Becoming A Non-Profit, Tax-Exempt Corporation in Massachusetts

The material contained in this guide is neither advice nor opinion on specific legal questions. It is furnished as general information on basic concepts and filing requirements for seeking federal tax-exempt status from the Internal Revenue Service and incorporating in Massachusetts. The material is not meant to serve as a substitute for legal counsel. You should consult an attorney or a certified public accountant before filing for incorporation as a nonprofit corporation or applying for recognition of federal tax-exempt status.

DEFINITIONS

• Charity

There is no statutory definition of a charity; rather, the term is defined by case law. Generally, charities share three characteristics:

a) they are nonprofit organizations

b) they have a purpose that is primarily charitable

c) they benefit an indefinite class or number of people.

• Corporation

A corporation is a legal entity that enables a group of people to pool energy, time and money for profit or nonprofit activities. It acquires legal existence after complying with a state's incorporation procedures and formalities. State law treats a corporation as a separate "person" distinct from the people who own, manage or operate it. It may enter into contracts, incur debts and pay taxes. The fact that the corporation exists as a separate entity gives directors, employees and members the benefits of limited liability.

State corporate statutes distinguish between profit and nonprofit corporations. Profit corporations are authorized to issue shares of stock to shareholders in return for capital investments of money, property or past services to the corporation.

• Nonprofit Corporation

Generally, nonprofit corporations can neither issue shares nor pay dividends under state law. Under the federal tax code, section 501(c)(3), tax-exempt nonprofit corporations cannot pay dividends or profits, as such, to members or other individuals. On dissolution, tax-exempt non profits must distribute their remaining assets to a similar tax-exempt nonprofit group.

Nonprofit corporations share some attributes with profit corporations. For both types of corporations, limited liability is available to founders, incorporators and directors. Both may also make a profit from nonprofit as well as commercial activities.

While most profit corporations are formed for "any lawful purpose" under state statutes, nonprofit corporations must usually be established to accomplish specific purposes of benefit to the public at large, a segment of the community or a particular membership. Any nonprofit organization must be one of three types: a corporation, a trust, or an "other" (usually an unincorporated association). A common element in each is that there should be a creating document (articles of organization or incorporation) and a document containing operational rules (bylaws). Keep in mind that before an organization can be tax-exempt, it must be a nonprofit organization. Nonprofit organizations are basically creatures of state law; tax-exempt organizations are basically subjects of federal tax laws.

Advantages of incorporating and being recognized as tax-exempt

The IRS will consider application for recognition of exemption from federal income taxation from both incorporated and unincorporated nonprofit organizations. However, the advantages of incorporating as a nonprofit corporation outweigh the disadvantages. Some advantages are:

• providing for the legal continuity of the organization

• limiting the personal liability of members and officers

• providing a practical, consistent framework for conducting business

• simplifying the negotiation and enforcement of contracts.

The act of preparing the standard paperwork necessary to organize a nonprofit corporation serves as a convenient means for dealing with important organizational issues that might otherwise be ignored in a more informal setting.

Federal tax exemption also has many advantages for a library support group. Among these are:

• allowing donors to claim an income tax deduction for contributions to the Friends organization

• providing an exemption from federal estate taxation for contributions made to nonprofit groups at death

• providing for lower cost nonprofit mailing, advertising and purchasing rates, as well as other private and governmental discounts and preferences

• a section 501(c)(3) organization can apply for and accept grants from government agencies and private foundations

• there are also state and local income, property, sales, excise and other tax exemptions available to nonprofit, tax-exempt corporations.

Be aware also that some organizations are not required to file with the IRS to be considered tax-exempt under section 501(c)(3) of the federal tax code. These include any organization (other than a private foundation) normally having annual gross receipts of not more than $5,000. These organizations are exempt automatically if they meet the requirements of section 501(c)(3).

However, if the organization wants to establish its exemption with the IRS and receive a ruling or determination letter recognizing its tax-exempt status, it should file Form 1023 with the appropriate IRS unit. By establishing the organization's exemption, potential contributors are assured by the IRS that contributions to the organization are deductible.

