20/20 Toolbox: The Public Charity — Structuring Considerations

Richard A. Smikle

You may be interested in starting a charitable organization. Specifically, some of you may be interested in organizing a tax-exempt entity in addition to the for-profit camp that you already operate. The following should answer some basic questions about the planning and practical steps that you would follow to start your charity and to receive tax-exempt status. This is a broad overview, and we hope that it serves as an opening to further conversations about the charity that you envision founding.

  • There Is a Difference Between Nonprofit and Tax-Exempt
    While these terms are often used interchangeably, they are in fact very different.
    • A nonprofit corporation is a corporate entity formed at the state level; the key distinction between a nonprofit entity and a for-profit entity is that a nonprofit entity is not formed to benefit shareholders or owners.
    • Once a nonprofit is formed, it can then apply to the Internal Revenue Service (IRS) to be exempt from federal income tax (a taxexempt entity). There is generally a corresponding application process at the state level to become exempt for state tax purposes.
  • Your Entity Must Be Charitable
    Generally, to be a tax-exempt entity, your entity must have a charitable purpose. The IRS has recognized a number of purposes that are charitable, including education and promotion of health. If you have identified your charitable purpose, your organization is not necessarily required to develop direct programs; instead, your charity may choose to provide grants to other charitable organizations that pursue your chosen purpose.
  • Distinction Between Private Foundation and Public Charity
    While your organization may have a charitable purpose and be eligible for tax-exemption, there is an additional distinction between being a private foundation and public charity. Public charities generally derive their funding or support primarily from the general public, receiving grants from individuals, government, and private foundations. Although some public charities engage in grant-making activities, most conduct direct services or other tax-exempt activities. A private foundation, on the other hand, usually derives its principal fund from a single source, such as an individual, family, or corporation, and more often than not is a grant maker. The IRS rules and regulations differ based upon the organization being classified as a public charity or private foundation.
    • Planning consideration: If one of the principal purposes of your organization is to grant scholarships, different rules likely govern based upon your organization’s status as a private foundation or public charity. There are specific guidelines that an organization must follow if granting scholarships, particularly if the organization is a private foundation related to a corporate entity (i.e., a for-profit camp).
  • Choosing a Board of Directors Is Critical
    Since your organization does not have shareholders like a for-profit entity, your board of directors will be instrumental in shaping the ultimate form of your organization’s charitable activities. Your board should include individuals with specialized professional experience. If you operate a for-profit camp, it is critical that your nonprofit and for-profit entities are operated separately. While it may be acceptable to have an overlap in individuals involved in both organizations, obtaining legal guidance in this area is necessary.
  • Applications for Federal and State Tax Exemption
    Once the governance structure is in place, the next step is to file for federal and state tax exemption with the IRS and appropriate state agency. The federal application is a comprehensive application that will require a detailed narrative of your organization’s proposed activities, a budget for the next three years, and detailed information regarding your organization.
  • Operating a Charitable Organization
    Charitable organizations are a part of a highly regulated industry with strict rules that are not intuitive. Areas of concern include, but are not limited to, state fundraising laws, lobbying activities, unrelated business income, and licensing agreements. It is very important for a public charity to have an experienced management team to recognize potential problems before they arise.

Additional Resources

Rich Smikle’s practice includes litigation, general business, and advice to colleges and universities. He has worked with public and private colleges and universities and their boards, foundations, and administrations for over twenty years.

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