US Foundation
United States law
Types of foundations – Article 501(c)(3)
The Internal Revenue Code defines many kinds of non-profit organizations which do not pay income tax. However, only charitable organizations can receive tax-deductible contributions and avoid paying property and sales tax. For instance, a donor would receive a tax deduction for money given to a local soup kitchen if the organization was classified as a 501(c)(3) organization, but not for giving money to the National Football League, even though the NFL is a 501(c)(6) non-profit association.
Tax-exempt charitable organizations fall into two categories: public charities and private foundations. A community foundation is a public charity. The US Tax Code in 26 USCA 509 governs private foundations. Meanwhile 26 USCA 501(c)(3) governs public charities.
* Neither a public charity nor a foundation can pay for or participate in partisan political activity, unless they surrender tax-exempt status including voiding the deductibility of any tax deductions for donors after the surrender or revocation date.
Non-profit corporation name
The corporate name ending must contain the word “Foundation,” “Association,” “Company,” Corporation,” “Club,” “Fund,” “Incorporated,” “Institute,” “Society,” “Union,” “Syndicate,” “Limited,” or the abbreviation “Co.,” “Corp.,” “Inc.,” “Ltd.,” or words or abbreviations of like import in other languages.
The name must be distinguishable from the names of other corporations organized, reserved or registered as a foreign corporation under the laws of Delaware. The use of word “Trust” is prohibited except for corporations under supervision of the Bank Commissioner.
Articles of incorporation
The name of the corporation.
Its Registered Office in the State of Delaware is to be located.
The Purpose of the corporation is to engage in any lawful act of activity for which corporations may be organized under the General Corporation Law of Delaware – if the corporation is to be a non-profit corporation, the expression “This Corporation” shall be a non-profit corporation must be added.
The corporation shall not have any capital stock.
The conditions of membership shall be – in lieu of setting out the conditions of membership in the Certificate of Incorporation – a Statement may be inserted that the conditions of membership shall be stated in the By-Laws.
The Name and mailing address of the incorporator.
All of the corporation’s issued stock, exclusive of treasury shares, shall be held of record by not more than thirty (30) persons.
All of the issued stock of all classes shall be subject to one or more of the restrictions on transfer permitted by Section 202 of the General Corporation Law.
The corporation shall make no offering of any of its stock of any class which would constitute a “public offering” within the meaning of the United States Securities Act of 1933, as it may be amended from time to time.
Notwithstanding any other provision of these articles, this organization shall not carry on any activities not permitted to be carried on by an organization exempt from Federal income tax under section 501(c)(3) of the Internal Revenue Code of 1986 or the corresponding provision of any future United States Internal Revenue law.
Upon the dissolution of the corporation, assets shall be distributed for one or more exempt purposes within the meaning of section 501(c)(3) of the Internal Revenue Code, or corresponding section of any future federal tax code, or shall be distributed to the federal government, or to a state or local government, for a public purpose. Any such assets not so disposed of shall be disposed of by the Court of Common Pleas of the county in which the principal office of the corporation is then located exclusively for such purposes or to such organization or organizations, as said Court shall determine which are organized and operated exclusively for such purposes.
US non-profit corporations
Foundations – Tax exemptions
Forming a non-profit corporation: two-step process
Forming a “Non Profit Corporation” is a two-step process. First, you form a non-stock non-profit company and then, within 15 months (which means it can be immediately afterwards the incorporation), you must apply to the IRS for non-profit Status. This is accomplished by submitting form #1023.
In order to qualify for non-profit status with the IRS, your Delaware Certificate of Incorporation must include the proper and appropriate clauses that declare your mission and identify the IRS subsection under which you intend to apply.
We can handle all this for you in the correct manner.
Why Delaware is a recommended US State?
The State of Delaware is a leading domicile for U.S. and international corporations. More than 500,000 business entities have made Delaware their legal home including 300,000 corporations and 200,000 limited liability companies and partnerships. More than 50% of all publicly-traded companies in the United States including 60% of the Fortune 500 have chosen Delaware as their legal home. You too can capitalize on the instant credibility that a Delaware corporation provides.
With Delaware you also get:
Low filing and franchise tax fees.
Director, Shareholder and Officer Anonymity.
There is no minimum amount of money required to be in the company bank account. Many states require $1,000. Delaware has no requirement.
You can be all of the officers of a Delaware corporation yourself.
No state income tax for entities that do not operate within Delaware.
No state inheritance tax on stock held by non-residents.
An established body of law and specialized court that protects corporations.
No presence required in Delaware – just need a registered agent here.
Non-profit corporations
Some non-profit organizations include, but are not limited to:
- Fraternal beneficiary societies.
