Rules and Regulations for Nonprofit Foundations

By Cindy DeRuyter, J.D.

Rules and Regulations for Nonprofit Foundations

By Cindy DeRuyter, J.D.

To qualify for tax-exempt treatment, nonprofit foundations must apply for recognition as 501(c)(3) charitable organizations under the Internal Revenue Code. In addition to meeting Internal Revenue Service (IRS) rules and requirements, nonprofit foundations must also follow their home states laws as well as the laws of the states where the foundation solicits contributions.

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Incorporating a Nonprofit Foundation

Starting a nonprofit foundation begins with the same steps as starting a for-profit business. The foundation's organizers file articles of incorporation with the Secretary of State or other business authority. Some states require nonprofits corporations to disclose on their incorporation documents their intention to operate as a nonprofit organization.

In states that require annual or other periodic registration of business entities, the nonprofit must also comply with such filing or notice requirements. Before forming your nonprofit foundation, first visit your Secretary of State's website in the state you live to find out what other steps must be taken. You'll want to ensure that you've properly formed your nonprofit before applying for 501(c)(3) status.

Electing 501(c)(3) Status and Governance Requirements

In addition to forming the business, nonprofit foundations that intend to seek tax-exempt status must file an Application for Recognition of Exemption Under Section 501(c)(3) (Form 1023) of the Internal Revenue Code as soon as possible after forming the business entity. Form 1023 is an application for treatment as a tax-exempt organization under section 501(c)(3) and asks for in-depth information about the foundation, its mission, its board members, its intended activities, and more. Time limits apply, so nonprofit foundations that intend to seek 501(c)(3) recognition should submit the application in a timely manner.

Nonprofit foundations have boards of directors that govern the organizations' activities. The foundation's articles of incorporation and bylaws generally specify the number of officers and directors and their roles as well as terms of service, compensation, and voting rights and procedures. State laws dictate how many officers and directors nonprofit organizations must have.

Excise Taxes and Books/Records

While nonprofit foundations recognized as 501(c)(3) organizations enjoy exemptions from federal income taxation, most domestic, tax-exempt private foundations are responsible for paying excise taxes on their net investment income.

All private foundations must file Return of Private Foundation or Section 4947(a)(1) Trust Treated as Private Foundation (Form 990-PF) with the IRS annually, which is a substitute for filing the traditional income tax forms used by for-profit companies. This form calculates applicable taxes on investment income and reports the organization's charitable activities and distribution.

Nonprofit foundations must maintain complete and accurate books and records including the articles of incorporation and bylaws, accounting records, minutes of board meetings, voting records, and more, as specified under state laws.

Other Nonprofit Foundation Requirements

This article is not intended as an exhaustive list of requirements applicable to nonprofit foundations or other nonprofit organizations. Private nonprofit foundations must also comply with several other requirements and restrictions to keep their 501(c)(3) status.

Specifically, nonprofits must ensure expenditures further their organizations' exempt purposes, distribute income annually for charitable purposes, limit their holdings in private businesses, ensure that investments do not jeopardize the organization's ability to carry out its exempt purposes, and more. To maintain its tax-exempt status, a nonprofit foundation's governing documents must also include specific provisions in addition to generally-required 501(c)(3) provisions.

Rules and regulations for nonprofit organizations are complex. Failing to meet requirements or adhere to regulations can result in the revocation of a foundation's tax-exempt status. Whether you are starting a new nonprofit foundation or managing an existing organization, ensure you meet all applicable requirements.

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