Forming and operating a not-for-profit corporation/tax-exempt entity in the State of New York implicates a number of statutes and regulations. These are requirements that must be complied with in order to receive the protections and tax-exempt benefits that these organizations are afforded.
Individuals involved in the formation and ongoing operation of a not-for-profit/tax-exempt organization should be aware of the need for and standards applicable to Organizational Meetings; the adoption of governing documents and necessary policies; applications for tax exemption status; initial registrations and filings; and ongoing annual reporting obligations. Specifically, those operating such organizations should be aware of and consider the need to take the following actions:
File a Certificate of Incorporation with the New York State Secretary of State, Division of Corporations—that satisfies the requirements of the New York State Not-for-Profit Corporation Law.
Conduct an “Organizational Meeting”—to adopt governing documents and policies, including Bylaws and a Conflict of Interest Policy.
Apply for a tax-exempt designation from the United States Internal Revenue Service—under Internal Revenue Service Section 501(a) or another similar authority (using Form 1023 or 1023-EZ).
Register with the New York State Attorney General, Charities Bureau (using Form CHAR410).
Apply for an Exempt Organization Certificate—i.e., Sales Tax Exemption Certificate—with the New York State Tax Department (using Form ST-119.2).
Apply for Exemption from Corporate Franchise Taxes from the Tax Department—to obtain recognition of exemption from New York State corporate franchise taxes (using Form CT-247).
Annually, file a Form 990 tax return with the Internal Revenue Service.
Annually, file a Form CHAR500 financial report with the Attorney General.
In addition to the foregoing applications and filings, once formed, not-for-profit corporations are required to comply with Not-For-Profit Corporation Law when conducting their affairs. New York State law imposes many structural and procedural obligations for not-for-profits corporations, for example, addressing such issues as who can serve on the Board of Directors and for how long; the creation of committees and appointments to same; how to deal with real property and other assets; and how to handle certain conflicts of interest. A not-for-profit corporation is expressly required to hold an annual meeting of its Members. (N-PCL § 603(b)). The term for any Director should generally not exceed five (5) years. (N-PCL § 703(b)).
Likewise, Federal statutes and regulations provide requirements and guidance for addressing such issues as executive compensation, a tax-exempt entities’ involvement in political activity and unrelated income producing activities.
Regarding executive compensation, a Board of Directors is responsible for hiring and establishing a salary and benefits for any executive that is hired—and any compensation that is paid must be reasonable and not excessive. Such payments are presumed to be reasonable if: (1) the compensation arrangement is approved in advance by an authorized body of the organization; (2) prior to making its determination, the authorized body relied upon appropriate data as to comparability; and (3) the authorized body adequately documented its basis for making the determination while making the determination. (26 CFR 53.4958-6, Rebuttable Presumption - Intermediate Sanctions | Internal Revenue Service (irs.gov))
With respect to political activity, the Internal Revenue Code, expressly prohibits tax-exempt “charitable” organizations from directly or indirectly participating or intervening in any political campaign on behalf of a candidate for elective public office. Violations of this limitation may result in denial or revocation of an organization’s tax-exempt status—and the imposition of excise taxes. At the same time, however, certain election-related activities, such as voter education activities conducted in a non-partisan manner, do not constitute a violation. (26 USCA § 501; The Restriction of Political Campaign Intervention by Section 501(c)(3) Tax-Exempt Organizations | Internal Revenue Service (irs.gov)).
Lastly, income producing activities that are considered “unrelated” to a tax-exempt entity’s charitable purpose may result in taxable income. When a tax-exempt entity earns such income through an activity that is not substantially related to its exempt purpose—and the activity is “regularly carried on”—the revenue from the activity could be taxable as “unrelated business income.” (26 USCA § 513; Unrelated Business Income Tax | Internal Revenue Service (irs.gov)).
The benefits of operating as a not-for-profit corporation/tax-exempt entity in New York State can be significant. The requirements imposed on such organizations under both State and Federal law, however, are extensive. As a result, organizations operating in this manner should consult an attorney specializing in this area of law.