Starting your non-profit organization
Many mountain bike clubs begin as casual affiliations of cycling enthusiasts who do valuable volunteer work with little or no formalities. Such clubs may have members and officers, yet have no formal legal status. In such circumstances, the club opens itself to potential problems with taxation and liability. If the club earns more money than it spends in a year, should it pay taxes on that profit? In whose name would the club pay? What if someone gets hurt while volunteering with potentially dangerous tools. Are the officers or members of the club liable to the injured party for medical expenses and other damages?
These kinds of problems can be easily avoided by creating a legal corporation, and most states have statutes that allow the formation of a special class of company, the nonprofit corporation. Corporate status significantly limits the personal liability of the corporation's organizers, directors and employees.
Before participating in the IMBA Local Program, you must form a corporation in which you can conduct business. The most common organization that advocates form are 501c3 non-profit corporations. While there are many c-designations that a non-profit can utilize, the c3 designation allows the organization to accept donations and contributions while allowing the donor to write the donation off on their annual tax filings, making donating to your organization more attractive.
A nonprofit corporation works very much like a for-profit corporation, with the main difference being the disposition of net income at the end of each year. For-profit corporations divvy profits to the corporation’s owners. With nonprofit corporations, any excess of income over expenses stays in the corporation’s accounts, never going to private individuals.
Forming a nonprofit corporation under state law is just the first step. That legal status may allow the corporation to not pay sales tax on purchases of equipment and supplies, but it does not avoid taxes on potential income, even if that income never goes to the personal enrichment of individuals.
To avoid taxation, a nonprofit corporation must be allowed under federal law and recognized by the U.S. Internal Revenue Service to be a tax-exempt organization. A further achievement is a federal recognition as a charitable organization, which allows contributors to deduct donations to the corporation from their federal income tax. A club that is organized as a corporation should find it easier to achieve tax-exempt and charitable recognition from the IRS because it quiets or eliminates certain IRS concerns regarding personal enrichment. Therefore, the following assumes that a member club has chosen to form itself into a nonprofit corporation to achieve tax-exempt and charitable status.
If this seems like a tangled and confusing web, consider recruiting members of the club who can gain, or already have, an understanding of the process, then gather and review all of the appropriate materials before submitting any of the forms to any agency.
If the club has the resources, it may want to consider hiring an attorney or accountant. You can get an estimate from the professional as to the cost of handling the entire process. As an alternative, you may request a professional review before you file a packet created by the club members.
Other sources of legal advice, referrals, and/or guidance:
- a paralegal or legal secretary who is also a club member
- a legal clinic at a local law school
- a local legal aid clinic
- the reference librarian at your local law or public library
- a Chamber of Commerce
- a local Retired Executives organization
- another tax-exempt club in your area with which you share similar objectives
- your state non-profit association
State Filing To Achieve Nonprofit Status
This is perhaps the easiest step in the process for your club. However, how you prepare this state filing is linked with your IRS filing.
Begin by checking the Secretary of State page of your state’s website and locating the necessary forms to register your club as a nonprofit corporation. This is important because the forms that need to be filed with the state are generally straightforward and can provide you with some guidance as to where to look and in what order to work on your club paperwork.
Some of the questions that you can expect will include the names of corporate officers and their duties, the location of the corporation, and the name of its registered agent. The registered agent is the person who can accept a subpoena or summons for the corporation. This can be anyone who resides within the state, whether or not they are a club member. By agreeing to be the agent, one does not assume any liability other than assuring the delivery of the document. If the agent should move, the club must amend its filing with the state.
Once the form is filled out it will likely request that you attach a copy of the Articles of Incorporation as well as a filing fee. Whether or not you need to attach your organization's bylaws varies from state to state and should be evident from the forms. With this step done, set the state filing aside until after you have completed the filing for the IRS. This is important because you may find as you work your way through the IRS filing that there is something in the Articles or bylaws that you may want to change. If you have already registered with the state you would then have to file the amended documents. To avoid this, hang onto everything until it is all ready to be filed.
Along with the limitation on personal liability that comes with incorporating your club, another advantage to incorporation is that the law may provide answers to many of the questions that will inevitably arise when forming and operating your club as a nonprofit organization.
- How many directors must the organization have? What are their voting rights? How is a quorum ascertained? What is the length and number of their terms in office?
