A Nonprofit Corporation is a corporate entity that has been formed in order to provide a public good or to do charitable work. Nonprofits may earn money and receive donations, but the organization does not exist for the purposes of earning a profit for its owners. Instead, the nonprofit has an organizational goal of providing help, assistance or enrichment to society or to people’s lives. Because nonprofits benefit the public rather than individual owners, these types of organizations are Tax-Exempt.

Forming a Nonprofit requires taking multiple different legal steps. The organization first must be incorporated and the organization must then apply to the Internal Revenue Service for Tax-Exempt Status. An experienced Scottsdale Arizona nonprofit lawyer at Lotzar Law Firm, P.C. can provide assistance to those wishing to start a nonprofit who are seeking Tax-Exempt Status for their enterprise. Call today to schedule a consultation and learn more.

What is a Nonprofit Corporation?

The first step in forming a Nonprofit Corporation is to request a Tax ID Number, decide on a business name and file Articles of Incorporation with the Arizona Corporation Commission. The name of the organization must not be in use already within the state of Arizona. All requirements must be met in filing the Articles of Incorporation including providing information on the name of the nonprofit; the address; the officers; and the organization’s purpose.

After the Nonprofit Corporation has been created as an official legal entity, it is necessary to request Tax-Exempt Status from the Internal Revenue Service. There are different categories under which organizations become Tax-Exempt Nonprofit Corporations. For example, a Nonprofit Corporation may be classified as a 501(c)(3) Organization. This means that section 501(c)(3) of the IRS Code is the section of the law that entitles this particular business to avoid paying taxes. Form 1023 must be submitted to the IRS, along with information on why the Nonprofit Organization should be considered Tax-Exempt, in order to obtain approval.

The IRS will allow an organization to be classified as Tax-Exempt only if the purpose is to do something beneficial to the public good. For example, a Nonprofit Corporation may be Tax-Exempt if its purpose is:

• To do charitable work.
• To provide educational services for a literary purpose or for a scientific purpose.
• To operate in service of a religious organization.

Forming a nonprofit organization not only allows for favorable tax treatment for the organization, but also for donors as well. In most cases, donors who give money to a 501(c)(3) or other similar Tax-Exempt Organizations will be able to take a tax deduction for the amount of the donation.

The owners and directors of a nonprofit also benefit from liability protections when an organization is structured as a nonprofit corporation. This means those in charge of running the organization will not be at risk of personal liability for debts or Judgments against the Nonprofit Corporation.

Lotzar Law Firm, P.C. can assist in the formation of a Nonprofit Corporation so you can start taking advantage of the legal benefits of this organizational structure. Call today to schedule a consultation and learn more.

To learn more, please download our free nonprofit corporation in Arizona report here.

Organizations that promote the public good or serve a public purpose may be classified as Nonprofit Organizations. This means that the organization may earn income and receive donations without paying income taxes on the money coming in. The organization must use the funds it receives to fulfill its goals. Most Charitable or Nonprofit Organizations rely on grants as well as on donations from benefactors. 

However, a Private Foundation is a different type of charitable organization. Instead of receiving ongoing or periodic donations, a Private Foundation is generally created by a single primary donation that comes from an individual, family or company. The person or entity that makes the initial donation for the Private Foundation will manage and control the money, often along with Trustees or a Board of Directors.

Private Foundations have specific tax obligations and full compliance with tax laws is essential . An experienced Scottsdale Arizona nonprofit corporate law attorney can provide assistance to those interested in starting a Private Foundation or to individuals involved with this type of organization. Call Lotzar Law Firm, P.C. today to learn more and to schedule a consultation with an attorney who can help.

What is a Private Foundation?

A Private Foundation is established in order to serve a charitable purpose or provide a public benefit. The foundation is started by, and receives initial funding, from a person, family or company. Instead of soliciting ongoing to periodic donations, or applying for grants, the foundation generates income from the investment of the initial donation. The bulk of this investment income is then used to fulfill the organizational purpose of the foundation. The Bill and Melinda Gates Foundation is an example of a Private Foundation, and it is controlled by the Gates’ family.

