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Public Charity – Getting Started with the Proper Documents

A public charity is another term for the coveted Internal Revenue Code Section 501(c)3 status.  This designation allows all donations made to the charity to be tax deductible for taxpayers.  To obtain this designation, the organization must have the proper provisions within the organizing documents. 

When getting started, it is essential for the organization to start out with the proper documents.  This article identifies the required documents and explains them.  In addition, I provide examples of these documents and the required provisions.

Every state in the union uses some form of a written instrument of organization to establish a non-profit entity.  The terms vary but include ‘Trust Instrument’, ‘Articles of Incorporation or Association’, or a ‘Charter’.  When starting out, this written instrument must contain some clause or article expressly stating that the organization will limit its function to what is allowed under Code Section 501(c)3.  In addition, the assets acquired will be strictly limited to that function.  An additional clause should be included stating that upon dissolution, the assets will be distributed to either another qualified charity serving the same purpose or to a governmental authority for a public purpose.  The following explain and illustrate the different written instruments:

Trust Instrument

This type of charitable organization is typically designed to hold funds and invest those funds to serve a narrow focus in benefitting the welfare of society.  Examples of trust organizations include college or university scholarship funds, endowments for education, medical research, religious goal or social advancement (e.g. literacy, arts, or science). 

The instrument will make several declarations and these include:

  • Name of the trust
  • Permission to receive proceeds for the purpose of the trust, but not those proceeds with limitations other than the purpose(s) of the trust
  • Limits of expenditures of proceeds to the purpose of the trust along with permission to transfer funds to governmental authorities as required under state or federal law
  • Purpose of the trust
  • Time period of existence
  • How to amend the trust instrument
  • Trustee management, how many trustees, how office is filled, time limits etc.
  • Powers granted to the trustees and how those powers shall be approved
  • Territorial limit, i.e. operate within certain states etc.
  • Dissolution clause or article specifically identifying the beneficiary(s) upon dissolution/termination

The following are examples of trust instruments for you to use as guidance:

  1. IRS Example – Charity – Sample Organizing Documents – Draft B – Declaration of Trust
  2. EndowmentEndowment Care Cemetery Trust Fund

Articles of Incorporation

For those organizations involved in more than just holding money and transferring proceeds to the cause (trust based) you have to create a legal operating entity.   This is similar to a regular corporation.  Each state will have a different legal filing process to gain approval, but when the organization applies, it has to submit a set of articles.  Some states use different terms instead of ‘Articles of Incorporation’.  These similar terms include:  ‘Articles of Association’, ‘Charter’, ‘Certificate of Incorporation’, ‘Constitution’ and sometimes ‘Application for Authority’. 

No matter the terminology, you must include in your wording the Internal Revenue Code provisions restricting your purpose to that which is allowed in Section 501(c)3 of the Code.  In addition, you must state that the assets of the organization are strictly used for the same purpose.   Finally, upon dissolution or termination, all net assets will be transferred to a similar non-profit organization or to a governmental authority for use by the public.

Below are examples of some various articles of incorporation:

  1. IRS Example – Life cycle of a public charity – sample organizing documents – Draft A – charter
  2. New York’s Certificate of IncorporationNew York’s Certificate of Incorporation
  3. Texas Certificate of FormationCertificate of Formation – Non-Profit Corporation

Inside of these articles of incorporation you should include provisions similar to the trust instrument above.  These include:

  • Name of the corporation
  • Trading name
  • Permission to receive proceeds for the purpose of the organization, but not those proceeds with restrictions other than the purpose(s) of the organization
  • Limits of expenditures of proceeds to the purpose of the organization along with permission to transfer funds to governmental authorities as required under state or federal law
  • Purpose of the organization and a statement restricting the operations to that which is allowed under Section 501(c)3 of the Internal Revenue Code
  • Organizational management, how many directors, how office is filled, time limits etc.
  • Powers granted to the directors and how those powers shall be approved
  • Territorial limit, i.e. operate within certain states etc.
  • Names of those individuals forming the organization, some states refer these individuals as organizing directors, founding directors or initial directors
  • Dissolution clause or article specifically identifying the beneficiary(s) upon dissolution/termination

Notice that in the corporation format, there is no need to limit the period of existence.  This is because most corporations exist like individuals.  That is, as long as you can live.  In addition, there is no need to identify the amending process because the state generally has an amending process via some form or application.

Religious Entities

This is a little different.  Often, many churches are members of a larger organization and this organization has the filing charter and or documents filed with the respective states and the IRS.  If your church or congregation is limited or restricted, it is best that you spend a little extra time and research your state’s respective requirements to form.  Each state is different and the documents they use are restricted to the religious aspect of your religion.  There will be rare instances where the state may not recognize your religion due to some unorthodox practice or possible illegal activity.  So you should hire an attorney to gain state recognition prior to getting recognized by the IRS.

Conclusion

In effect the IRS is not going to recognize your organization as a separate legal entity until you meet your state requirements.  The key is that when you form the organization and seek permission to exist based on the state you live in, you MUST include certain clauses (articles) in your initial documents restricting your purpose(s) to that which is allowed under Section 501(c)3 of the Internal Revenue Code. 

Most organizations will exist under two major groupings.  The first group uses a Trust Instrument to document its existence.  This instrument is included with the application in your state to form a separate legal entity.  Trusts are generally used to receive proceeds and disburse proceeds for a narrowly defined purpose.

The second grouping is more broad in nature and similar to a corporation.  It forms just like a corporation in the state you live.  But when you form this organization, you must include the articles or clauses or statements to the effect of limiting activities to those authorized under Section 501(c)3 of the Code.  Each state is different in the formation process and use different forms or applications to recognize an entity’s existence.  Act on Knowledge.

If you have any comments or questions, e-mail me at dave (insert the usual ‘at’ symbol) businessecon.org.  I would love to hear from you. If interested in my services as an accountant/consultant; click on My Services in the footer of this article.

 

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About David J Hoare (389 Articles)
I spent 12 Years as a Certified Public Accountant, Over 20 Years of Practice in Accounting and Consulting, Controller in Management of Closely Held Operations, Masters of Science in Accounting, Prepared over 1,000 Business Tax Returns and Hundreds of Individual Returns

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