STEP 1

FORMING A NONPROFIT ORGANIZATION

Complete the blue form Articles of Organization obtained from the Corporations Division, Secretary of the Commonwealth, One Ashburton Place, 17th Floor, Boston, MA 02108, (617) 727-9440. Items which must be included in the document are:

• Name of the corporation which must include one of the following words: Limited (Ltd.), Incorporated (Inc.) or Corporation (Corp.). The name must not in any way duplicate that of any other existing Massachusetts corporation.

• A statement of purpose of your nonprofit organization. If you intend to apply for federal tax exemption status, you will have to elaborate on the purposes in a different section of the application in Article 4, the "other lawful provisions" clause. The answer will have to further define the purposes, the means of achieving those purposes, procedures for dissolution, the disposition of net earnings, etc. The answer that you provide in Article 4 is critical in the determination of your tax status by the IRS.

• Information on categories of membership if the corporation has more than one class of members.

• A written affirmation that bylaws have been adopted, corporate officers selected and that an annual corporate meeting will be held for all members on a certain date.

• The location of the principal office of the corporation which must be a street address, not a post office box.

Submit the blue form to the Corporations Division of the Office of the Secretary of the Commonwealth with a check made payable to the Commonwealth of Massachusetts (not the Secretary of State) for the filing fee of $35.00 (current as of date of this publication).

Approximately two weeks after the Articles of Organization have been approved by the Secretary of the Commonwealth, a copy will be mailed to your corporate address. This serves as notification of approval.

STEP 2

FILING FOR FEDERAL TAX EXEMPTION

Once you have received your notification of incorporation from the Commonwealth, you may decide to file for federal tax exemption. If your organization has decided to incorporate, you cannot submit Form 1023 until the Articles of Organization have been filed with and certified by the Corporations Division of the Office of the Secretary of the Commonwealth.

You can download most of the following IRS forms and publications from the IRS web page at http://www.irs.ustreas.gov, or obtain them by calling or writing:

Internal Revenue Service
John F. Kennedy Federal Building
Boston, MA 02203
(800) 829-3676 (800-TAX-FORM)

Tax-Exempt Status for Your Organization
Publication 557

Application for Recognition of Exemption
Form 1023

User Fee for Exempt Organization Determination Letter Request
Form 8718

Tax on Unrelated Business Income of Exempt Organizations
Publication 598

Application for Employer Identification Number
Form SS-4

Exempt Organization Appeal Procedure
Publication 892.

Under section 501(c)(3), a Friends organization, or other library support group, may file for federal tax exemption by completing Form 1023 even if it is not incorporated. A basic requirement for exemption is that the organization is "organized" for exempt purposes. An organizing instrument is any of the following:

• Articles of Incorporation or Organization

• Constitution

• Trust Instrument

• Articles of Association

• Any other written instrument by which an organization was created.

See IRS Publication 557, Tax-Exempt Status for Your Organization for sample organizing instruments that satisfy the requirements of section 501(c)(3).

Filing for federal tax exemption

Fill out Form 1023 and attach to it certified copies of both your corporate bylaws and your Articles of Organization. Mail the completed Form 1023 with required attachments (conformed copies of Articles and bylaws, etc.) and Form 8718 with your filing fee to:

The Internal Revenue Service
EP/EO Division
P.O. Box 1680, GPO
Brooklyn, NY 11202.

Required inclusions with Form 1023

• Employer Identification Number

• Conformed copies of organizing documents (Articles of Organization, Constitution, Trust Instrument, etc. and bylaws)

• Description of activities

• Financial data

• Fund raising activities

• Information on previously filed tax returns

User Fee - Form 8718

• Payment must accompany your request. The IRS will not process a request unless the fee has been paid. A fee of $150.00 (current as of date of this publication) is required for:

An exempt organization that has had annual gross receipts averaging not more than $10,000 during the preceding 4 years, or
A new organization that anticipates gross receipts averaging not more than $10,000 during its
first four years.
A fee of $500.00 (current as of date of this publication) is required for:
An exempt organization that has had annual gross receipts averaging more
than $10,000 during its first 4 years, or
A new organization that anticipates gross receipts averaging more than $10,000 during its first 4 years.