According to the Internal Revenue Service, Private Foundations are required to file Form 990-PF, Return of Private Foundation each year. An excise tax is typically charged on the net investment income made by domestic Private Foundations. Some foreign Private Foundations are taxed on gross investment income that is derived from sources within the United States.  Some Private Foundations are also required to fulfill public disclosure requirements.

Private Foundations can make it possible for wealthy benefactors to contribute funds to causes they believe in and to have more direct control over where the income from those funds is distributed. However, there are restrictions on Private Foundations that limit self-dealing between contributors and the foundation, as well as that limit the amount of holdings in private businesses. Investments made by the Private Foundation cannot jeopardize the ability of the organization to carry out its charitable or exempt  purposes, and a significant portion of investment income must actually be distributed annually in service of the organization’s goals.

An experienced nonprofit corporate law attorney at Lotzar Law Firm, P.C. can assist with the creation and ongoing operation of a Private Foundation to ensure that all legal requirements are fulfilled. To get started so your foundation can begin working towards achieving its important mission, call today to schedule your consultation.

Tax-Exempt Organizations may earn income that is used to fulfill a public purpose. For example, a charity that is organized to provide food for the homeless may receive donations, grants and other funds. Provided the organization meets Internal Revenue Service requirements and uses the funds to purchase and distribute food, the organization will not be assessed taxes on the money received.  Tax-Exempt Organizations need to ensure that they use any income for appropriate purposes only in order to keep exempt status.

Tax-Exempt Organizations must identify their purpose, which must provide some type of public benefit or charitable service. Under some circumstances, however, a Tax-Exempt Organization may engage in activities that generate a profit and that are outside of the normal scope of operations. For example, a Tax-Exempt free clinic may begin a side operation selling non-prescription pharmaceutical medications at an on-site pharmacy. The free clinic is earning business income that may not be considered Tax-Exempt. This money is called Unrelated Trade or Business Income (UTBI).

When a Nonprofit or Charity earns Unrelated Trade or Business Income, the Tax-Exempt Organization may be charged tax on this specific limited income only while still retaining Nonprofit status. It is important to understand the circumstances in which an organization will be taxed on Unrelated Trade or Business Income in order for an organization to comply with IRS obligations. An experienced Scottsdale Arizona nonprofit business lawyer at Lotzar Law Firm, P.C. can assist with understanding whether your organization is earning Unrelated Trade or Business Income.

Earning Unrelated Trade or Business Income (UTBI)

Unrelated Trade or Business Income is money that a Nonprofit Organization is taxed on. There is a very specific set of requirements that must be met for money that a charitable organization makes to be classified us UTBI. The IRS specifies that the key criteria include:

• The income is earned through a business or trade.
• The activities resulting in the income being earned are regularly carried out by the exempt organization.
• The activities resulting in the income are not substantially related to furthering the purposes of the organization.

According to the IRS, Trade or Business “generally includes any activity conducted for the production of income from selling goods or performing services.” The fact that a particular activity is similar to the activities conducted for the purpose of a nonprofit does not necessarily mean it is not a trade or a business. For example, as the IRS explains, the fact that a pharmacy provides medication and supplies to a nonprofit hospital does not change the fact that its provision of supplies to the general public is a business or trade.

The question of whether an activity is regularly performed or not is also important. For example, if a Charitable Organization has a one-time bake sale, the income would not be taxed even if the production of baked goods was not related to its organizational mission.  If the Charitable Organization begins operating a bakery and routinely sells its products, then the earnings from the bakery may be considered Unrelated Trade or Business Income and will be subject to taxation.

Finally, the IRS indicates that: “A business activity is not substantially related to an organization’s exempt purpose if it does not contribute importantly to accomplishing that purpose (other than through the production of funds).” This question must be answered by considering the facts in a particular case.

It is imperative your charitable organization follows the rules regarding taxation of unrelated trade or business income. A Scottsdale Arizona business law attorney at Lotzar Law Firm, P.C. can provide assistance in understanding your obligations and complying with tax requirements. Call today to schedule a consultation and learn more.