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Dear ABCs,

I have questions about starting a new non-profit business.

• What exactly qualifies a business as a non-profit?
  
• Can a business donate a portion of its profits and be considered for a grant under those circumstances?
  
• How does one go about finding agencies that need this type of funding? I know of several thrift stores (local, not the nation wide chains) in my town that give a portion of their proceeds to the local homeless shelter, local kids club etc. but I know it is only a percentage of their profit and not all of this is posted in their stores. This also allows them to accept donations, which of course cuts inventory expenses.

I am also curious to know if you can operate under more than one type of license, for instance: can you operate a retail, resale, consignment, new products, used products, etc. all under the same "business"?

I am contemplating going into business with a relative. Would my "not so good & limited credit" offset her excellent and extensive credit when applying for a business loan? I would rather not resort to getting a loan in only her name (although she is willing), as I would once again, in essence, be employed as opposed to being a business co-owner.

I have searched for special opportunities for women starting businesses and have basically gone in circles. Are their any specific programs that you can recommend?

Thank you.

Sorry for the looooooooooooooooooooong "question".

Dear Loooooooooong,

No Problem! Business questions are rarely really simple, at least if we're talking about a real business instead of a school case study. Let's take your questions one at a time.

"What exactly qualifies a business as a non-profit?"

This is actually pretty complicated to answer since the IRS gets to make the decision on whether a business is not-for-profit. It's important to make a correct application because you may be personally liable for taxes if your not-for-profit designation is not granted.

What are the benefits of forming and operating a not-for-profit?

One is limitation of your personal liability - which can also be accomplished to some extent by incorporating a for-profit business. Another is exemption from payment of some, but not necessarily all, taxes. Another is the ability to raise funding from donors that will only fund tax-exempt, non-profit organizations.

There are some downside considerations as well to forming a not-for-profit. Kris and Cindy, the ABCs Start-Up Moms, have pretty extensive experience with not-for-profits because we each volunteer our time and efforts for organizations with worthwhile goals. Not-for-profit does not necessarily mean "No Problems!" You will not be in sole control and will need a board of directors to set policy for the organization and oversee results. Not-for-profits don't have to be cash-poor, but many of them are and that can create a strain.

What makes a not-for-profit organization acceptable to the IRS?

There is a two-part test that may discourage you from seeking not-for-profit status. (1) The organization must be operated to meet one or more of the purposes set under Internal Revenue Code for a not-for-profit organization. (2) No private shareholder or individual can receive the earnings made by the not-for-profit although reasonable pay to employees of the organization is allowed.

Not-for-profits are not allowed to influence legislation as a "substantial part" of its activities and it may not participate in political campaigns for or against political candidates.

Whew!

What kinds of organizations can receive tax-deductible contributions?

These organizations would most likely fit under 501(c)(3) section of the Internal Revenue Code that allows the donor to deduct 100% of his/her donation subject to the donor's annual limits. Generally, the 501(c)(3) organizations are:

• Charitable organizations. The generally accepted legal sense includes relief of the poor, the distressed, or the underprivileged. They may also build or maintain public facilities or reduce government burdens. Charitable organizations may also reduce neighborhood tensions, combat community deterioration and work to reduce juvenile crime. Some charitable organizations work towards the elimination of prejudice and discrimination or support defense of human and civil rights secured by law.
  
• Religious organizations
  
• Educational organizations
  
• Scientific organizations
  
• Literary organizations
  
• Testing for public safety - however, this is exempted by the government from being tax-deductible for donations.
  
• Fostering national or international amateur sports competition.
  
• Prevention of cruelty to children or animals

To be organized exclusively for a charitable purpose, the organization must be a corporation, community chest, fund, or foundation. A charitable trust is a fund or foundation and will qualify. However, an individual or a partnership will not qualify.

All material resources must be permanently dedicated to an exempt purpose. If the organization is dissolved, its assets must be given to further an exempt purpose or turn back to the government for a public purpose.

Other Not-For Profits

Section 501 (and 521) of the Code has several categories of not-for-profit status, each allowed a different level of deductibility based on its purpose. Here are some of the other types of non-profits. We'll exclude the deductibility and rules for each because the code becomes long and involved with "exceptions" and "exceptions to exceptions!"

• 501(c)(1) - Corporations Organized Under Act of Congress (including Federal Credit Unions).
  
• 501(c)(2) - Title Holding Corporation For Exempt Organization.
  
• 501(c)(4) Social welfare organizations and local associations of employees. A local association of employees is an organization whose membership is limited to employees of a designated person or persons in a particular municipality, and whose income will be devoted exclusively to charitable, educational, or recreational purposes. The organization must (1) be of a purely local character, (2) limit its membership to employees of a designated person or persons in a particular locality, and (3) its net earnings are required by its articles of organization, constitution, or bylaws to be devoted exclusively to charitable, educational, or recreational purposes.
  
