Starting Your Nonprofit Corporation

Excerpted from Complete Nonprofit Corporation Kit by Mark Warda ©2007

The first step in forming a nonprofit corporation, registering with the state, is explained in this chapter.

Obtain Forms and Instructions The first thing to do to form a nonprofit corporation is obtain the forms and instructions that are available from your state's corporate registration office (usually the secretary of state). Some states provide a lot of information, others only the basics. Some are available over the Internet, some by mail.

If you ask for the forms by mail, you should ask for "any and all forms and materials available without charge for forming a new nonprofit corporation."

You will need the information and forms for state tax exemption from your state's Department of Revenue. The addresses, phone numbers, and websites are in Appendix B. A form request letter is in Appendix C. For some states, you may be able to download the material from the Department of Revenue website.

If you plan to do charitable solicitation, in most states you will need to obtain information on any registration requirements from the state attorney general's office (in a few states it is a different office).

IRS Forms and Instructions The fastest way to get IRS forms is to download them from the Internet at www.irs.gov. However, because they are large booklets, downloading will tie up your line for a long time unless you have a fast connection. Another way to obtain them is to call the IRS forms office at 800-829-1040. (If this does not work in your area, check the federal government pages of your telephone book.)
The information you need includes:
? Publication 557-Tax-exempt Status for Your Organization;
? Package 1023-Application for Recognition of Exemption under Section 501(c)(3);
? Package 1024-Application for Recognition of Exemption under sections other than Section 501(c)(3);
? Publication 526-Charitable Contributions;
? Publication 561-Determining the Value of Donated Property; and,
? Publication 598-Tax on Unrelated Business Income.

Define Your Purpose Before forming your nonprofit organization, you should have a clear picture of your purpose and goals. You should then review the permissible purposes under the Internal Revenue Code and decide which type of organization you can be.

You will want to fit your purpose into the requirements for a Section 501(c)(3) organization if at all possible, so that people who contribute money to you can deduct it on their taxes. If your activities fit into more than one area, you should stress the one that is permitted under Section 501(c)(3).

If the goal on your application is one that the IRS feels can only be achieved by legislation, they will deny your exemption as a Section 501(c)(3) organization. In such a case, you either have to form a noncharitable organization or redefine your goal.

Choose and Search Your Name While the activities and accomplishments of your organization will build up a reputation for its name, having a good name to begin with is a good way to appear more trustworthy. At the same time, the wrong kind of name (such as sounding like a commercial business) may raise questions with the IRS.

Choosing a Name In choosing a name, you should use the following guidelines.

Use the Right Suffix Some states require that certain words or suffixes be a part of the name of a company, such as "Inc." or "Assn." On the state sheets in Appendix B and on the materials from your state, you will find the rules that apply to the corporation's name.

Do Not Use Forbidden Words Certain words, such as "olympic" or "trust," are not allowed to be a part of an organization's name under many states' laws. Most of these rules can be found either on the state sheets in Appendix B or on the materials from your state.

Do Not Be Too Similar While there might seem to be some advantage to having your name sound like a similar group, such as the American Cancer Society or the American Red Cross, this leaves you open to a lawsuit by the other organization and possibly legal action by your state's attorney general. You can use words such as "cancer," "heart," or "diabetes" if they relate to your organization's purpose, but do not intentionally make your name sound like another group's name.

Be Sure It Is Not Confusing Many words in the English language are spelled differently from how they sound. Be sure that the name you choose is easy to spell so that people can locate your phone number or Web address easily.

Searching a Name Once you have chosen the perfect name, you need to be sure that no one else has established legal rights to it. Many businesses have been forced to stop using their name after spending thousands of dollars in promotions because the name was already in use.
Legal rights can be established by registering a name as a trademark or by merely using the name. Consequently, you cannot be sure no one has rights to a name just by checking registered names. You need to check if anyone is using the name but has not yet registered it. The following are places you should check.

Federal Trademarks First, you should check if anyone has registered the name as a federal trademark. To be sure that your use of the name does not violate someone else's trademark rights, you should have a trademark search done of the mark in the United States Patent and Trademark Office (PTO). In the past, this required a visit to their offices or the hiring of a search firm for over $100. However, now this can be done on the Internet by going to the United States Patent and Trademark Office website (www.uspto.gov) and clicking the "Search" button under "Trademarks."

Yellow Pages You should search the Yellow Page listings next. With Internet access, you can search all of the Yellow Page listings in the U.S. at a number of sites at no charge. One website,
www.superpages.com, offers free searches of Yellow Pages for all states at once. You can also use a search engine such as www.google.com to see if your company name is used anywhere on the Internet. Since search engines are not always 100% accurate, you should search on at least a few other sites for the state in which you will operate.

