Establishing a Tax Deductible Charity – 501(c)(3)

Partnerships are formed when individuals collaborate without a formal agreement.  They are commonly formed on accident and lead to negative outcomes.  The 501(c)(3) tax deductible organization, which we will simply refer to as a charity here, is quite the opposite in formation.  The process involves numerous steps, regulatory agencies, and formalities.  There are many legal and practical considerations that must be involved when you embark on forming a charity.  If the cost of complying with the stringent guidelines is higher than the gain you receive from the tax deductible status, you may want to consider an alternate entity.  Here we will assume that you decided to form a charity, and we will walk through some of the steps for establishing one in Arkansas.
 
To be tax-deductible you need to form a 501(c)(3) Nonprofit Corporation.  You cannot just follow the barebones requirements for Arkansas Domestic Nonprofit Corporations when you are seeking the tax exempt status, you must comply with the enhancedIRS requirements.
 
The first step is to fill out the appropriate Arkansas Articles of Incorporation with the filing fee.  The stock purposes are generally sufficient from a legal standpoint, and as long as they correlate to your organization they can be used.  One of the early considerations is whether there should be “members.”  Members in a 501(c)(3) hold only votes; whereas, members in a for profit corporation may hold both votes and stock.  Members can elect the Board of Directors, or you can just determine the Board of Directors prior to filing.  Simple charities can often be formed without members, but one way of raising contributions is by charging a dues fee for members.  Keep in mind that if you have members that vote, the quorum required to vote (as specified in the by-laws) comes into play.  If your Board of Directors is determined, it is advisable to attach this list to your Articles of Incorporation.
 
The second step is to write the by-laws that govern the organization.  The “Purpose” in the by-laws should be identical to that on the Articles of Incorporation.  Whether or not you have members, there are many details are must be in the by-laws.  This non-exhaustive list includes:
  • Members: qualifications, dues, meetings, resignation, duties, etc
  • Board of Directors: qualifications, duties, term, dissolution, nomination committee, etc
  • Officers:  positions, authority, scope, amendment, termination, etc
  • Money Management:  trustee, reimbursement, expenses, deposits, account management, etc
Quorum and Meetings may sound like simple concepts, but what exactly constitutes a Meeting?  Can someone participate by conference telephone?  If you state a 50% Quorum is required and you have 5,000 members, then you need 2,500 to show up to make a material decision.  This is why people often choose a low quorum number such as 10%.
 
The third step is to apply with the IRS.  The IRS website walks you through the checklist which includes form 1023, 1024, and SS-4 to acquire an EIN.  Other forms may apply to your unique situation.  The IRS will either send you an acceptance letter, or request even more paperwork.
 
The fourth step is getting the IRS issued acceptance letter to the appropriate department of the Arkansas Office of the Attorney General.  
 
Remember, charities are highly regulated.  Annual reports are required by August 1st.  No lobbying can be conducted.  No profits can accrue to any member.  If they do not need to seek the tax deductible aspect of the 501(c)(3) a variety of other more flexible arrangements and entities are available.  
 
Please remember that this is only a partial list of information that needs to be taken under consideration when forming a charity, and none of the above constitutes legal advice.
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