• 501 (c) (5) Labor organizations, farm bureaus and agricultural associations. A labor organization is an association of workers organized to protect and promote the interests of labor in connection with employment. Agricultural and horticultural organizations are connected with raising livestock, forestry, harvesting crops or aquatic resources, the cultivation of useful or ornamental plants, and similar pursuits.
  
• 501(c)(6) Business leagues with the purpose of promoting common interests, such as trade associations and professional associations. The business league must be devoted to the improvement of business conditions of one or more lines of business as distinguished from the performance of particular services for individual persons. It must be shown that the conditions of a particular trade or the interests of the community will be advanced. It is permissible for business leagues to pursue legislative changes but not specific candidates.
  
• 501(c)(7) Social clubs. The membership in a social club must be limited. In general, a club should be supported solely by membership fees, dues, and assessments.
  
• 501(c)(8) A fraternal beneficiary society, order, or association under §
• 501(c)(8) must be (1) a fraternal organization, (2) operate under the lodge system or for the exclusive benefit of the members of a fraternal organization itself operating under the lodge system, and (3) provide for the payment of life, sick, accident, or other benefits to the members of such society, order, or association or their dependents. All members, not only a particular class of members, must be eligible for the benefits in order to sustain exemption.
  
• 501(c)(9) A voluntary employees' beneficiary association (VEBA) under is an
  organization organized to pay life, sick, accident, and similar benefits to members or their dependents, or designated beneficiaries if no part of the net earnings of the association inures to the benefit of any private shareholder or individual. The organization must (1) be a voluntary association of employees, (2) provide for payment of life, sick, accident, or other benefits to members or their dependents or designated beneficiaries and substantially all of its operations are for this purpose, and (3) not allow any of its earnings to inure to the benefit of any private individual or shareholder except in the form of scheduled benefit payments.
  
• 501(c)(10) A domestic fraternal society, order, or association under § must be (1) a domestic fraternal organization, (2) operate under the lodge system, (3) devote its net earnings exclusively to religious, charitable, scientific, literary, educational, and fraternal purposes, and (4) not provide for the payment of life, sick, accident, or other benefits to its members. The organization may arrange with insurance companies to provide optional insurance to its members without jeopardizing its exempt status.
  
• 501(c)(11) Teachers' Retirement Fund Associations.
  
• 501(c)(12) Benevolent Life Insurance Associations, Mutual Ditch or Irrigation Companies, Mutual or Cooperative Telephone Companies, Etc.
  
• 501(c)(13) Cemetery Companies.
  
• 501(c)(14) State Chartered Credit Unions, Mutual Reserve Funds.
  
• 501(c)(15) Mutual Insurance Companies or Associations.
  
• 501(c)(16) Cooperative Organizations to Finance Crop Operations.
  
• 501(c)(17) A supplemental unemployment benefit trust is a trust or trusts forming part of written plan (established and maintained by an employer, his or her employees, or both) providing solely for the payment of supplemental unemployment compensation benefits.
  
• 501(c)(18) Employee Funded Pension Trust (created before June 25, 1959).
  
• 501(c)(21) Black Lung Benefit Trusts.
  
• 501(c)(22) Withdrawal Liability Payment Fund.
  
• 501(c)(25) Title Holding Corporations or Trusts with Multiple Parents.
  
• 501(c)(26) State-Sponsored High-Risk Health Coverage Organizations.
  
• 501(c)(27) State-Sponsored Worker's Compensation Reinsurance Organizations.
  
• 501(d) Religious and Apostolic Associations.
  
• 501(e) Cooperative Hospital Service Organizations.
  
• 501(f) Cooperative Service Organization of Operating Educational Organizations.
  
• 501(k) Child Care Organization.
  
• 521(a) Farmers' Cooperative Associations.

What Information Will The IRS Need?

You will need to provide the IRS with:

• A detailed written description of your organization's activities. These will include what the organization has done in the past, what it is currently doing and what it plans to do in the future.
  
• Each officer and director's name, address and title.
  
• The Federal Employer Tax Identification Number (FEIT) of the organization.
  
• A copy of your organization's Articles of Incorporation and By-laws.
  
• Financial Statements for the current year and for each of the prior three years.
  
• If organized for less than one year, you will need to provide budget plans for the next two years.
  
• Filing Fee to handle the paperwork. This is based on current and projected revenues.

Does "Tax Exempt" Mean No Taxes at All?

No, it does not! If your not-for-profit has employees, you will have to taxes related to that employment. Unless specifically exempted by law or if the taxes cannot be applied, exempt organizations must withhold, deposit, pay, and report federal income tax, social security taxes (FICA), and federal unemployment tax (FUTA).