- Orders or associations, cemetery corporations and corporations organized or trusts created for religious, charitable, scientific or educational purposes or for the prevention of cruelty to children or animals, home owner associations.
- Business leagues or organizations not organized for profit but operated exclusively for the promotion of social welfare and clubs organized and operated exclusively for pleasure, recreation and other non-profit purposes.
The net profit of these organizations cannot benefit any private stockholder or member.
Additionally, organizations exempt under Section 501(c) of the Internal Revenue Code are exempt from obtaining a business license and paying the accompanying gross receipts tax on the sales of most goods and services. Some services such as leasing tangible personal property or providing accommodations are taxable regardless of the entity providing such services.
Non-profits corporations are required to register with The Division of Revenue and withhold Delaware State income taxes on employees performing services within Delaware. Registration is also required with the Department of Labour.
Additionally, if the non-profits activities are conducted in Delaware a copy of Federal Form 990 PF must be filed with the State of Delaware, Attorney General.
Registration of charitable solicitations or fund raisers
Further, all state laws applicable to fraud and fraudulent transactions are required to be observed.
FAQ – Frequently Asked Questions
Formation:
What is a non-profit corporation?
A non-profit corporation is created by filing articles of incorporation with the secretary of state in accordance with the Non-Profit Corporation Act. “Non-profit corporation” means a corporation with no part of the income of which is distributable to members, directors, or officers. A non-profit corporation may be created for any lawful purposes, which purposes must be fully stated in the articles of incorporation. Not all non-profit corporations are entitled to exemption from state or federal taxes.
Is a non-profit corporation exempt from taxes?
How does a non-profit organization, including a non-profit corporation, obtain an exemption from Federal Income Taxes?
How do I form a “501(c)(3)” Corporation?
Do you have to be a US citizen to incorporate and/or own a corporation in Delaware?
Can a person under 18 years old be a director, officer or shareholder of a Corporation?
Can the same person be a shareholder, director and officer of a Corporation?
Can a non-profit corporation pay a salary to its officers and/or employees?
Are the books and records of a non-profit corporation available for inspection?
In addition, the Act provides that non-profit corporations should maintain accurate financial records including records relating to all income and expenditures. Based on these records, the board of directors shall prepare or approve an annual report of the financial activity of the corporation. All records, books, and annual reports of the financial activity of the corporation shall be available for inspection or copying by the public. There are numerous exceptions to this provision.
It does not apply to corporations that solicits funds only from its members or a corporation that does not intend to solicit and does not actually receive contributions from sources other than its members in excess of $10,000 during a fiscal year. Nor does the provision apply to proprietary schools; religious institutions; trade associations or professional associations whose principal income is from dues and member sales and services; insurers; charitable organizations concerned with conservation and protection of wildlife, fisheries, and allied natural resources; and alumni associations.
Does a non-profit corporation file the IRS Form 990 with the Secretary of State?
Application for tax exemption:
How long does it usually take to get recognition of tax exemption?
The entire process generally takes about 2-4 months from start to finish. A lot of it depends on how fast the client gets information to us, and on how long a particular state takes to file the articles of incorporation. Most of the applications we file with the IRS are reviewed in about 2-3 months. It’s important to keep in mind, however, that the official date of the tax exemption from the IRS will date back to the original date of incorporation if the tax-exemption application is filed within 27 months of the end of the month of the date of incorporation.
How do we get started?
First, you should contact our firm; we will discuss your organization with you and determine all matters relating to the application for tax exemption.
Then you will need to sign a retainer letter that you understand the firm’s fees and the work we will complete for you and provide the retainer fee. In addition, to get started we will need the following basic information about your organization:
- Name and address for the organization.
- Basic mission statement and list of primary activities you plan to engage in.
- List of names and addresses of the initial board of directors (we recommend at least 3-5 board members to start).
Estimated budgets for the first three years of the organizations existence, including basic sources of income (i.e., individuals, corporate grants, private foundation grants, membership dues) and major categories of expense (i.e., program expenses, salaries, rent/utilities, legal, accounting).
We recommend setting up a simple spreadsheet, which we shall be very pleased to assist you with, considering the following basics: Income, Individual Donations, Corporate grants, Total Income, Expenses, Program expenses, Salaries & benefits, Rent/utilities, Legal, Accounting, Total Expenses et surplus (deficit).
What happens after you get all the necessary information?
How often does the IRS deny tax exemption?
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Disclaimer: While TBA & Associates strives to make the information on this website as timely and accurate as possible, the information itself is for reference purposes only. You should not substitute the information provided in this article for competent legal advice. Feel free to contact TBA Customer Services for advice on your specific cases.