Disclaimer: I am not a lawyer, CPA, tax consultant, IRS representative, or insurance agent, broker, or analyst nor do play one on television. I am not offering this information as legal or tax advice, nor should it be construed or used as legal or tax advice. The information presented here was gathered for use by our robotics team to form a non-stock, nonprofit corporation in the State of Connecticut. Corporate law varies from state to state and should be researched accordingly.
Furthermore, while I am confident that our team will shortly be recognized as a 501(c)(3) nonprofit corporation, our filings are still in progress and therefore I may have overlooked something. I will attempt to edit this report in the future to add or correct missed information, but I will not try to keep this document current with all applicable State and Federal laws and codes. Again, use this information as a starting point or for reference, but research everything carefully and consult with legal, insurance, and tax professionals before taking action.
FRC team 228, Gus Robotics, has been in existence since 1998 as a high school sanctioned club/team. Several issues have developed which lead to our decision to form the team into a non-stock nonprofit corporation:
- Our long-standing faculty advisor is preparing to retire. This advisor and the team have been unsuccessfully searching for a teacher to take over these duties. Several posting for this job through the Board of Education have resulted in no prospects. Without a supportive liaison between the school system and BOE we are concerned that school funding, considered to be one of our corporate sponsors, could be compromised.
- In the team’s history we have moved between schools twice. The city and our team are comprised of three high schools; two local high schools and a state run regional vocational-technical high school. During the last move, one of our corporate sponsors donated over $1000 by paying the rigging costs to move our mill and lathe between the schools. This cost may easily fall back on the team if there is ever a future third move.
- As mentioned above, the team owns its mill and lathe, and has purchased several thousand dollars worth of other computers, tooling and supplies. These were not purchased with BOE funds and are not BOE assets. The team needs to insure these assets and protect them from potential liability.
- Several years ago, the team lost a major corporate sponsor when the company closed its facilities in the state. This sponsor at the time was supplying one-third of the team’s annual budget. The following years were very difficult, and it has been nearly impossible to find a corporate sponsor to replace the lost income. Nonprofit tax status should make it easier to attract corporate sponsors.
- Nonprofit tax status will allow the team to seek charitable grants. Many grants are available only to recognized 501(c)(3) nonprofits.
- The team has an aggressive fundraising program involving food concessions at local agricultural fairs. The team has begun to realize some very nice profits from this fundraising. We can make more money with nonprofit status because many fairs offer vendor space at a discount to nonprofits. Also, the team’s budget and revenue is growing through these fundraisers. This money needs to be protected. There are numerous stories in the news about mentors, volunteers, and officers of PTO’s, youth sports leagues, etc. stealing that group’s proceeds. Operating as a nonprofit corporation should lessen the liability of a loss in this way.
- Being a somewhat conservative engineering type, I’d like to increase the liability protection for the team.
What is a 501(c)(3)?
501(c)(3) refers to the section of the federal tax codes which applies to nonprofit corporations, trusts, and unincorporated associations. Churches and schools are also nonprofits, but they a covered under different sections of the federal tax code. Local public schools are tax exempt, but may not be recognized as a nonprofit by the IRS.
To qualify as a nonprofit, the group must meet two basic tests.
- How the group is organized; You must be organized as a corporation (including a limited liability corporation), a trust, or an unincorporated association. Corporations will operate under articles of incorporation or articles of organization, trusts under a trust agreement or declaration of trust, and unincorporated associations under a constitution or articles of association.
- How the group operates; The organizing documents (articles of incorporation, bylaws, etc) must limit the organization’s purpose(s) and permanently dedicate its assets to exempt purposes. Several key prohibited activities include;
- Absolutely never engaging in the political campaigns of candidates for local, county, state, and federal office.
- Must never use its assets or earnings to unjustly enrich the board members, directors, officers, management employees (actually any employees), or other insiders of the organization.
- Must not further non-exempt purposes (such as purposes that benefit private interests) more than insubstantially.
