The conventional wisdom is that individual artists and new arts groups should organize themselves as non-profit corporations and apply for 501(c)(3) status from the IRS. Given the economics of our industry, exemption from most taxes and the ability to solicit tax-deductible contributions have historically been vital survival skills. Yet operating as a 501(c)(3) incurs substantial financial and administrative overhead. Here are some questions to ask yourself before you submit Form 1023 or 1023-EZ to the IRS for 501(c)(3) status. After going through the questions and associated links, please contact us if you’d like to discuss this further.
Do you expect your organization to exist in perpetuity?
Tip: Regardless of what happens to you or your co-founder or your chairman of the Board, the corporation will live on. A bus could hit everyone you work with, but the corporation will still be there and the IRS will still expect a 990 at the end of the year. There’s an undeniable appeal to this kind of immortality, but it’s important to make sure your organization is committed to the idea of a permanent existence and has the infrastructure to sustain it.
Do you have an accountant and a lawyer?
Tip: You’ll need to hire an accountant and attorney that can help with the forms and advise you on the application. (See the tip after question #8 below.) Depending on your budget size, you may need an accountant to do a review or consolidation of your books or even an annual audit of your financials. This can take an enormous amount of time and for a small organization can cost thousands of dollars.
Are you prepared to file form 990 each year with the IRS and file reports with your state’s Attorney General and Secretary of State?
Tip: The guidelines for filing a 990 and remaining in compliance with the IRS are online and it is important to have the assistance of an accountant to complete the requirements. Also, make sure to check with your state to determine what filings are necessary.
Are you ready to hold regular board meetings and record official minutes?
Tip: The IRS has regulations on governing bodies for 501(c)(3) organizations, which must be adhered to. Take a look at this governance check sheet to understand the responsibility of your board. There are also state-specific accountability practices that you'll need to be familiar with in order to operate as a non-profit corporation.
Are you prepared to institute an accounting system and keep your books in accordance with non-profit accounting standards?
Tip: The earnings of your 501(c)(3) organization may not benefit any private shareholder or individual, and must be spent in furtherance of its charitable mission. Due to this, 501(c)(3) businesses have to account to their donors and other stakeholders on how they spend their earnings. The Financial Accounting Standards Board developed generally accepted accounting principles that must be adhered to when reporting financial information. The compliance guide by the IRS gives more details on how to do this.
Are you prepared to adhere to the IRS rules governing recording, soliciting, and acknowledging contributions?
Tip: The IRS rules governing contributions are quite specific and must be adhered to and understood before soliciting or collecting donations.
Is a funder encouraging your organization to become a 501(c)(3)?
Tip: If a funder is encouraging your organization to become a 501(c)(3), ask them to have an open, candid discussion with you about what they think you need to do to be effective. Are they concerned about the risk of funding a fiscally sponsored project? Is there information that your fiscal sponsor can provide to alleviate their concern? Ask them if tracking your outcomes as an indicator of program effectiveness will help alleviate their concerns. Find out what is causing their concern and be transparent about why you have elected to not become a 501(c)(3). Share information with them on why becoming a 501(c)(3) is not always the best fit for everyone.
Do you understand the implications of filing for 1023-EZ?
Tip: The NJ Center for Non-Profits has issued this word of caution about filing Form 1023-EZ.
The new Form 1023-EZ is, in essence, a three-page checklist, and provides few of the checks, balances and obligatory reviews that can help prevent an organization from making potentially damaging legal and operational missteps. If you file a 1023-EZ instead of a 1023, the review of organizational documents and other key supporting information by IRS officials is automatically bypassed. While this may save processing time up front, there is a risk that an organization may unwittingly engage in inappropriate practices for years before a problem is discovered, leaving it open to significant penalties and liabilities.
Keep in mind that the availability of a shorter form is NOT a substitute for thorough preparation and competent professional or legal guidance. In fact, the new Form 1023-EZ makes these reviews – performed in advance -- more critical than ever. Ultimately, it is up to each organization, its governing board and managers to ensure that its proposed (and actual) purposes, programs and revenue streams are appropriate for gaining and maintaining 501(c)(3) tax exemption. BEFORE you file, be sure that you and your board fully understand the requirements and implications. We encourage you to explore the resources at the end of this article for more information.
According to Brad Bedingfield, an attorney with Goulston & Storrs PC in Boston and a former tax law specialist in the IRS Exempt Organizations division:
An organization that (1) has any doubt about whether it will meet the Form 1023-EZ filing criteria in its early years; (2) must answer yes to any of the questions in Part III, lines 4 through 11; or (3) is concerned about the weight that state officials or others may give to an "EZ" determination letter may want to file a full Form 1023 application.
Are you still unsure whether or not your project should apply for 501(c)(3) status? Contact our staff to discuss your specific situation.