Before entering into a business transaction, the tax implications must be fully understood. Reorganizations may have tax implications for seller shareholders if those shareholders receive consideration from an acquirer that does not qualify as exempt.

Scottsdale Arizona business law attorneys at Lotzar Law Firm, P.C. represent clients in all types of business transactions including Tax- Exempt Reorganization. Tax-Exempt Reorganization refers to Mergers & Acquisitions (M&As) transactions that do not generate tax obligations.  Lotzar Law Firm, P.C. provides qualified legal representation for investors and business owners to protect your legal and financial interests. Call today to schedule a consultation and learn how we can help with Tax-Exempt Reorganization.

Tax-Exempt Reorganization is similar in most ways to a typical M&A deal except the acquirer uses stock instead of debt or cash for a substantial part of the consideration that is provided to sellers.

Tax-Exempt Reorganization is similar in most ways to a typical M&A deal except the acquirer uses stock instead of debt or cash for a substantial part of the consideration that is provided to sellers.

Understanding Tax-Exempt Reorganization

The Internal Revenue Code section 368 sets forth several conditions that must be fulfilled in order for a Merger & Acquisition transaction to be considered a Tax-Exempt Reorganization. The IRC requires:

• Continuity of the ownership interest.  Generally, 50 percent or more of consideration provided to sellers must be stock owned by the acquirer.
• Continuity of the business operations. The acquirer of the business must maintain ongoing business operations for a period of at least two years after the completion of the Tax-Exempt M&A transaction. This means the acquirer must either use a substantial part of the assets of the target in an existing business or must continue to conduct the business that the acquired organization was historically involved in.
• Legitimate business purpose. The Tax-Exempt Reorganization must have some legitimate or valid purpose. The reorganization may not be undertaken solely for the purposes of avoiding or reducing income tax obligations.

The Tax-Exempt Reorganization may also not be a part of  a broader plan to complete a taxable acquisition. The Step Transaction Doctrine applies to combine a series of multiple transactions that are formally kept separate but that are part of a larger whole. If the Tax-Exempt Reorganization combines with other steps taken to constitute a taxable acquisition, then the reorganization will not be treated as exempt.

IRC section 368 lists several types of corporate acquisition structures that can qualify as a Tax-Exempt Reorganization or as a Tax-Deferred Reorganization. These include a Type A; Type B and Type C stock-for-assets acquisition.  Statutory Mergers; Statutory Consolidations; and Forward and Reverse Triangular Mergers are among the different types of transactions that can be considered a Tax-Exempt Reorganization.

Lotzar Law Firm, P.C. has represented many clients at all phases of a Tax-Exempt Reorganization.  It is important to be represented by a qualified Scottsdale Arizona lawyer familiar with the relevant sections of the Internal Revenue Service code when entering into these complex transactions. Call today to schedule a consultation and learn more about how we can help you with all of your Mergers & Acquisitions transactions.

As long as you comply with all local rules, you can open different chapters of your non profit throughout the country with the same trademark and the same mission statement.

Learn more about Non Profit Operating in More than One State in this presentation.

Nonprofit or charitable organizations have Tax-Exempt Status because the organizations serve a public good or provide a benefit to society. These organizations are also allowed to solicit donations from people with the promise that the money will be used to do something that will provide some type of benefits to society.

Unfortunately, in some cases, the money that a nonprofit obtains is not used properly in accordance with the purpose of the organization. If money donated or given to the nonprofit is used to enrich insiders with a leadership or employment role in the foundation, this is referred to as a Private Inurement. There are penalties associated with a Private Inurement and it is important for those who operate a nonprofit to speak with an experienced attorney to make sure they are not breaking the rules regarding what they can do with the organization’s money.

What is a Private Inurement?

 

When a Nonprofit applies for Tax-Exempt Status, it must state a purpose other than making money. There are certain types of organizations that the Internal Revenue Service (IRS) will give nonprofit status to, such as religious organizations, organizations to further the arts or education, and charitable organizations. In every case, the IRS will allow Tax-Exempt Status only if the nonprofit plans to use the money it obtains to serve some type of broader purpose that is good for the public.

All money the Nonprofit takes in must actually be used to fulfill the purpose that was specified when the organization was started. No money, or assets, can be used to provide a private benefit to anyone involved with the Nonprofit. This includes the founders of the foundation; those who contributed money to it; and those who work for it.

For example, if the founder or manager of a Nonprofit uses money that was donated to the organization to buy a car for himself or to pay his mortgage, this would be an example of Private Inurement. If a contributor or a donor to a nonprofit made a $10,000 donation but then the nonprofit bought him a $10,000 car, this would also be an example of a Private Inurement. Even those who donate to a charity or nonprofit cannot use the money they have gifted to the organization for their own personal purposes, as the money is Tax-Exempt and it is supposed to be used for the nonprofit’s goals.