You may have to pay real estate taxes. Making mistakes can hurt - your organization can be fined, lose its tax-exempt status or the entire organization may be forced to disband.

Even tax-exempt organizations may owe tax on "unrelated business income" (UBI). An exempt organization that has $1,000 or more gross income from an unrelated business must file Form 990-T, Exempt Organization Business Income Tax Return. Organizations that expect to owe $500 or more yearly in UBI taxes must make estimated quarterly tax payments.

Not-for-profits may also be taxed on their investment income.

Not-For-Profit Organizations Must Disclose Information

Exempt organizations not only must report to the government but they must also disclose information to the public. This is a safeguard so that donors and other stakeholders can evaluate for themselves whether an organization deserves support. Most donors who actually evaluate their beneficiaries prefer an organization that provides a higher percentage of revenues to serve its exempt purpose.

"Can a business donate a portion of its profits and be considered for a grant under those circumstances?"

Generally not. Grants to businesses-as-businesses are usually pretty limited and hard-to-find.

"How does one go about finding agencies that need this type of funding?"

I'm a bit confused as to whether you're asking about agencies that provide or accept this type of funding. Acceptance of funding - well, many not-for-profits are pretty pleased by anything legal that fits with their ethics and which can provide funding to help with their programs.

"Agencies" do not generally provide funding - usually agencies carry out programs. However, there are a number of foundations, funds and community foundations that provide grant funding to not-for-profit organizations. You'd need to find a funding organization that supports your particular set of public purposes.

If you are asking what the arrangement is that thrift stores use - that can be a sweet deal for for-profit businesses that make donations to not-for-profit organizations. Often, not-for-profits will cut deals where they accept either a flat fee for the use of their name or a percentage of the value of donations. This is a good deal for people who donate merchandise because they can get tax-deductibility for the value of their donations. It benefits not-for-profits by getting them a cut of the donations without having to staff and run them. And the for-profit business, as you pointed out, gets a great deal on the donations and only has to pay a flat fee or a percentage of the value of the donation to the not-for-profit.

"I am also curious to know if you can operate under more than one type of license, for instance: can you operate a retail, resale, consignment, new products, used products, etc. all under the same 'business'?"

Generally, yes. Check with your local licensing authorities to make certain because this can vary from locality to locality.

"I am contemplating going into business with a relative, would my 'not so good and limited credit' offset her excellent and extensive credit when applying for a business loan? I would rather not resort to getting a loan in only her name (although she is willing), as I would once again, in essence, be employed as opposed to being a business co-owner."

Yes, your credit will be considered in the decision on whether to issue a loan to both of you. If you find that you can only get credit in her name, you may want to establish a contract that will vest you with a percentage of ownership over the next couple of years. That way you will not remain an employee but will become a co-owner. The best time to establish this contract is before you actually start the business.

"I have searched for special opportunities for women starting businesses and have basically gone in circles. Are their any specific programs that you can recommend?"

There are no specific government grants for women, as such. Essentially, the government makes the same loan programs available to women as to other business owners and startups.

You can find a list of resources for government grants, in general, at http://www.sba.gov/expanding/grants.html. Most of them are offered to not-for-profit agencies rather than for profit businesses. You also find state and local opportunities listed at http://www.statelocal.gov/cdc-comp.htm.

The SBA does provide Women's Business Centers. Find your local center at http://www.sba.gov/womeninbusiness/wbcs.html. Some of these are also intermediaries in the Low Doc and Microloan programs and may be able to help you qualify for these available loans.

The government can also help you qualify as a women-owned business for help in getting "set aside contracts" after your business has been started.

Networking

The SBA has a list of women's business organizations at http://www.onlinewbc.gov/womens_business.html that may help you make the connections you need. We'd also add the following Women's Business Organizations:

The Forum for Women Entrepreneurs: http://www.fwe.org/
The National Association of Women Business Owners: http://www.nawbo.org/

This has been a LOT of information and we hope it'll help you make decisions about going forward with your business plan.

Now - Go Make Money!
Kris & Cindy
The "Start-up Moms"

Other Resources:

Center of Excellence for Nonprofits: http://www.cen.org/
National Center for Charitable Statistics: http://nccs.urban.org/
Nonprofit Financial Center: http://www.NFConline.org/
The Internet NonProfit Center: http://www.nonprofits.org/

IRS Resources:
http://www.irs.ustreas.gov/prod/bus_info/eo
IRS Publication 557 can be downloaded. It contains information about getting exemption from federal income tax under 501 (a) of the Internal Revenue Code.

State Resources
This is ABC's list of state business resources, but it will usually lead to information within the Secretary of State's office in your state. They will be the appropriate state agency to contact regarding getting nonprofit designation in your state.