Web Addresses If you have any expectation of having a website some day, you should check if the Web address, or uniform resource locator (URL), is available. This can be done at www.domainname.com. As a nonprofit organization, you may use the designation ".org" (rather than ".com" or ".net"), but if you have a clever name you wish to use with ".com," you can use that. If the name you want is already taken in ".org,"".com," and ".net," it may be available in the new designations ".cc" and ".to." However, because the name is similar to an existing group, you run the risk of being sued and would be better off with a unique name.

Search Services If you are unable to access the Internet in any way or if you would rather have someone else do the search, you can hire a professional search firm. In addition to a trademark search, they can check other records around the country to give you a more accurate answer as to whether the name is being used anywhere. The cost can range from about $100 to over $800, depending on how thorough the search is and who is doing it.

Secretary of State Finally, you should check with the secretary of state in the state in which you plan to register your corporation to see if the name is available. In some states, this can be done over the phone or on the Internet. In others, you must send a written inquiry.
No matter how thorough your search is, there is no guarantee that there is not a local user somewhere with rights to the mark. If, for example, you register a name and later find out that someone in Tucumcari, New Mexico has been using the name longer than you, that person will still have the right to use the name, but just in his or her local area.

Registering the Name After you have chosen the name for your new company and you have made sure that it is still available, you should register it before someone else does. You are allowed to reserve a name for a small fee in most states. However, it is usually better to send your ARTICLES OF INCORPORATION in as soon as you select a name.

By forming your corporation, you have ensured that no other person can register a company with the same name in your state. Nonetheless, this does not stop someone from registering the name with another state or from getting a federal trademark for it.

Trademarks A federal trademark gives the owner the right to use the name anywhere in the United States and to stop most others from using it. However, it does not eliminate the rights of those who have used the name previously.

With a federal trademark, you can stop any new clubs from using the name, but not those who used it before you began.

With the Internet reaching into every corner of the world, there is an issue of Internet businesses infringing on the rights of small operators in remote locations. If you plan an operation with a significant Web presence, you may be sued by a small operator somewhere who has used the name before you. If you register a federal trademark and he or she has not, it would work in your favor, but there is now the open legal question of how thorough a business needs to be when doing a search.

One good way to see if anyone is using a name is to perform Web searches on the major search engines (such as Google, Yahoo, Excite, Altavista, Lycos) to see if your desired name is being used anywhere by anyone. If not, you are in good shape. If so, you need to determine if the other use conflicts with your intended use.

Before attempting to register your name, you should know the basics of federal trademarks.
? A trademark is technically the name of a mark applied to goods, while a service mark is a mark used with services. A nonprofit organization usually provides services, so it will likely be registering a service mark.

? Trademarks and service marks are registered according to classes of goods or services. If you plan to use your mark in more than one class, you will need to register (and pay a filing fee of $335) for each class.

? Your trademark will not be granted until you have actually used the mark. You can file an application indicating your intent to use a mark, but you must actually use it before registration is official.

? In order to qualify for federal registration, you must use your mark in commerce, which means in a transaction with people in different states or with a foreign country. The use must be in good faith, meaning that you cannot just mail a copy to a relative.

? You can register your trademark with each state. This is not necessary if you plan to get a federal trademark immediately. However, if you plan to limit your business to one state or do not plan to expand out of state for a number of years, state registration is faster and less expensive than federal registration.

You can get more information from the United States Patent and Trademark Office website at www.uspto.gov.

Articles of Incorporation To create a nonprofit corporation, a document must be filed with the state agency that keeps corporate records-usually the secretary of state. In most states, this document is called the articles of incorporation; however, in some states, it may be called the certificate of incorporation, articles of association, or charter. For simplicity, this document is referred to as the articles of incorporation throughout this book.

Most states provide a blank form for the articles of incorporation, and the IRS provides a sample of what they look for as articles of incorporation. Unfortunately, these two forms are in no way similar. What you will need to do in order to have articles that are acceptable to both your state and the IRS is to combine the requirements of both.

The following is a discussion of the articles included in the ARTICLES OF INCORPORATION form in this book. These articles are the common ones on most states' forms.

Article 1: Name of the corporation. Some states require nonprofit corporations to include a suffix like "Inc." or "Assn." at the end of their name, but others do not. Check the state pages in Appendix B for your state's requirements.

Article 2: Address of the corporation. The street address of the principal office, and if different, the mailing address of the corporation, should be provided.

