Business Law Checklists Legal Topics

“To Do” List for Setting Up a Nonprofit

164142653After you’ve taken the client through the many questions to be answered in deciding to form a nonprofit and all agree to move forward, you need to take these first steps in the process of establishing the nonprofit.

When setting up a new nonprofit organization, the attorney must be prepared to do the following—consider this your “to do” list:

  • Provide preorganization analysis and advice. Be prepared to do extensive analysis and give advice on tax-exemption qualification and classification issues. Except in a few relatively simple cases, you’ll likely have to do some research. There’s a growing and unfortunate tendency among clients to regard “research” as something attorneys did before becoming “experts.” Recognize this tendency and don’t fall into the trap of accepting the mistaken assumption that the client shouldn’t be billed for necessary research.
  • Draft and file governing instruments. For example, the articles of incorporation and the bylaws.
  • Prepare and file state and federal exemption applications. Most organizations seeking exemption under IRC §501(c)(3) must prepare and file a tax-exemption application on either the Application for Recognition of Exemption (IRS Form 1023) or the recently promulgated Streamlined Application for Recognition of Exemption (IRS Form 1023-EZ). IRC §508. Both are available on the IRS website. Organizations that are exempt under California law (see e.g., Rev & T C §23701d) may file a short-form application (FTB Form 3500A) with the Franchise Tax Board (FTB), along with a copy of the IRS determination letter.
  • Prepare an operating manual for directors, officers, and staff that’s tailored to the client’s needs. A memorandum of guidelines, often called an “operating manual,” should be tailored to the organization’s particular tax and corporate status, acquainting its managers with the rules with which they must comply. The operating manual should provide guidance in sufficient depth and detail to enable the client to avoid violating the applicable Corporations Code provisions and tax laws.
  • Provide advice and forms for fundraising. If the client will have an active fundraising program, provide the necessary advice and forms to ensure compliance with all applicable regulations (including registration for charitable solicitation, raffles, and substantiation and recordkeeping) and to avoid potential liability to donors.
  • Identify and retain a qualified nonprofit accountant.
  • Locate an auditor to perform an audit if gross revenue exceeds $2,000,000. See Govt C §12586(e).
  • Determine the responsible party for filings and minutes. You need to identify who’s responsible for all federal and state filings, including Secretary of State filings, if applicable, and the preparation of annual minutes.

In rendering your advice, anticipate that individuals working in nonprofit organizations may not pay much attention to technical rules because they think, “What could be wrong here? We’re doing the work of the Lord” (or the secular equivalent). You’ll need to disabuse them of this mindset.

Although you may be able to reduce the cost of this work somewhat by being familiar with the availability and content of boilerplate materials, be cautious when using such materials because they rarely completely satisfy the need for advice tailored to the client’s situation.

Get detailed guidance on each of these tasks, including handy checklists, in CEB’s Advising California Nonprofit Corporations. Also check out CEB’s program Organizing & Advising Nonprofits.

Other CEBblog™ posts you may find useful:

© The Regents of the University of California, 2016. Unauthorized use and/or duplication of this material without express and written permission from this blog’s author and/or owner is strictly prohibited.

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