When Private Inurement occurs, the consequences will vary depending upon the situation. In many cases, the IRS will simply impose monetary sanctions or penalties. In other situations, however, the IRS May revoke the Tax-Exempt Status of the Nonprofit. Revocation is a much more serious consequence and it is not as common. News of the Private Inurement can also affect donations, causing people to no longer trust the nonprofit and to be reluctant to donate as a result.

It is important to ensure that Private Inurement does not occur if you are running a nonprofit. Speak with an experienced nonprofit lawyer at Lotzar Law Firm, P.C. for help understanding the rules for nonprofits and ensuring that expenses are legitimate in accordance with the law.

If you wish to operate a Charitable or a Nonprofit Organization, it is important to understand the rules and requirements that will apply to fundraising. Most nonprofits survive on a combination of grants and donations, with the exception of organizations that are supported by Private Foundations. This means that nonprofits need to be able to reach out to donors and ask for financial contributions.

The rules differ from state-to-state regarding what a charitable organization must do in order to fundraise. If you wish to operate your charity in Arizona or to try to raise money from people within the area, you should speak with an experienced attorney about the requirements to Solicit Donations in Arizona. Lotzar Law Firm, P.C. has helped many clients to successfully start charitable organizations and to ensure they remain in compliance with all state rules for operating. Call today to schedule a consultation and learn more.

Arizona used to have a law requiring charities to be registered in order to Solicit Donations. Charities had to file a registration form annually in order to be allowed to Solicit Donations in Arizona. However, the registration requirement was repealed and after 2013 charities are no longer obligated to be registered in the state of Arizona in order to raise funds. Furthermore, Arizona is also one of just four states in the country where the Attorney General does not have Common Law Authority to ensure that charities are complying with legal requirements.

Requirements to Solicit Donations in Arizona

Because of the repeal of the registration requirements, it has become far too easy for dishonest organizations to try to pass themselves off as charities and raise money in Arizona. Wary consumers who are concerned about where money is going may ask for other information from your charitable organization before making a contribution in order to ensure your non profit is legitimate. It is important to be prepared with documentation demonstrating that you are a legitimate charity in order to have success at raising funds.

One of the essential things that you will need to do is to secure Tax-Exempt Status from the Internal Revenue Service. Most organizations do this under the provisions set in 501(c)(3) of the tax code and are thus called 501(c)(3) Organizations. Donors will need to know your status as a Tax-Exempt Organization before making contributions so they are able to take a deduction for the money that they give to your organization. If you cannot provide proof of Tax-Exempt Status, it will be very difficult to successfully Solicit Donations in Arizona.

You may also wish to use a Unified Registration Statement, which is accepted in Arizona as well as in other locations throughout the country. This provides your organization with an opportunity to register to Solicit Donations in participating states.

An experienced Scottsdale Arizona non profit lawyer knows the ins-and-outs of starting a charity and complying with the laws regarding who may Solicit Donations in Arizona. An attorney can advise you on the specifics of what you need to do if you want to start raising funds, so be sure to talk to a lawyer about your legal obligations.

If you run a Nonprofit or Charitable Organization, you may wish to solicit funds from people throughout the country who are interested in the work that you do. You may also want to expand the services that you provide to help people outside of your immediate geographic location. 

Operating a Nonprofit in multiple states is possible, but there are many legal steps that must be taken in order to successfully work across state lines while remaining in compliance with the law. An experienced Scottsdale Arizona nonprofit lawyer can help you to understand your options and ensure you are in compliance with the law so you do not accidentally do anything that will jeopardize the good works your organization is trying to do.

Following the Rules for Operating a Nonprofit in Multiple States

 

When Soliciting Donations from people from out-of-state in order to raise funds for your non profit, you must ensure you comply with the rules and requirements from the states where the money will be coming from. This is true even if you send donation requests via email or via mail, rather than having a physical location in the location where you are soliciting funds.

The laws, unfortunately, differ from state-to-state. This means you will need to find out the specific requirements for raising money in every state where you wish to tap into a potential donor base. In states like California and Illinois, for example, there may be criminal penalties for a failure to register your Charity before Soliciting Donations.

The Internal Revenue Service, which operates on the federal level, also wants to ensure that your Charity is not breaking the rules for any of the individual states that you are soliciting funds from. Form 990 must be filed by nonprofits that raise $25,000 or more. This form asks questions about compliance with state registration laws and it has to be signed by an officer of the organization under penalty of perjury.

Of course, your organization may want to do more than just solicit funds. If you wish to actually provide services in a different state, then you will also need to check the laws applicable to beginning your type of operation. Many states have very specific rules about the type of charity work that can be performed. For example, there may be municipal ordinances or statewide laws limiting where homeless people can be fed. You need to know the local rules to avoid criminal and civil penalties.