- What officers must the organization have? What are their duties? What are the length and numbers of their terms of office? Can more than one office be held by the same individual?
- What are the members' rights? When must they meet? How can they vote?
- How are the organization's governing instruments amended?
- What is the process of dissolving the organization and distributing its assets upon dissolution?
Nearly every state has a nonprofit corporation act. The answers to these and many other questions may be found in that law and will be important to consider when preparing the articles of incorporation and bylaws.
A nonprofit organization is a corporation formed by preparing and filing articles of incorporation, with its operating rules embodied in bylaws. The contents of the articles of incorporation are established by state law and usually include:
The name of the organization
- A general statement of its purposes
- The name(s) and address(es) of its initial director(s)
- The name and address of its registered agent
- The name(s) and address(es) of its incorporator(s)
- Language referencing the applicable federal tax law requirements
The bylaws of an incorporated nonprofit organization will usually include provisions concerning:
- Its purpose (it is good to restate them in the bylaws)
- The election and duties of its directors
- The election and duties of its officers
- The role of its members (if any)
- Meetings of members and directors, including dates notice, quorum, and voting
- Role of executive and other committees
If you are a club member or organizer working through this process yourself, the governing laws of your state will provide you with many answers to these questions. However, you may still be uncertain as to how to formulate your answers and what these documents should look like. If you need a sample set of bylaws to get started, contact the IMBA Local team at email@example.com.
Federal Filing For Tax-Exempt And Charitable Status
For most people, the concept of what is a nonprofit organization and what is a tax-exempt organization may seem the same. In addition, for most people, a nonprofit/tax-exempt organization is synonymous with a charitable organization... but neither is true. In reality, the idea of a nonprofit organization is much broader than that of a tax-exempt organization and a charitable entity is merely one of many types of exempt organizations.
The federal tax law uses the term "charitable" in two ways. First, a charitable organization means all organizations that are eligible to receive deductible contributions (what your club wants). Used this way, the term includes entities that are religious, educational, scientific, and the like, as well as certain other organizations not pertinent to this discussion. These organizations are IRS Code 501(c)(3) organizations --probably the most widely recognized provision of the code.
Second, the term charitable organization is used to describe organizations that are defined as that type of entity under law, as opposed to religious, educational, scientific, and like entities. The federal tax law definition of a charitable organization contains at least 15 different ways for a nonprofit entity to be charitable. These definitions include advancing education; lessening the burdens of government; beautifying and maintaining a community; preserving natural beauty; and promoting environmental conservation. These are the types of phrases that you want to use when describing the purpose of your club in its organizing documents and its IRS application.
As an example, advancement of education, as a charitable activity, includes providing student assistance, advancing knowledge through research, or disseminating knowledge through publications, seminars, lectures, and the like.
Another way for an organization to be charitable under the federal tax law is to lessen the burdens of government. This can include the building and maintenance of public trails and park facilities. For this status, the organization's activities must be those that a governmental unit (such as the Forest Service) considers being its burden and that lessen that burden.
Somewhat overlapping the concept of lessening burdens of government is the charitable activity of community beautification and maintenance, and the preservation of natural beauty. An organization that is charitable under this definition may maintain community recreational facilities, assist in community beautification projects (cleaning up litter at trailheads), or work to preserve and beautify public parks.
And finally, an organization can be charitable because it endeavors to promote environmental conservation: a range of activities to preserve and protect the natural environment for the benefit of the public. The IRS has recognized as legitimate a national policy of conserving the nation's unique natural resources; this type of organization serves to implement that policy.
Any combination of the above classifications may be present with the purposes and activities of a nonprofit organization. However, when organizing your club, it is best to choose one main purpose, such as "the education of mountain bikers and trail users in responsible and environmentally sound use of trails", and then list the other purposes as means to achieving that goal. For example: "The Club will promote and participate in regular trail maintenance activities to bring together all trail users to educate them in responsible trail use and environmental conservation."
Under the federal income tax system, every element of income received by a person whether a corporate entity or an individual is subject to taxation unless there is an express statutory provision that exempts either that form of income or that type of person. Many types of nonprofit organizations are eligible for exemption from federal income tax. However, the exemption is not granted merely because an organization is not organized and operated for profit. Organizations are tax-exempt where they meet the requirements of the particular statutory provision that supplies the tax-exempt status.
