Expertise Over Title Any Day
I pride myself on the expertise I have gained related to setting up nonprofit entities and acquiring that highly valued IRS 501c3 determination letter. Expertise which took years of work in the industry developing the understanding and skills to keep up with the sector’s ever-evolving needs and its unique layers and regulations.
However, with certain professional titles – namely lawyers and CPA’s, it is assumed they automatically ‘know’ the intricate details and unique requirements of filing for a 501c (3, 4 or 6) and have the same level of expertise. Unfortunately, they have very little experience in the sector, in fact they often prefer to outsource any nonprofit needs.
I’d like to share a true story and reference real-life examples to point out some key elements that make creating a nonprofit entity more than just paperwork. It truly reiterates what I have been saying for years.
Have you ever had the urge to say, “I told you so”, or “I tried to warn you”? I am not trying to be mean but it evolves from years of seeing the same scenario over and over, and the resulting frustration I feel trying to fix, correct, explain… whatever way you want to label it, other people’s work that was done incorrectly.
Another phrase I’ve used more times than I can count is ‘it’s more than filing paperwork’ in my attempt to describe how forming a 501c3 is an entrepreneurial decision to start a business. How it requires understanding the process and how it works across several government agencies, plus understanding the unique attributes of setting up a for-purpose business. I consider myself a nonprofit start up service provider plus a consultant in nonprofit management. I provide more than paperwork.
Case in point and a true story.
I have a client that needed help to build their website, set up some fundraising strategies, and set up a few other basic systems. Because they said they were a ‘nonprofit’, I always review the documentation and certification on the state and federal level so I could gather some basic information. However, what I did was open a can of worms, which sent my frustration level soaring.
A simple disclaimer – all lawyers aren’t this bad. However, most will acknowledge that nonprofit development is not their expertise.
However, in this instance I don’t think he knew, he didn’t know, what he was doing.
My client hired a lawyer April 2021 to establish their 501c3 entity and paid them more than $3,800. The price alone would have had me researching other options but when you have the title ‘Lawyer’, it provides a level of privilege. Anyway, I digress, eleven (11) months later their 501c3 application still had not been submitted. They were in the dark as to why no movement was happening because they didn’t know the right questions to ask. I don’t blame them; they had hired a lawyer they thought would know the requirements and regulations. However, they still did not have what they needed, and it was prohibiting them from moving forward with their programs and plans. The problem was the lawyer didn’t know what he was doing either.
After not finding their certification, I asked to see all the documents they had received regarding their nonprofit filing.
Side note: My radar went up when I looked at the timelines. They contracted the lawyer in April 2021, didn’t receive the corporate status for 3 ½ months, and now March 2022 still don’t have the 501c3 determination? FYI, State certifications in this digital age are often instantaneous but at the most might take about 14 days if manual processed. An IRS application can be filed immediately after receiving state corporate status. In this scenario, it should have been filed in July 2021.
OH MY GOSH… What I discovered
I discovered multiple issues related to their state filing and organizing documents. For example their state corporate filing was done incorrectly and not IRS compliant, and the bylaws provided were not for a nonprofit nor were they legal. IRS would reject the application (may have already) if it was filed with the documentation I was reviewing. I immediately informed my client, and told them to STOP the lawyer from filing or submitting any paperwork until the issues were corrected. I’ll get into why that is important later.
Element 1 – When creating any business, and yes, a nonprofit is a for-purpose business, you start at the state level filing what most states call Articles of Incorporation (certificate of incorporation etc…). Each State has their own process and requirements. However, no matter what the state requires, when creating a nonprofit entity there are additional criteria that need to be established.
For example, my client’s filing was in the state of Nevada. I already mentioned they wanted to fundraise. On the Nevada Nonprofit Articles of Incorporation application, it specifically asks “Does this organization intend to solicit charitable/tax-deductible contributions?” That box was checked ‘NO’ on their filing nor was the required ‘Charitable Solicitation Statement’ form submitted. Remember, I said they came to me to set up fundraising strategies. That means if they were to conduct fundraising activities, they would be illegal in Nevada. Now understand, there are organizations that don’t do fundraising, but they had told the lawyer they wanted to fundraise. FAIL
That one element triggered me to look at ALL documents. Can I say, OH MY GOSH again?
Element 2 – When establishing a regular business, you don’t need to file for ‘approval’ with the Internal Revenue Service (IRS). However, to gain 501c3 status, a separate application (1023) is filed and during the application process the IRS will review your formation documents (state filing) to 1. determine if the organization’s purpose meets the criteria to qualify for 501c3 status, and 2. confirm it includes specific language and a dissolution clause.
In this true story the IRS rejected their state organizing documents because they were non-compliant. The purpose statement did not meet their requirements and a dissolution statement was not included.
Their state purpose statement contained only two words (yep you read that right) when it should have been a complete statement.
Said organization is organized exclusively for charitable, religious, educational, and scientific purposes, including, for such purposes, the making of distribution to organizations that qualify as exempt organizations described under section 501(c)(3) of the Internal Revenue Code or corresponding section of any future federal tax code and particularly the purpose is as follows.
In addition, the dissolution clause which specifies if the organization were to close the remaining funds or assets would be distributed to another nonprofit organization was not included. Most state applications do not ask for that therefore, for all my clients, they receive a standalone Articles of Incorporation document no matter what the state requires. This document contains the required specific purpose statement language and includes a dissolution statement. Don’t let the simplicity of getting a state charter fool you. The IRS requirements supersede state requirements.
The response from the lawyer was, “I can amend that to make it work”. Really, that is a fundamental element of the IRS filing process.
To be honest, states don’t really care what your business purpose is, nor do they automatically include additional clauses so unfortunately most state requirements don’t alien with IRS 501c3 criteria. That is why understanding the regulations is important – it’s more than paperwork.
Element 3 – The IRS application process is an in-depth examination of the organization’s governance and many of the details are outlined in the by-laws. Within the IRS application there are questions that ask for the exact location, such as the page, article, and section numbers to affirm that required elements are included. They ask if a board member will be paid, and if there is a conflict-of-interest policy.
These details highlight how nonprofit by-laws are very different from a for-purpose company. In this true story the by-laws provided to the client detailed some items that IRS regulates as illegal. For example, Article III, Section. 1.12 stated a board member may be paid a salary – that is illegal. However, that was just one of many issues that made these by-laws unacceptable.
At this point, I really felt sorry for the client. They were relying on the professionalism and/or expertise they assumed the lawyer processed. I felt like Negative Nancy, pointing all the issues I found.
This experience reaffirmed the need for my services and expertise. I could have saved this client time and money – at least the initial $3,800.
But what is more disturbing is the how a title precipitates an assumption they know everything. Due diligence is still required to assess if you are getting the EXPERTISE you need.
EXPERTISE OVER TITLE ANY DAY.
I am glad to say I solved all of their formation problems. I corrected their Articles of Incorporation, drafted compliant By-Laws, and got their 501c3 application approved. Now, finally they can start working on their programs!!
If you have questions about forming a nonprofit or need expert guidance, please reach out.
Dr. Victoria Boyd – Vboyd@DrVictoriaBoyd.com
We also have great training and resources at https://HowtoStarta501c3.now.site
Already a nonprofit? Visit: https://PhilantrepreneurFoundation.org
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