SURE YOU REALLY WANT TO....
start a Nonprofit, Tax-exempt Corporation in Connecticut?
FOUR IMPORTANT QUESTIONS

last updated 8-22-15

Lisa Nachmias Davis
Davis O'Sullivan & Priest LLC
129 Church Street, Suite 503
New Haven, CT 06510

203-776-4400
Fax 203-774-1060
davis@sharinglaw.net
http://www.sharinglaw.net

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Question 1.
Is tax-exempt status really necessary to your finances?

    1.   If you expect to / need to get donations to survive, from donors who file itemized deductions on their income tax returns, or which are corporations, tax-exempt status probably does makes sense.
    2.   If you expect to "earn" (get paid for goods or services) or borrow to survive, tax-exempt status may be a neutral factor unless you plan to build up a stockpile of income-producing assets.
    3.   If you expect to depend on government payments for services you provide, check with the agency that pays you to find out if it makes any difference whether you are/are not exempt under 501(c)(3).
    4.   If you're applying for a government grant, find out if exempt status is a requirement -- it isn't always the case.
    5.   If your idea is one more likely to attract investors than donors, you may want to re-think -- tax-exempt organizations can't pay dividends or otherwise give a return on investment to someone who pays in.  Plenty of big tax-exempt organizations out there reach this conclusion and find that in order to go "for-profit" they must first donate all assets (or equivalent) to charity.  Once assets are charitable, they have to stay charitable.

Question 2.
Can you live with the restrictions of being 501(c)(3)?

    1.   501(c)(3) tax-exempt organizations are limited in how much they can lobby (there are other tax-exempts that may be less limited).
   
2.   501(c)(3) tax-exempt organizations can't participate in political campaigns no matter how closely they seem tied to the organizations' purposes (there are other tax-exempts that may be less restricted).
    3.   Tax-exempt organizations are closely watched to make sure nobody "inside" is getting more than "reasonable compensation" out of the organization, and fines and penalties are out there if you don't walk the straight and narrow.
    4.   501(c)(3) tax-exempt organizations have little privacy:  documents must be provided to the public, IRS returns are put on the internet, and donor names must be given to the IRS.
    5.   "No private inurement"  means that if you come up with a brilliant money-making idea for the organization, you can't reap the profits -- they are permanently dedicated to the "public."
    6.   The public interest comes first:  no guarantee of lifetime employment, even for you, the brilliant founder; donors have no power to sue if the organization doesn't do what it promised; the Attorney General can step in and interfere with the organization's affairs in the interest of donors.

QUESTION 3.
Are you up to the task of maintaining corporate and tax-exempt status?  ARE YOU READY?

    1.    Federal law imposes an affirmative annual filing requirement on EVERY nonprofit organization, no matter how tiny.  Failure to comply for 3 years will mean LOSS OF EXEMPT STATUS and starting all over again with a new application!  This is true even if you are very tiny and haven't yet filed for exemption.  If you don't do the annual filings, and eventually apply for exemption, you won't get exemption retroactively.
    2.    In CT, any corporation must get (and keep) the IRS recognition in order to avoid the $250 minimum business tax. (Note: this doesn't seem to kick in until you file the Organization and First Annual Report.)
    3.    Corporate law imposes some constraints on how you organize and run your operation, or at least sets up hoops you have to jump through to run things the way you want. 
    4.   BUT -- if you are acting "on your own" and doing anything with liability risks, you pretty much have to be a corporation to limit your own personal liability exposure.

QUESTION 4.
Is there anyone out there doing what you're doing or could "adopt" your project, at least while you think things through?

    1.    Staying "under the umbrella" of another organization may allow you to piggy-back on the other, bigger organization's liability insurance.
    2.    Staying "under the umbrella" or having a fiscal sponsor may spare you some headaches associated with fundraising, including the time lag between applying for exemption and getting confirmation from the IRS.
    3.    Being a separate employer creates a lot of headaches that you may not have to deal with if you can interest someone else in the project enough to take you in.
    4.    If you decide to do something else in a few years, you don't have to wind up a corporation, file for dissolution, etc.
    5.    Do you really have enough staying power to ensure that your project will continue if you move on to other things?


THESE ARE SOME, BUT NOT ALL, OF THE QUESTIONS
YOU SHOULD ASK YOURSELF BEFORE TAKING THE PLUNGE
AND FORMING A TAX-EXEMPT ORGANIZATION !!

Thousands of organizations have lost exemption by failing to file with the IRS for 3 years straight.
I've spent countless hours setting up new organizations that fail and disappear.
Does the world really need your project to be set up as a brand new separate corporate entity?  No other way?
TAKE IT SLOW! TRY IT ON FOR SIZE BEFORE JUMPING IN! HASTE MAKES WASTE!

DISCLAIMER:
THIS INFORMATION IS NOT PROVIDED AS  LEGAL ADVICE AND CREATES NO ATTORNEY-CLIENT RELATIONSHIP.
PLEASE CONSULT YOUR OWN LEGAL AND FINANCIAL ADVISORS.