Class 2 Notes
5/13 Arts Law Class 2 - Non Profits
WHY A NOT FOR PROFIT
1. Organization has no profit objective
ex: religious organizations
ex: pure charity (homeless teens)
ex: Faternal Clubs
ex: Museums / public trusts
Set up to GIVE not to EARN
2. Organization sells products, but wants revenue to be directed to furthering Non Profit purpose
ex: Hospitals not subject to tax - maximize revenues
ex: Theaters also do this
This creates problems with Profit theaters (ex; Chanhasen in competition with Guthrie)
3. Desire to get grants / donations and make sure donors get tax break - incentive to donate
Most organizations exist with combinations of any (all) of these reasons
TYPES OF NON PROFITS
Most Arts organizations are 501(c)3 - - subchapter of non profits - - Fine art and education - - advocacy groups have a different category (and number) as well as hospitals etc.
THE PROCESS OF SETTING UP A NP
1. Someone comes up with an idea
High Point Center for Printmaking did it right - they got a lawyer ( -:
Non Profit is not automatically Tax Exempt (You can file a one page form with the state to become a non profit - but there is no tax break!)
To qualify for tax exemption IRS looks at private benefit vs. Public Benefit
(is there any hint of advocacy?)
(You gotta prove you're different from a PROFIT organization)
For Profit activities can be taxed. Northern Clays Non Profit application initially rejected because they wanted to rent out studio space - - - modify terminology on appeal
("We'll have a gallery to sell stuff" vs. " Adjunct to primary focus we'll have a education display space to show examples of work for sale with monies subsidizing our educational focus" !!!!!)
Make it an intergral component of mission
Twin Cities Fine Arts Organization established a record / history of activity (published paper, website, etc.) THEN applied for N.P. status and were rejected (it characterized them in the wrong way.
Other Issues
Will you be a membership or open organization (membership can be a red flag - NP should be public. When limited it ups the scrutiny on the part of the IRS - - Private Charity doesn't get a tax break).
How will board be established?
(A self perp board (ex: Minnesota Orchestra / Walker
OR elected by members (with member meetings and members choosing board) (NOT common in Arts Organizations!)
OK WE'VE FLESHED OUT AN IDEA . .. NOW WHAT
1. File articles of incorporation - 1 page form from secretary of state (worthless - not IRS approved) Spring board has the forms.
IRS wants certain rules in charter . . .
A. They'll do nothing political!!)
B. In the Articles the Organization must have a board of directors with at least 3 people (In John's experience they really want 5!! Minnesota requires 1 - but you won't get the tax break for just following MN law)
C. Statement determining that set up for educational purposes with in 501(c)3
D. Statement committing to being non discriminatory
E. Clause stating that is the organization should dissolve, assets will go only to another 501(c)3 - - important because it distinguishes NP's from Profits. MIA assets are not owned by anyone - Assets are public (trustees act as guardians)
F. $70 filing fee!
THEN. . .
2. Put together a board - more difficult than you think. WHO?? Not interested party with economics of organization - - Disinterested board - Zero Economic impact / conflict of interest
BASIC DUTIES OF THE BOARD (see hand out)
Make sure board members understand their duties!
1. Org. DO operations properly
2. Board members don't get into legal liability
ex: Mike Hatch and Alina - - board didn't follow fiduciary / ethical responsibilities
fiduciary responsibility - legal term - - a person duty bound to act in the Best Interest of the organization.
Ex: sat on board and knew of $$ mismanagement - VIOLATION
Ex: Board decision to purchase and you don't research - VIOLATION
you are failing the organization
Subjective duties under law - no clear "what in best interest" rules
Law Ordinary persons standard (not super human activities / knowledge) you don't need to be a financial expert. Lowest common denominator. Organization may have a higher standard for board members.
Boards are customarily not paid - but they can be in Minnesota — some ramifications
.
In TX (state of questionable ethics!!) Kimball paid director / board $100,000's
Medical boards get paid — bug impact on liability and requirements put on board - - paid = higher than volunteers
2.) Loyaly to organization - not a law but ethical of organization
3. Abide by articles of incorporation and bylaws and rules (obvious but a lot of boards get into trouhble with that and that opens up potential liability
Sheild of liability unless you breach fiduciary responsibility (delf dealing, shutting eyes to obvious problems) you have to be REALLY irresponsible to get into trouble legally.
OK BOARD IS FORMED / ESTABLISHED / EDUCATED . . Now you need BYLAWS!
Then an APPLICATION with IRS for tax exemption must be filied with 15 months of date of incorporation (and a year more if you have a good reason.)
You can do this on your own - but certain "art" to it - (rejection is tough to fix) Get a lawyer!
Apply for advanced ruling on taz exemption — temporary exemption - retroactive to date of incorporation everything up until them is tax exempt.
4 year period is CRITICAL a number fail in 4 years - if it succeeds organization must fill summary report of activities - basically economic report : $$ that came in, how spent, must have sertain % of revenues come from public sources (33 1/3) (IRS rule — make a standard and then make an exception!!!!) Rules out public charity vs. Private foundation mare than 5% of funding makes a person an excluded donor (for 33 1/3% rules)
STANDARDS FOR GOVERNANCE
Once established what are minimum requirements for board meetings and such?
IRS - by laws require annual meetings (min.) Usually far more regular meetings. Small org. Tend to have "working board" that does fund-raising and stuff staff can't do. Once a month meetings are VERY common
MIA / Orchestra have big boards 30-40 "leaders in the community" (i.e. people with money and connections!) Executive committee runs organization, every one else name / recognition / $$ show up once a year
WHEN ORGANIZATIONS FAIL
2 ways to close shop
1. Walk away and do nothing. Shut doors (if there's no assets that's easy!) BUT if you have liabilities / assets must do disolusion
2. Organize meeting of board / membership to vote with a noice of purpose of meeting. If decide to close, a notice of intent to dissolve must be filed with the Sec. Of State and published in legal paper (not always daily news paper!!)
Intent to give notice to people who might have claim before organization is dissolve. Mus run 4 weeks ina row once a week. Then there's a waiting period (90 days) for creditor to make a claim
THEN the organization is able to dispearse assets — to non-profit 501 (c) 3 organizations
If creditor comes up after the fact - TOUGH LUCK - - articles of dissolution field with secretary of state means they're "dead" and closes all liability forever
(If you don't file dissolution - you can have liability until 2 year statue of limitation
