Six Important Questions to Ask

When Forming a Nonprofit

Discussing Common Misconceptions NJ Ethics

The legal process of forming a nonprofit can be surprisingly complex.

One of the more notable aspects of the Nissenbaum Law Group’s nonprofit legal practice is the degree to which the firm is required to customize its legal representation to accommodate the unique needs of such clients. Those needs tend to drastically change based upon each such organizations’ aims and goals.

For example, some of the law firm’s nonprofit clients have been heavily involved in legislative lobbying, while others have scrupulously avoided the political sphere. Some are well-funded and directly connected to a larger parent organization, while others have no significant funding nor associations with other nonprofits, whatsoever. Indeed, the term “nonprofit” applies to such a wide range of entities that it can mislead one into assuming that forming such an entity is as straightforward as incorporating a for-profit company. That is not the case; there is a surprisingly complex set of questions that need to be answered before a nonprofit can be formed and begin to fulfill its mission.

Six Important Questions to Ask When Forming a Nonprofit

The following is a nonexclusive list of six such questions that frequently come up when forming these entities. They should be considered by the potential nonprofit’s attorney (and preferably, accountant) before the entity commences operations.

1. What state should the nonprofit use as its place of incorporation?

Generally speaking, the nonprofit corporation must first be created under state law and only then apply to the government for 501 status. Therefore, it is important to carefully consider in which state to file. That decision will impact a range of legal issues, such as, for example, where the nonprofit would likely be sued if a claim against it were made. That is more than simply a question of whether the lawsuit would be local to the nonprofit’s base of operations, but also what state’s case law, statutes and regulations would govern. It is a significant decision that needs to be considered before proceeding.

2. How involved are the IRS’ 501(c)(3) formation requirements?

It depends upon how much fundraising the entity intends to obtain in its initial operation. If it does not exceed a certain threshold, the simple IRS form 1023-EZ can be utilized. If not, the more elaborate 1023 form must be used.

3. Is it necessary to name the initial members of the board of trustees and to have an agreed-upon mission statement before proceeding?

Yes to both questions. It is not only necessary to have at least three persons on the board of trustees at the outset, but they must generally be identified in the filing to the IRS for 501 status. This is important because the IRS wants to know whether they have potential or actual conflicts of interest stemming from their relationship to one another to any anticipated personal financial benefit they may expect from the nonprofit’s activities. Likewise, a mission statement should be included with the bylaws or organizational resolutions submitted with the application. This is important so that the IRS can evaluate whether the nonprofit is applying under the correct federal statute and whether it qualifies for nonprofit status at all.

4. Does the nonprofit intend to engage in lobbying activities for legislative change?

A 501(c)(3) entity is allowed to engage in a certain limited amount of legislative lobbying. However, when that threshold is exceeded, it may be necessary to form a second entity under section 501(c)(4) of the IRS code. In such event, the client will effectively be split in two and the lobbying activities will generally take place under the (c)(4) rather than (c)(3).

5. Can a nonprofit pay its officers the same way a for-profit company can?

Yes and no. A nonprofit may provide market-rate compensation to the people who work for it. However, it is important to be able to verify through objective criteria that the compensation is not excessive beyond the general market for those services in the prevailing community. Moreover, a nonprofit cannot provide such additional compensation such as stock options, nor can it enter into a buy-sell agreement. That is because it does not issue shares of stock; it is not “owned” by the individuals who are involved in running it, the way a for-profit presumably would be.

6. Can a nonprofit obtain a trademark for its name and logo?

This question comes up a fair amount of the time in our firm’s intellectual property practice since most people associate trademarks with a means of identifying a for-profit business in the stream of commerce. However, federal law is clear that a nonprofit entity—which is obviously not in business, as such—may also apply for federal trademark status.

Looking for advice?

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Contact the Nissenbaum Law Group to schedule an appointment at 908-686-8000 or feel free to use the following form to e-mail us. Please include as much information as you can to ensure that we are able to handle your request as quickly as possible.

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Looking for advice?

We're here to help.

Contact the Nissenbaum Law Group to schedule an appointment at 908-686-8000 or feel free to use the following form to e-mail us. Please include as much information as you can to ensure that we are able to handle your request as quickly as possible.

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