefully dissolved. As a legal entity, it is separate from those who manage or govern the organization. A nonprofit corporation can conduct charitable and educational activities; it can enter into contracts; it can incur debt; it can hire employees who are eligible for benefits; and it is legally liable for its actions. Why Should We Incorporate? There are several very good reasons to incorporate. First, as stated above, your Friends group will not be able to apply for federal tax exempt 501(c)(3) status unless incorporated in your state. Secondly, as a nonprofit corporation you will also have limited liability for those who manage or govern your organization. As long as the your board members act prudently and reasonably in making decisions, follow a strict policy that ensures no board member personally benefits by his or her service, they are more likely to be absolved from personal liability when acting in their official capacity on the board. Finally, when you incorporate you are creating a stable organization that exists independently from the change of board members and personnel over the years. This will help the organization apply for grants, do business with other corporations, and again, help you to acquire federal tax exempt status. How Do We Incorporate? While it is true that the rules for incorporating vary from state to state, there are some basic guidelines that all states will require. You will need to draft a legal document called “Articles of Incorporation” to file with the state. These Articles will become a binding legal document. The contents will vary from state to state and should normally include only what is required by your state. Bylaws, which can easily be amended, should handle the more detailed regulations governing your organization (see Appendix B for sample bylaws). Typically you will need to include: Explanation Additional Resources Name of Check with your state agency for any Corporation regulations concerning naming of your corporation. Statement of This is best if it is brief and broad so that your See Appendix C for Purpose organization can easily evolve with the times sample. and should clearly state your charitable (nonprofit) focus. Location of the This can be the library’s address which will Corporation’s help groups without their own location to Office ensure consistency over time. List of Board Include the names and addresses of the See Toolkit 1 on Members members of the initial executive board. FOLUSA’s website in the Friends Zone for information on developing your initial board. Type of Clearly state that your group is a membership Organization organization. Dissolution The provision for the distribution of your See Appendix D for a Statement group’s assets when or if the group is officially sample. dissolved. Before drafting your Articles of Incorporation, it is a good idea to check with your state’s authorities to determine what state laws cover your organization and ask for guidance. Your state may regulate such things as the number of incorporators you need or may have limitations on your name selection. The agency can often provide assistance in the development of your Articles of Incorporation and legal requirements for board meetings. Information on filing your Articles of Incorporation and forms for doing so can be obtained from the state agency that handles registrations. Check with the Corporations Division or Business Bureau at the office of your Secretary of State. The National Association of State Charity Offices (NASCO) maintains a website that provides links to state offices that regulate charitable organizations and charitable solicitations online at www.nasconet.org. The IRS website also maintains links for each state to its offices for charities regulation, tax filing, and business filing information. Visit the IRS website for charities and non-profits at www.irs.gov/eo and select “State Links.” Does it Cost Money to Incorporate? Yes. Most if not all states require you pay an application fee. Check with the office of your Secretary of State to find out what fee or fees will apply to you. In addition, FOLUSA recommends that you consult an attorney for review of your Articles of Incorporation prior to their filing. Hiring an attorney will also be useful in applying for your 501(c)(3) status. If you are just forming your Friends group and do not yet have funds you may be able to acquire pro bono assistance from a lawyer or legal firm in your community. Additional Notes on State Tax Status Requirements and application processes vary from state to state. Be sure to also determine how to obtain exemption from paying state sales tax on supplies you purchase for use by your organization. You will also need to determine if your group must collect sales tax on used book sales or items sold in a Friends bookstore or in the library to support your group. FILING FOR FEDERAL TAX EXEMPT 501(C)(3) STATUS Why Should We Apply for Tax-Exempt Status? Official tax-exempt 501(c)(3) status is an important step in preparing your organization to accept donations and become eligible for grants. With this status, your group will not have to pay taxes on revenue generated and those who contribute to your organization will be able to claim the gift or donation as a charitable contribution on their own federal tax returns. In addition, many companies will award grants only to organizations with official 501(c)(3) status. How Do We Apply for Tax Exempt Status? Application for tax exempt status must be made to the Internal Revenue Service with the filing of Form 1023. Form 1023 and accompanying statements must show that all of the following are true: 1. The organization is organized exclusively for, and will be operated exclusively for, one or more of the purposes (charitable, religious, etc.) specified in the introduction of Chapter 3 of IRS Publication 557: Tax-Exempt Status for Your Organization. 2. No part of the organization’s net earnings will inure to the benefit of private shareholders or individuals. You must establish that your organization will not be organized or operated for the benefit of private interests, such as the creator or the creator’s family, shareholders of the organization, other designated individuals, or persons controlled directly or indirectly by such private interests. [See Appendix E for sample statement of nonprofit status.] 3. The organization will not, as a substantial part of its activities, attempt to influence legislation (unless it elects to come under the provisions allowing certain lobbying expenditures) or participate to any extent in a political campaign for or against any candidate for public office. [Voter education activities or public forums conducted in a non-partisan manner may not be prohibited
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