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Legal Aspect of NP Mgt Final
Terms in this set (55)
What is a nonprofit?
It provides goods or services but is neither a private business nor government operated. It is an organization that is barred from distributing net earnings to any individuals who exercise control within the organization
What are disqualified persons?
They are those who exercise control within the organization, like members, officers, and trustees who cannot obtain any distribution of the net earnings.
Characteristics of a NP (4)
IRS has authority, no stock, excess revenue is retained for benefit of the org, linked to public policy
8 common types of Tax Exempt Orgs
Charitable,Educational, Religious, Scientific, Literary, Testing for public safety, fostering national/international amateur sports, and preventing cruelty to children and animals
What are the benefits of a 501(c)(3)?
Exempt from federal income tax, contributions are tax deductible, Possible exemption from state income, sales, and employment taxes, reduced postal rates.
501c3's make up ___% of all tax exempt orgs
What is the defining characteristic of the NP sector?
The non-distribution constraint
Are all NPs tax exempt?
Are all tax exempt orgs Nps?
NP status is determined by who?
Tax exempt status is determined by who?
5 ways to jeopardize tax exempt status
Private benefit, lobbying, political campaigning, excessive UBI, and failure to comply with annual reporting
A 501c3 must be one of the following(3)
Corporation, Trust, Unincorporated Association.
(most exempt orgs are corporations)
Can you operate as an exempt org as an individual or a partnership?
To form a NP you must think about 2 things
Decide which of the 3 it should be (corp, assc, or trust), and which state it should be in because laws differ between states
What are the tax considerations to think about while forming a np? (3)
appropriate type of federal tax exemption, org's classification as public or private charity, forms of org permitted under Internal Revenue Code
Non tax considerations when forming np (4)
time constraints for establishment, financial resources, type and scale of activities to be conducted, concerns with limited liability, goals of the org
First stage of organizational process in forming NP
Charter/Article of Incorporation: name of org, purpose of org, contact name, name and addresses of directors, dissolution language
Who is the finished charter filed with?
Secretary of State
After the charter, the NP must form ____?
Bylaws: rules governing the entity, more detailed than charter, meeting requirements, date of annual meeting, meeting requirements, election procedures, fiscal year, quorum requirement for conducting business
What is a quorum?
The number of people needed to conduct business
Once the charter and bylaws have been established, whats next?
Federal Tax Identification: once the charter is accepted and the first meeting is held to approve bylaws and authorize bank account, the FTI is obtained from IRS.
5 Theories of the NP sector existence
Historical, Market failure, Government failure, Pluralism/Freedom, and Solidarity
Historical Theory of why the NP sector exists
Can be explained by historical factors, such as the growth of voluntary orgs in the American colonies that predated government
Market Failure Theory of why the NP sector exists
Exists in response to certain inherent limitations of the American Market economy. The market is not good for handling those things we consume collectively such as clean air, national defense, and safe neighborhoods. Market will only supply collective good if it is desired by majority. NPs allow small groups to produce what they desire and would not be supported by majority
Government failure theory
Comes from failure of the gov to provide collective goods because they require majority support. Limitations of gov show why we need NP sector.
NPs play a valuable role in promoting values of pluralism and freedom
(pluralism: diverse and competing ideas and centers of power in society)
The NP sector is a mechanism through which an individualistic democratic society can express solidarity through joint action
Traditional Public Benefit Subsidy Theory (why NPs are tax exempt)
Justifies charitable tax exemptions on the basis of public benefits conferred by the organizations benefits which relieve the burdens of government by providing goods or services that society or government is unable or unwilling to provide
Public Policy Requirement of NPs
NP cannot operate for purposes that violate public policy
What 2 things does the IRS test NPs for
Organizational and Operational Tests
Organizational: limit purpose to one or more of the 501c3 purposes, operate for those purposes, operate according to governing documents.
Operational: must show that it will engage primarily in activities that further its exempt purposes
How are NP's executives' compensation determined?