- Must not operate for the primary purpose of conducting trade or business that is not related to your exempt purpose(s).
- Restrict legislative activities.
I strongly recommend that you read the IRS information package i1023.pdf, please visit the IRS web site for the latest copy of this document.
In most cases a robotics team would be eligible for nonprofit status as an educational corporation or organization. There are other types of nonprofits, and your bylaws, goals, and mission statement may make you a better candidate as a different type of nonprofit. Please review your bylaws, articles of incorporation, and other documents with an attorney to see which type of a nonprofit your group might qualify as.
Why a Corporation?
The group can be formed as a corporation, trust, or unincorporated association. If you are unsure of which would be right for your group, consult with a lawyer, insurance agent, and/or accountant. I feel that incorporating is the best choice for our group as a robotics team. It should provide the best protection to our members, mentors, officers, and directors. There is a common misconception that becoming a corporation is an expensive ordeal. In most states forming a corporation is fairly simple and inexpensive.
I strongly recommend that you research the requirements to incorporate in your state. They vary from state to state.
Forming the Corporation
In the State of Connecticut, two primary documents need to be filed with the Secretary of the States office.
- Articles (Certificate) of Incorporation – The filing fee is $40 for non-stock corporations. The form needs six key pieces of information.
- The name of the corporation.
- Statement that the corporation shall be nonprofit and shall not issue shares of stock or distributions.
- Whether the corporation will have members and classes of membership.
- The appointment of a registered agent.
- List the nature of the activities to be conducted or the purposes to be promoted by the corporation.
- Other supporting information which satisfies the IRS requirements on approved uses of proceeds and distribution of assets upon dissolving the nonprofit corporation.
- Organization and First Report – The filing fee is $25 for non-stock corporations. This form needs six pieces of information.
- The name of the corporation.
- The date of the organizing meeting.
- The address of principal office and mailing address.
- The name, title, address of residence, and business address of the elected officers.
- The name, address of residence, and business address of the elected or appointed directors.
- The document needs to be executed by an officer of the corporation.
- Other documents which might need to be filed to start or later in your groups life may include. Change of registered agent, change of name, change of business address, reservation of a corporate name, dissolution of the corporation, etc. Most have small (less than $80) filing fees. The registered agent is the individual the state will send all correspondence to. Since changing registered agents requires a filing with the state, you should find a mentor who will be with the team for the foreseeable future. The incorporators can be some of the senior mentors on the team, or whomever your attorney recommends should act as your incorporators. Most states will also require the corporation to file an annual report. This report will be sent to the registered agent. Reporting will be covered later in this document.
The description of the nature of the corporation’s activities and the other supporting information required by the Connecticut forms are pulled from the teams bylaws and are the required tests sought by the state and IRS to proved tax exempt purposes. I my team’s case, a mission statement that reflects that we are forming as an educational corporation, and language which proves that the corporation will meet the IRS tests for tax exemption. I have attached a copy of the team’s Articles of Incorporation with any personal information removed as a guideline.
Please research forming corporations and specifically nonprofit corporations in your state. The filings will be similar to those shown here, but state laws vary. The Secretary of the States office should generally be the correct entity to deal with when forming corporations. The forms needed should be available through that office or on their web site. You may be required to submit supporting documents, such as an executed copy of your bylaws, and minutes from your organizational meeting where the bylaws were adopted, officers and directors were appointed or elected. Directors, officers, incorporators, and the registered agent may also be required to be residents of the state you are incorporating in.
Please consult with an attorney before filing your corporate papers and bylaws. An attorney should review the documents and he/she may recommend additions or changes to your documents to further reinforce your nonprofit claims, further protect your members and officers, or catch potential errors.
Copies of the State of Connecticut’s Certificate of Incorporation and Organization & First Report forms are attached. Please check at the Secretary of the States web site for newer versions of this form. Check with your state to find the correct forms to be filed.
As will be restated throughout this document, please seek professional help. Lawyers, accountants, and insurance specialists are all important for their knowledge.
