BY ROBERT J. LABATE
Whenever I speak before groups of film producers, especially those involved with documentaries, someone usually asks about creating a not-for-profit (also called a "nonprofit") corporation.
"How difficult is it to create a not-for-profit company?" is the first question, which is often followed by one or two other questions:
"If I do, will I be able to apply for foundation grants?" or
"Can I offer a tax-exemption to people who donate to my project?"
Creating and operating a not-for-profit corporation has many advantages (limiting personal liability and obtaining an exemption from payment of certain taxes being the two most obvious), but these benefits come at a price.
To begin with, the creation of an Illinois not-for-profit corporation, by itself, does not entitle your organization to any form of tax exemption. To obtain an exemption from federal income taxes for your company (and a deduction for donors) you must file a separate application with the IRS. But be warned that not all nonprofit entities will qualify for an exemption from federal income taxes and, even if you qualify, the application process for obtaining tax-exempt status often takes six months or longer!
Research and Planning
There are dozens of issues to consider when forming a nonprofit company and it is essential that you define your purposes and goals before you file any application or take any donation. For example the answers to the following questions will help you determine the appropriate form and structure of your nonprofit:
Do you primarily want to limit your personal liability should an accident occur at one of your events, or are you more interested in obtaining tax exempt status in order to attract funding from the many private foundations which fund only tax-exempt, nonprofit organizations?
Are you organizing to produce a single project (such as a documentary film) or do you intend to generate ongoing activities in the community?
Do you know who will serve on your Board of Directors (you must have at least three directors) and do you know who will have the right to control and direct the activities of your nonprofit corporation?
How will you raise funds in support of your activities and do you plan to sell goods or services which are related (or unrelated) to the purpose of your nonprofit corporation?
One of the best local sources of information on these issues is Anna Gehant, the Director of Operations for the Nonprofit Financial Center (www.nonprofitfinancial.org), located at 111 West Washington Street, Suite 1221, Chicago, IL 60602-2706 (312/ 606-8250). The NFC offers a number of useful handbooks (including one on creating an Illinois nonprofit company) and sponsors training sessions to educate nonprofit companies on topics such as responsible financial management, raising money, legal reporting and public disclosure requirements. If you are seriously considering the creation of a nonprofit corporation, then the NFC, or some similar organization, should be your first stop.
Another source of information is the IRS itself. A significant amount of "plain-English" information on the process of filing for tax-exempt status can be obtained directly from the IRS Web site (www.irs.ustreas.gov) by clicking the section on "Tax Info For Business" or you can go directly to the specific IRS Web page which provides information on tax-exempt organizations (www.irs.ustreas.gov/prod/bus_info/eo). From the IRS site you can download "Publication 557," a triple-column, single-spaced 55-page booklet which discusses the rules and procedures for seeking to obtain exemption from federal income tax under 501(a) of the Internal Revenue Code.
Obtain Professional Advice
Few things will ruin your day as quickly as having to withdraw a foundation funding proposal, or having to tell a donor that their contribution to your nonprofit corporation is not tax deductible because the IRS declined your application for tax-exempt status. Thus, obtaining professional advice is required.
If you don’t have a lot of money to spend on hiring an accountant or lawyer, there are several places you can call for assistance.
One good source is the Small Business Opportunity Clinic (SBOC) of the Northwestern University School of Law (312/503-8576), located at 357 East Chicago Avenue, Chicago, IL 60611. The SBOC Director, Thomas H. Morsch, supervises Northwestern Law School students who perform the majority of the legal services. A list of the services provided by the SBOC is available at its Web site (www.law.nwu.edu/small-business) or you can send them an e-mail at small-business@nwu.edu.
For approximately $200, plus filing fees, the SBOC will prepare and file your Illinois nonprofit incorporation documents. For an additional $200, plus filing fees (which can be as much as $500), the SBOC will prepare and file your 501(c)(3) application for tax-exempt status. And if you simply want a consultation, the SBOC will be pleased to arrange it. By any measure this is a terrific deal.
Another source is Lawyers For The Creative Arts, 213 West Institute Place, Suite 401, Chicago, 60610 (312/649-4111), itself an Illinois nonprofit corporation which provides low-cost legal assistance in support of the creative arts. If you are truly without funds, either the LCA or one of its volunteer attorneys may be able to assist you.
A Final Caution
Please keep in mind that obtaining tax-exempt status is the only the beginning of your reporting and payment responsibilities. Obtaining tax-exempt status does not mean that you are exempt from all tax payment and reporting requirements and failure to observe applicable rules and laws, even if innocently done, might result in the revocation of your tax-exempt status or the dissolution of your organization.
©2000 Robert J. Labate. This column is provided as a source of information and is not to be construed as legal advise or opinion. The characters and situations are entirely fictional. You may send questions or comments to Robert J. Labate, Defrees & Fiske, 200 South Michigan Avenue, Suite 1100, Chicago, IL 60604.