Article 3: Purpose. The first sentence is the required language to qualify for Section 501(c)(3) status. After this, you must add the specific purpose of your organization. It is important to word this correctly, or your exempt status may be denied by the IRS. Refer to IRS Publication 557 for guidance. If you have trouble drafting your purpose, consider consulting with a specialist in nonprofit law.

Article 4: Directors. Include the number of directors (most states require three, but some allow just one), and their names and addresses.

Article 5: Private inurement and lobbying. This is required by the IRS to prevent the corporation from using its assets for private inurement and from lobbying the government. (see Chapter 6.)

Article 6: Dissolution. This is required by the IRS so that if the corporation dissolves, the assets will go to another qualifying organization.

Article 7: The name of the registered agent and the address of the registered office, along with the agent's acceptance. Each corporation must have a registered agent (in some states called a statutory agent) and a registered office. The registered office can be the business office of the corporation if the registered agent works out of that office. It can be the office of another individual who is the registered agent (such as the corporation's attorney), or it can be a professional registered agent's office. In some states, it cannot be a residence unless the address is also a business office of the corporation.

Warning: If you do not comply, you will be unable to maintain a lawsuit and you may possibly be fined.

Article 8: Members. In this section, check the box to designate whether or not the corporation will have members.

Article 9: Duration. In nearly all cases, you want the duration of the corporation to be perpetual rather than for a set number of years.

Article 10: Name and address of the incorporator of the corporation. In some states, this may be any person, even if that person has no future interest in the corporation. There are companies in state capitals that have someone run over to the secretary of state to file corporate articles that are later assigned to the real parties in interest.

Article 11: Additional requirements. Review the state pages in Appendix B and the materials from your state (or the state statute) to determine if any other matters are required to be included in the ARTICLES OF INCORPORATION. If so, include them here. If more than one matter needs to be included, you can designate them Article 12, Article 13, etc.

Execution In most states, the ARTICLES OF INCORPORATION must be signed and dated by the incorporator in black ink. Typically, the registered agent must sign a statement accepting his or her duties as such. This can be done either as a separate form or on the same form as the ARTICLES OF INCORPORATION.

Filing The ARTICLES OF INCORPORATION form must be filed with the secretary of state by sending it and the filing fees to the secretary of state's office. A duplicate copy must be included in most states. If you wish to receive a certified copy of the articles, which you need for the nonprofit mailing permit, there is an additional cost.

NOTE: It is possible in some states to file corporate papers by fax or online and to use a credit card for payment.

The return time for the articles in most states is usually a week or two. If you need to have them back quickly, you might be able to send and have them returned by a courier such as FedEx, Airborne Express, or UPS, with prepaid return. Call your secretary of state for details.

Bylaws Every corporation must have bylaws. This is the document that spells out in detail the corporation's purpose, operating rules, and operational structure. For a nonprofit corporation, they are especially important and must be submitted to the IRS when applying for the tax exemption.

Taxpayer Identification Number Prior to opening a bank account, the corporation must obtain a taxpayer identification number (formally known as an employer identification number or EIN). This is the corporate equivalent of a Social Security number. You need this number even if you do not expect to hire employees.

The easiest way to obtain your EIN is by filing an online application. In most cases, you get the number immediately, but if there is a problem with your application you may need to phone, fax, or mail your application in. To fill in the SS-4 online, go to the IRS website at www.irs.gov, search for "SS-4," link to the online application, and follow the directions.

A copy of the SS-4 is included in this book. You can use this as your worksheet before beginning online. For assistance, call the IRS at 800-829-4933. You can also mail your application in, but it may take weeks before you receive your number.

When you apply for this number, you will probably be put on the mailing list for other corporate tax forms. If you do not receive these, call your local IRS office and request the forms for new businesses. These include Circular E (explains the taxes due),W-4 forms for each employee, the tax deposit coupons, and Form 941 (quarterly return for withholding).

Corporate Supplies A corporation needs to keep a permanent record of its legal affairs. This includes the original state letter approving your organization, minutes of all meetings, lists of members, fictitious names registered, and any other legal matters. The records are usually kept in a ring binder. It is possible to purchase a specially prepared corporate kit that has the name of the corporation printed on it and usually contains forms such as minutes and bylaws. However, most of these items are included with this book, so purchasing such a kit might be unnecessary.

Corporate Seal One thing not included with this book is a corporate seal. This must be specially made for each corporation. Most corporations use a metal seal, like a notary's seal, to emboss the paper. This seal can be ordered from an office supply company. Some states now allow rubber stamps for corporate seals. Rubber stamps are cheaper, lighter, and easier to read. These can also be ordered from office supply stores, printers, and specialized rubber stamp companies. The corporate seal should contain the exact name of the corporation, the word "seal," and the year of incorporation.