Legal Issues

Nonprofit corporations generally can neither issue shares, nor pay dividends under state law. The federal tax code also prohibits 501 (c) (3) tax-exempt nonprofit corporations from paying dividends or profits, as such, to members or other individuals.” (Mancuso, p.2/1) Mancuso (2002) identifies several advantages of being a 501 (c) (3) nonprofit corporation:

  1. “To make your group eligible to receive both public and private grants.” (p.7/1)
  2. Nonprofit corporations are eligible for “state and federal exemptions from payment of corporate income taxes, as well as other tax exemptions and benefits."
  3. Incorporation offers nonprofit organizations limited liability. This means “directors or trustees, officers, employees, and members of the nonprofit corporation are not personally liable for corporate debts or liabilities, including unpaid business debts and unsatisfied lawsuit judgments.” (p. 7/1)

The IRS (Internal Revenue Service) sees education foundations as tax-exempt organizations under section 501 (c) (3) of the Internal Revenue Code. State laws must be investigated. This is a variation of the checklist the Education Foundation Assistance Team (cited in Clay et al., 1985, pp.13-15) for a California foundation:

  • Secure legal counsel.
  • Designate the pre-incorporated individual (the official contact person)
  • Determine the size of the board.
  • Choose a name for the foundation.
  • Draft articles of incorporation and bylaws; the articles of incorporation represent the legal description of your organization; bylaws cover matters of corporate business.
  • Submit a completed application for the State Franchise Tax Board Exemption.
  • File articles and bylaws with the State’s Secretary of State.
  • Register with the state Attorney General registry of charitable trusts.
  • File for the Internal Revenue Service Exemption Certificate. If you want your foundation to offer tax deductions to the donors, you must file for the Internal Revenue Service Exemption Certificate (it may take up to six months). The foundation must clearly indicate on its brochure if donors are tax-exempt.
  • Hold the first meeting of the board of directors.
  • Apply for Nonprofit Mailing Permit with the U.S. Postal Service.

The foundation should not start fundraising activities until tax exemption is granted both for the foundation and its donors.

Resources

  • Clay, K., Hughes, K.S., Seely, J.G., & Thayer A.N., (1989). Public school foundations: Their organization and operation. Arlington, Va: Educational Research Service.
  • Mancuso, A. (2002). How to form a nonprofit corporation (5th ed.). Berkeley, CA: Nolo.