This does not mean that operating a non profit in multiple states is impossible. In fact, non profit organizations that work in different geographic areas can open up different chapters that share a name, trademark and mission. When this occurs, the groups of charity chapters in different states are usually called “Federated Organizations.”

Federated Nonprofit Organizations can be structured as a Single Corporation operating in multiple locations; as Separate Subsidiary Corporations; or as separate corporations with affiliation agreements. There are advantages and disadvantages to each approach and you should ensure you speak with a Scottsdale Arizona nonprofit lawyer at Lotzar Law Firm, P.C. for help before you decide how best to begin your operations in a new location.

Some organizations are founded for the purpose of serving the public good, rather than making money for owners. These organizations may operate as Tax-Exempt and avoid paying income taxes on the money they earn or obtain as long as that money is used to fulfill the organization’s purpose. An organization must apply to the Internal Revenue Service to be classified as a Nonprofit and obtain Tax-Exempt Status. Different sections of the Internal Revenue Code (IRC) allow different types of organizations to be classified as Exempt Nonprofits. Most charitable and religious organizations, as well as organizations intended to promote science or literacy or protect kids and animals – obtain their Tax-Exempt Status under section 501(c)(3) of the Internal Revenue Code.

Section 501(c)(3) of the Internal Revenue Code allows for an organization to be a Tax-Exempt Nonprofit only if it is organized exclusively for an exempt purpose. This section of the IRS Code doesn’t specifically use the term “Private Benefit.” However, an organization is not organized exclusively for an exempt purpose if it concerns Private Benefits that are more than just incidental to furthering its charitable goals.

In other words, if an individual benefits from an organization rather than society or the public, then this can jeopardize the organizations’s Tax-Exempt Status. The distinction between a public good and a Private Benefit can be difficult to make, and an experienced Scottsdale Arizona nonprofit lawyer should be consulted for help understanding the meaning of Private Benefit and how it applies to your organization.

Defining a Private Benefit

Drawing a distinction between an organization intended to provide a Private Benefit and one intended to serve an exempt purpose can be difficult. After all, individuals are members of the public. A soup kitchen, for example, feeds individuals. However, while a soup kitchen is created to benefit the individuals who are being fed, this does not necessarily mean that the soup kitchen is conferring a Private Benefit and should lose its Tax-Exempt Status. If the soup kitchen was set up to provide food only to a small select group of people, however, this could mean that it was conferring Private Benefits that are not permissible if the organization wants to maintain Tax-Exempt Status. This is true even if the small select group of people are among the hungry who are part of a larger charitable class.

To draw a distinction between a Private Benefit that is impermissible and a charitable purpose, it is essential to assess whether the benefit is qualitatively and quantitatively incidental. The Private Benefit, for example, will need to be a by product of the benefit to the public (qualitatively incidental) and will need to be insubstantial (quantitatively incidental) in order for the organization to be considered Tax-Exempt under 501(c)(3) provisions. To determine if the organization is benefitting the public or a private individual, the IRS will consider:

• The size of the group of people who will benefit.
• Whether the organization is entering into transactions on unreasonable or unfavorable terms.
• Whether the organization engages in a substantial amount of activities that are not directly related to fulfilling a charitable purpose.
• Whether private parties are receiving more benefits than would be necessary for the charity of fulfill its exempt purposes.
• Whether the 501(c)(3) organization establishes exclusive business dealings with a for-profit enterprise or fails to compare prices or consider alternative sources of services or goods.

It is very important to avoid conferring Private Benefits if your organization is Tax-Exempt under 501(c)(3). Call a Scottsdale Arizona nonprofit lawyer at Lotzar Law Firm, P.C. for help to ensure you are able to avoid mistakes that could jeopardize your nonprofit status.

While most organizations are started in order to make a profit for owners, some businesses have a different purpose. If an organization does not exist to make a profit, it may be classified as a nonprofit. Nonprofits are generally Tax-Exempt because it does not make sense to tax an entity that does not exist to earn income or make money.

Any charities and other organizations that want to be officially classified as a nonprofit, in order to be considered Tax-Exempt, must apply to the Internal Revenue Service Code and provide information on  the purpose of their organization. If the IRS finds that the organization qualifies as a Nonprofit, it will grant the Tax-Exempt Status.

Different sections of the IRS code establish different types of nonprofits or exempt organizations. Many nonprofits that file for Tax-Exempt Status seek to qualify under section 501(c)(3) of the IRS Code. In fact, so many nonprofits are considered 501(c)(3)’s that the term “Nonprofit” has almost become synonymous with the term “501(c)(3) Organization.” In reality, however, there is a difference between a Nonprofit Entity and an IRC Section 501(c)(3) Organization. The experienced Scottsdale Arizona nonprofit lawyers at Lotzar Law Firm, P.C. can assist you in taking care of filings with the IRS so you can get Tax Exempt Status for your organization.