Lawyers can be expensive, but that is not necessarily the case in forming nonprofits. Most lawyers are required by the Bar Association to provide a certain amount of Pro Bono or free work each year or at the start of their careers. Simply call law firms in your area and explain the nature of your business in forming a nonprofit corporation to provide technical educational to children. You should be able to find a legal firm willing to take your case rather easily. If not, contact your state Bar Association and/or Universities with Law Schools in your area. Either should be able to direct you to a source of Pro Bono legal services. Law students may wish to help to get some needed practice. In our case, my wife helped form a nonprofit for a local youth civic orchestra. The attorney who helped with that corporation agreed to help with our nonprofit application.
Accountants are important resources too. They are usually more familiar with the federal tax codes than even some lawyers. Leave the legal questions to the lawyers, but help in filling out the IRS forms is perfect for accountants. Again, check with local accounting firms, you may find a source of Pro Bono work. Also check with local universities and state CPA associations for sources of Pro Bono work. Since our robot teams are generally small, the amount of worked required is equally small, finding low cost accounting services should not be too difficult. Also, remember that even after your corporation is granted tax exemption, you will need to continue to file returns and reports with the IRS. I will discuss those later, but having a good relationship with an accountant is important.
Once your corporation is formed you will need to keep accurate financial records. State laws may require the corporation to file a financial statement or report as part of their annual reporting requirements. The corporation may also be required to have their financial records audited on a regular basis. This would be accomplished by a CPA, and as a small nonprofit, you may be able to get the audit done Pro Bono or for a small fee since the corporation’s records shouldn’t be very complicated. Regular audits of the team’s financial records are important because it is the best way to uncover embezzlement or other misuse of corporate funds.
Then there’s insurance. Once you form a corporation, you’ll probably need at least general liability insurance to protect your corporation. If you have assets like machines and tools, you’ll probably want property coverage for theft and damages. Other coverage you might consider is a drayage rider for tools and equipment that are moved off site, Directors and Officers coverage to protect them and the corporation as they carry out the duties of office, fidelity coverage to protect the corporation from improprieties by its officers, and if you use parent and mentor vehicles for team functions you might want to consider Non-owned vehicle coverage. The only way to know exactly what the corporation needs is to consult with an insurance agent or broker preferably one that specializes in corporate or nonprofit insurance. There is excellent information on insurance on the ctnonprofits.org web site.
We are currently still soliciting insurance quotes, but are anticipating the team’s insurance needs will cost between $500 and $800 annually. Do not ignore insurance and don’t let insurance costs stop the team from forming a nonprofit corporation. Talk to your legal council and the insurance experts you might find that your mentors and team may be exposed to greater legal liability by not being incorporated and insured. In our very litigious society your team is much better off being properly protected. Also, even though we have been a school sanctioned club/team, we have had one issue at a FRC Regional where a student was injured. The school’s insurance would cover the emergency room visit, but not the ambulance ride. Don’t assume everything is covered under the school’s insurance. Some school systems may also require teams to carry the general liability insurance policy. As a former scout leader, I was responsible for providing Boy Scouts of America’s proof of insurance to the school system each year.
One final note: While you will find professionals who are willing to work Pro Bono, do not waste their time. Do your research and prepare everything you can without the pro’s help. When I met with the attorney I had prepared the team’s bylaws, articles of incorporation, and prepared a list of questions I needed answers to. I gave this information to the attorney in advance and let him review the documents and research my questions at his leisure. I met with the attorney when he was ready and we had everything ready to file with the state in one hour. When I’m ready to file the IRS application, I will complete everything I can, prepare a list of questions, and have the accountant and attorney review the application and research my questions. One more hour with the attorney and accountant should be all that’s needed to file with the IRS.