Whether a nonprofit organization is entitled to tax exemption, on an initial or continuing basis, is a matter of law. It is the U.S. Congress that defines the categories of organizations that are eligible for tax exemption and it is up to the Congress to determine whether an exemption from tax should be continued. Except for state and local governmental entities, there is no constitutional right to a tax exemption.
Despite what many may think, the IRS does not "grant" tax-exempt status. Congress does that. The function of the IRS is to recognize the tax exemption. Therefore, when an organization makes an application to the IRS for a ruling or determination as to tax-exempt status, it is requesting the IRS to recognize a tax exemption that already exists (assuming that the organization qualifies). Charitable organizations, to be tax-exempt, file with the IRS an application for recognition of the exemption.
A request for recognition of tax exemption for a charitable organization is commenced by filing a form, entitled "Application for Recognition of Exemption" also known as Form 1023. An organization that has been recognized by the IRS as being tax-exempt can rely on the determination as long as there are no substantial changes in its character, purpose, or methods of operation.
The IRS has specific rules by which an organization may receive a ruling in response to a request for a tax-exempt determination. An organization seeking recognition must apply, and all information is required, with the key district office for the organization's principal place of business (see page 2 of Package 1023). The determination of exemption will generally be issued by the district office unless the application presents some novel issue or unresolved point of law. Organizations should allow at least three months for the processing of an application for recognition of tax exemption.
A ruling or determination will be issued to an organization, as long as the application and supporting documents establish that it meets the particular statutory requirements. The application must include a statement describing the organization's purposes, copies of its governing instruments (such as the articles of incorporation and bylaws), and either a financial statement or a proposed multi-year budget. For a charitable organization (such as your club), the application must also include a summary of the sources of financial support, its fund-raising program, the composition of its governing body (e.g., board of directors), the nature of its services or products and the basis for any charge for them, and its membership.
The IRS is generally free to seek and obtain further information deemed to be necessary for a ruling. However, once the organization has made the requisite "threshold showing," the IRS must grant recognition of exemption. If the application is not complete, the IRS will not retain it and ask for the remaining information, and will instead return the application and all of the supporting documents to the organization and request that it file again by submitting a complete application.
The information filed with the IRS under this procedure is used to make three sets of determinations: whether the organization will be recognized as tax-exempt, whether it will be eligible to receive deductible charitable contributions, and whether the organization will be a public charity or a private foundation. How the answers to the application are phrased can be extremely important, with the prime objective being accuracy. That is why emphasis was given earlier in this paper to obtaining all the necessary state and federal materials first before diving into the formal process.
An application for recognition of exemption should be considered an important legal document and be prepared accordingly. Throughout the organization's existence, this document will likely be reviewed. Further, as an organization, you will be required to keep a copy of this application, and supporting documents and related correspondence, available for scrutiny by anyone during regular business hours. As mentioned in the beginning, an organization doesn't need to retain the services of a lawyer to help in the preparation of an application for recognition of exemption. However, because of the complexities involved, it is a good idea to obtain the assistance of a professional who understands the process if only to review the documents before they are filed.
With care and perseverance, a mountain bike club can obtain both state nonprofit status and federal tax exemption. The rewards are surely worth the effort.
IMBA Local organizations participating at the Chapter level can receive 501(c)(3) status through the program by inclusion in IMBA’s general group exemption. This only requires that your organization be up to date in filing a 990 each year to remain in compliance with IRS regulations. If your organization requires it to have its own 501(c)(3) determination, please see the steps below.
Quick Start Guide
- Check with the Secretary of State in your state to learn how the process of filing for corporate status works. This can be found online along with the appropriate forms and instructions. What these forms request can be useful in guiding you through step one.
- Establish Board of Directors
- Adopt bylaws and a name
- File with the Secretary of State to establish a non-profit corporation
- Incorporate your organization in the state (this may be a separate step than the step above)
- Pay state non-profit filing fees
- File Form SS-4 (Application for Employer Identification Number), Form 8718 (Determination Letter Request)
- Obtain 501(c)(3) status
- Contact IMBA to be included in general subordination 501(c)(3) filing through the IMBA Local Chapter-level Service option
- Contact the IRS and request the following forms: Package 1023 (which contains Form 1023 for 501(c)(3) recognition and Form 872-C)
- Start advocating for, and stewarding trails