Understanding the Difference Between a Nonprofit Entity and an IRC Section 501(c)(3) Organization

Internal Revenue Code section 501(c)(3) is just one of many sections of the IRS Code that allows for an entity to be classified as a nonprofit and thus to become Tax-Exempt. Any organization or entity that exists for a purpose other than making money can be classified as a nonprofit, but the organization must fall within a specific section of the Internal Revenue Code to be granted Tax-Exempt Status.

Section 501(c)(3) status is available to charitable organizations or nonprofits that are established to serve a religious, literary or scientific purpose. There are numerous other sections that exist for other types of non profits that wish to become Tax-Exempt Organizations. For example:

• Employee Benefit Associations or Funds may apply for Tax-Exempt Status under IRC section 501(c)(4), 501(c)(9) and 501(c)(17).
• Fraternal Societies may apply for Tax-Exempt Status under IRC section 501(c)(8) and 501(c)(10).
• Veterans organizations may apply for Tax-Exempt Status under IRC section 501(c)(10) and 501(c)(23).

The IRS code sections 501(c)(3) to 501(c)27 all list different types of organizations that can be officially recognized as Tax-Exempt Nonprofits and the IRS website provides an overview of these different sections. Unfortunately, understanding how to comply with IRS rules to be officially classified as a nonprofit can still be very complicated. If you want to get Tax-Exempt Status for your business, call Lotzar Law Firm, P.C. today to speak with a Scottsdale Arizona nonprofit startup lawyer for help.

A Non Profit Organization that is created for a purpose other than earning a profit for its owners and shareholders.

Topics covered in this whitepaper include:

1. Purposes of a Non Profit
2. Benefits of Forming a Non Profit Organization
3. How to Form a Non Profit Corporation

Click here to read the whole article or download the PDF.

Certain organizations are started not to make a profit for owners, but instead to serve the public good or to provide a benefit to society. These nonprofit organizations are given special Tax-Exempt Status from the Internal Revenue Service since any income that is earned is generally returned to the nonprofit in order to fulfill the organization’s aims.  There are different sections of the IRS Code that specify when an organization may become Tax-Exempt and the requirements to achieve Tax-Exempt Status. The majority of Nonprofit Organizations will seek Tax-Exempt Status under Internal Revenue Code section 501(c)(3), which provides the exemption for companies organized and operated for charitable purposes.

Before submitting your application to the IRS for Tax-Exempt Status, it is imperative you understand the meaning of Charitable Purpose to qualify as the official IRS definition is specific on this issue. An experienced Scottsdale Arizona nonprofit corporations lawyer at Lotzar Law Firm, P.C. can assist you in determining if your organization meets the criteria. Our attorneys can also help you to complete your application with the IRS for Tax-Exempt Status and to demonstrate that the goal of your organization should qualify you as a “Charity.”

 

What is a Charitable Purpose to Qualify as a Nonprofit?

In order to qualify as a 501(c)(3) Tax-Exempt Organization as a Charitable Purpose your business may include:

• Relieving the distressed.
• Promoting health.
• Reducing the burden of government to provide services to the people.
• Advancing religion.
• Advancing education.
• Advancing science.
• Promoting social welfare.
• Promoting the arts.
• Serving as an instrumentality of government.

In order for your organization to have a Charitable Purpose, in order to qualify as a nonprofit, the organization must specify its specific purpose in its Charter and the Charter must make clear that the goals of the enterprise are to achieve one of the objectives that are considered charitable.

When the IRS receives information from the organization on an Application for Tax-Exempt Status, it will review the Charter to determine if designation as a nonprofit is appropriate. If so, the organization will no longer be taxed on income used to fulfill its charitable goals. Those who make donations to a Nonprofit Charitable Organization may also take deductions for the donations. This can make it easier to raise funds to fulfill your organization’s purpose.

Determining the definition of a charitable organization can be challenging and you may be uncertain as to whether your business should qualify for Tax-Exempt Status under 501(c)(3) of the Internal Revenue Code. It is always advisable to consult with a qualified and experienced nonprofit lawyer at Lotzar law Firm, P.C. for help when applying for Tax-Exempt Status for your organization. Our experienced attorneys can review your Charter and other relevant organization information. Our attorneys can also assist in completing an IRS application and advise you to ensure you comply with all legal requirements necessary to maintain your not-for-profit status. Call today to schedule a consultation and learn more about how our Scottsdale Arizona nonprofit formation lawyers can assist you.

A Nonprofit Organization may qualify for Tax-Exempt Status if the goal of the organization is to serve the public good. Learn more about Charitable Purpose in Maricopa County and Charitable Purpose in Arizona in this presentation.