I have included a copy of our team’s bylaws. This is one of the key documents for proving to the IRS and the state that your corporation is in fact operating as a nonprofit. Bylaws for nonprofits are public documents so look up bylaws for several nonprofits in your state on the web. State laws vary so please review local nonprofit bylaws for any state specific language. Do not reinvent the wheel! Plagiarism is allowed when crafting your bylaws. Start with a set of bylaws that are close to what you need and modify them to meet your specific needs. I will not review every article of the team bylaws but I will touch on some of the important points:
- Mission Statement – This is where the team clearly establishes that it is going to operate as an educational organization. One of the allowed nonprofit organizations.
- Purpose – This section must clearing set forth the team’s purpose(s) and show that the team is operating in accordance with IRS and state laws and codes.
- Restriction on Activities – This section may be required in your state.
- Members – If your corporation is going to have members this article should cover membership issues.
- Member Meetings – This article should detail how and when meetings are to be held and conducted.
- Board of Directors – A corporation should have a Board of Directors to manage the business of the corporation. Directors can be appointed or elected. In our case the Directors are also the Officers. If the corporation was to ever increase to the point where more control is needed we can easily amend our bylaws to make the Directors and Officers separate functions. We didn’t want the Board to get too large. Remember if you create positions they must be filled. Keep the size of your Board and Officers manageable and obtainable. Also keep your Board of Directors an odd number so there cannot be tie votes. As a small nonprofit, we have chosen to not pay salaries to Directors, we’re a volunteer organization.
- Officers – Generally, only two or three officers are needed in the corporation. A president, secretary, and often a treasurer. We also decided to have a vice president and three student officers, a captain and two co-captains; we felt it was important that the students actively participated in the running of this corporation. Remember, our officers double as our directors but that can change in the future, and keep the number of officers odd to avoid tie votes. Like directors, officers are volunteers they will not be compensated in our corporation.
- Departments – Some teams call them sub-teams. I felt it would help to add a brief description of each department and what they are responsible for. This can also help the IRS confirm that you are operating within the laws of a nonprofit corporation.
- Prohibition of Distributions – This is a very important section! This covers the requirements of the IRS that directors, officers, employees, and members cannot receive unreasonable benefits from the corporation. Nonprofit corporations can have paid staff and employees, but the corporation must ensure that the level of compensation is comparable with equivalent jobs in other corporations. Most robot teams are volunteer organizations so we won’t be paying salaries, but the language is needed to satisfy the IRS. Also, if the nonprofit corporation ever dissolves, the IRS needs to see language that clearly states the assets of the corporation will be distributed to other nonprofits. If the corporation doesn’t distribute the assets then the courts will distribute the assets to other nonprofits.
- Bills, Notes, Etc. – No one person or group of persons can spend the team’s money or incur debt on the team without the authorization of the Board of Directors.
- Indemnification and Reimbursement – This article protects the officers, directors, members, and employees of the corporation if they are acting in the best interests of and the bylaws of the corporation, and following all applicable state laws.
- Waiver of Notice – Most states require a waiver of notice clause. For a corporate meeting to be legal, it must have proper notification as set forth in the bylaws. A meeting can be called without proper notification if a waiver of notice is used and signed by the required directors, officers, or members. You can find sample Waiver of Notice forms on the web.
- Books and Records – The Corporation must keep certain records. Accounting records, minutes of meetings (including any waiver of notices), reports by committees, asset records, membership and employee records, etc. Consult with the professionals to determine exactly what records your team needs to keep.
- Fiscal Year – Every corporation runs on a fiscal year. The team needs to determine if the fiscal year should be based on the calendar year or a different twelve month cycle. Many corporations run on a July to June fiscal year. Also give the Board the ability to change the fiscal year if it needs to.
- Amendments – From time to time the bylaws will need to be amended. Even with all my research and a lawyer’s review, I have already identified the need for one minor amendment to the bylaws to better suit our team regarding election of officers. Spell out how the bylaws can be amended, and how the amendments are added to the bylaws.
Organization Meeting and First Report
The organizational meeting is where you begin the legal process of establishing the corporation. Document this meeting with minutes, and attendance sheets because this is the birth date of your corporation. Some of the key issues that need to be addressed at this meeting are:
- Adopt the form to be used for recording minutes of corporate meetings.