The IRS will consider applications for exemption from both incorporated and unincorporated nonprofit organizations. But corporations must be certified as such by the Secretary of the Commonwealth. If you wish to apply for the federal exemption, the form you submit to the Secretary of the Commonwealth will have to be written with the federal exemption in mind.

A ruling or determination letter will be issued to your organization if its application and supporting documents establish that it meets the federal statutory requirements. Although the IRS turnaround time is often two months, you may have to wait three to six months before receiving a response to your exemption application.

It is important to retain appropriate originals and copies of everything for your permanent file before submitting forms to the IRS or Secretary of the Commonwealth.

STEP 3

FILING FOR STATE AND LOCAL EXEMPTIONS

Receiving recognition for federal exemption does not automatically guarantee state and local exemptions. After you receive the federal determination letter approving your organization's status as a 501(c)(3) organization, you will need to file with state organizations for the following exemptions:

• State Sales Tax - Fill out Form TA1 (obtained from the Bureau of Sales Excise) and send it to Bureau of Sales Excise, Department of Revenue, 100 Cambridge St., Boston, MA 02202, (617) 887-6970. There is no fee for the application for exemption from state sales tax. The exemption is issued for five (5) years and is renewable.

• State Corporation Income Tax - Send copy of your IRS exemption letter to Corporate Exemptions, Department of Revenue, 100 Cambridge St., Boston, MA 02202, (617) 727-4545.

STEP 4

FILING REQUIREMENTS FOR A CHARITABLE ORGANIZATION

Filing requirements with the Division of Public Charities

1. Articles of Incorporation

Any charitable organization established, operating or raising funds in Massachusetts must register with the Division of Public Charities, Attorney General's Office by filing a copy of its Articles of Incorporation or other governing instrument, and its bylaws.

Division of Public Charities
Office of the Attorney General
One Ashburton Place
Boston, MA 02108
(617) 727-2200.

2. Certificate of Solicitation

If the organization intends to solicit funds from the public, it must first obtain a Certificate of Solicitation from the Division of Public Charities. An organization is exempt from this requirement, if it does not raise or receive contributions from the public in excess of $5,000 during a calendar year or does not receive contributions from more than ten persons during a calendar, if all of the organization's functions, including fund raising activities, are performed by persons who are not paid for their services

3. Annual Public Charities Report

Unless exempt, a charitable organization, after it completes its first year of activity, must file an annual Form PC Report with the Division of Public Charities, Office of the Attorney General.

4. Professional Solicitor Form 10

A professional solicitor, who is an individual or organization hired by a charitable organization to conduct a fund raising campaign on the charity's behalf, must file a registration statement, Form 10, with the Division prior to commencing any form of solicitation.

Filing requirements with the Office of the Secretary of the Commonwealth

Each year, all nonprofit and tax-exempt organizations must file a short form entitled Annual Report with the Corporations Division, Secretary of the Commonwealth, One Ashburton Place, Boston, MA 02108, (617) 727-9440.

Filing requirements with the Internal Revenue Service

Tax-exempt organizations, other than private foundations, must file Form 990, Return of Organizations Exempt From Income Tax, or Form 990EZ, Short Form Return of Organization Exempt From Income Tax, with the IRS by the 15th day of the 5th month after the end of your organization's accounting period. Which form to use is determined by your gross receipts in the tax year.

ADDITIONAL RESOURCES

Hopkins, Bruce R. A Legal Guide to Starting and Managing A Nonprofit Organization. New York: John Wily & Sons, 1993.

Mancuso, Anthony. How To Form Your Own Nonprofit Corporation. Berkeley, CA: Nolo Press, 1994.

Massachusetts Office of the Attorney General. Questions Commonly Asked to the Division of Public Charities. Boston, 1994.

Massachusetts Office of the Secretary of the Commonwealth. Organizing a Non-Profit Corporation. Boston, updated 9/28/98.

U.S. Department of the Treasury. Internal Revenue Service. Tax-Exempt Status for Your Organization (Publication 557). Washington, DC: Internal Revenue Service, rev. May 1997.