The IRS permits orgs to pay their executives "fair and reasonable" compensation. There is no universal standard for this, but the orgs can look at other organizations NP or for profit that are similar in size and purpose to get the market rate.
Can NPs lobby?
In general, no organization may qualify for section 501(c)(3) status if a substantial part of its activities is attempting to influence legislation (commonly known as lobbying).
A 501(c)(3) organization may engage in some lobbying, but too much lobbying activity risks loss of tax-exempt status.
They will consider lobbying trying to contact, or encouraging the public to contact legislation.
Can a 501c3 operate for private benefit?
No, it must not operate for the private benefit of disqualified persons, or private shareholders. No part of the net earnings of a section 501(c)(3) organization may inure to the benefit of any private shareholder or individual.
A private shareholder or individual is a person having a personal and private interest in the activities of the organization.
Can NPs participate in political campaigning?
Absolutely not! It is prohibited. Participating in this could cause org to lose exempt status or have to pay excise tax.
They are prohibited from directly or indirectly participating in, or intervening in, any political campaign on behalf of (or in opposition to) any candidate for elective public office
Why do boards exist?
To represent ownership of org, board can only direct when acting as a group, focuses on vision, monitor financial health, hire/fire executive director
Why are board members recruited?
their profession, constituency, bank account, age, reputation, they know someone on the board
Legal duties of Board members:
Duty of Care, Duty of Loyalty, Duty of Obedience
Duty of care?
The duty to exercise reasonable care when he/she makes a decision for the organization. Must act as someone would in a similar circumstance with being familiar with the nonprofit activities, financial condition, and attend board meetings
Duty of loyalty?
The duty to keep info gained through his/her service confidential and not use info for personal gain. Means that you act with undivided loyalty in the best interests of the NP.
Duty of obedience?
The duty to be faithful to the org's mission and the duty to act consistently with the org's goals.
What are the policies of a NP?
They state the processes for day to day activities
What is parliamentary procedure?
The organization's rules that speak to the mechanics of board meetings. It functions as a support for board governance and improve its ability to govern.
What role does the TN Attorney General play?
Has broad oversight over TN NPs
What role does the TN Dept of State play?
Responsible for processing documents filed pursuant to the TN Np corporations act
What role does the Secretary of State play?
Responsible for administrating and enforcing TN's Charitable Solicitations Act and TN Charitable Gaming Implementation Law.
What is the Charitable Solicitations Act?
Requires that Charitable organization who solicit contributions from or within the state of TN register with the Dept of State's division of Charitable Solicitations and Gaming
What is the size of the Charitable Giving Industry in the US?
3 state regulations for Charitable Solicitation
1. They provide mandatory disclosure through state and local registration and licensing requirements that make financial and operational information available to the public
2. The statutes make unlawful any fraudulent solicitation activities carried on by groups purporting to represent charities, by charitable groups, or by professional solicitors
3. States have attempted to have provision controlling costs of solicitation and administration in order to increase the percentage of funds directly spend on the exempt purposes of the organization
Misuse of monies raised for charitable purposes is fraud upon:
What is the Sarbanes Oxley Law of 2002?
(SOX): the most prominent law affecting NP accountability.
SOX significant accountability requirements for publicly traded companies and included two provisions that are also applicable to nonprofits:
(a) a prohibition against destruction of documents that are tied to a criminal investigation
(b) a prohibition of retaliation against whistleblowers
Reasons in favor of SOX
Assumes a need for reform
Stresses SOX's positive aspects in terms of cost benefit analysis
Its need due to lack of or inconsistent state enforcement
Reasons against SOX
SOX's rationale does not apply to the sector
For-profits have a greater incentive to distort financial status
It is cost prohibitive and many nonprofits lack an existing structure of attorneys and accountants
The American Institute of Certified Public Accountants (AICPA) issued a statement of position in 1988:
Accounting for Costs of Activities of Not-for-Profit Organizations and State and Local Government
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