- Adopt the bylaws of the corporation.
- Elect or appoint your Directors and Officers.
- Authorize the application for federal IRS tax exempt status.
- Authorize the application to the United States Postal Service for nonprofit standard class bulk mailing rates.
- Authorize the establishment of a corporate bank account.
- Authorize the payment of organizing expenses and filing fees.
- Authorize the establishment of a corporate ledger and other appropriate corporate records.
- Adopt a fiscal year for the corporation.
- Designate chairpersons and members of committees that the corporation wants to establish immediately.
Ctnonprofits.org has some excellent information on organizational meetings on their web site. Some of the items may not be required by your group. We are not currently looking at bulk mailing rates since we don’t send out much mail.
Filing the Corporate Papers
At this point the corporation should be ready to begin the filing process. The Articles (Certificate) of Incorporation has been created and reviewed. The bylaws have been created, reviewed and adopted. Your Directors and Officers are in place. The Organization and First Report, or similar document, can be filled out. You can then submit your Certificate of Incorporation and Organization and First Report with the state. If all of your work was done carefully and reviewed by an attorney, the team should shortly be recognized by your state as a corporate entity. The next step is to begin the application process with the IRS.
Employer Identification Number
The next step is to get your tax identification number. For an individual it is known as a tax ID number (ITIN), but the corporation could have the potential to hire employees, so it is known as an employer ID number (EIN). The corporation will need to fill out and file an IRS form number SS-4 Application for Employer Identification Number. It is a one page form and instructions are available at the IRS web site. Consult with an accountant if you have questions filling out this form. If you file online or by fax you should receive your EIN in a few days. If you mail it in, the IRS estimates 4-6 weeks to receive your EIN. A couple of comments on certain lines of the form are;
- Line 3 “executor, administrator, trustee”, this should probably be the same person that was listed as the corporation’s registered agent on your Articles of Incorporation.
- Line 7a “principal officer”, list one of the newly elected officers, president, secretary, or treasurer.
- Line 9a “type of entity”, if you’re following our lead and forming a nonprofit educational corporation, then check the “other nonprofit organization” box, and fill in the “specify type” as educational corporation.
- Line 10 “reason for applying” check the “started new business” box and “specify type” as non-stock nonprofit educational corporation.
- Line “date business started” should be the date set forth on your Articles of Incorporation.
Corporate Bank Account
Upon receiving your EIN you should now have everything the team needs to establish its corporate bank account. Do some research, some banks give favorable rates and reduced or no fees to nonprofits. One key piece of protection that I would recommend is to establish the account(s) to require at least two signatures for withdrawals and checks drawn on the account. In our case the treasurer and the president will need to both sign. Our bylaws clearly give the president the responsibility for paying all debts at the approval of the Board of Directors, and the treasurer maintains the financial records. Therefore the president and treasurer are the likely names to be on the account. You can also add the vice-president or another officer if you want to be able to conduct business when the president or treasurer are unavailable and the business can’t wait for their return. By requiring two signatures, you will greatly reduce the risk of an officer embezzling funds from the corporation.
Recognition of Exemption
Once your corporation has received its EIN it is then recognized as a potential taxable entity to the IRS. The final step is to prepare and submit your form 1023 package Recognition for Exemption under Section 501(c)(3) of the Internal Revenue Service Code. This will probably be the most tedious task of the whole process, and it is the most costly part of the process. If your team averages gross receipts of less than $10,000 annually over a four year period, then your filing fee will be $300. If your team averages gross receipts greater than $10,000 annually over a four year period, then your filing fee will be $750. The four year period includes past years and expected receipts for the coming years, so if your yearly receipts have been under the $10,000 level but your funds are growing and will likely top $10,000 in the near future pay the higher fee.
This fee is subject to change! The IRS form 1023 tells filers to check on the IRS web site before filing to see if the fee has changed.
The form 1023 is a 12 page application, with many additional supporting documents, and an additional 14 pages of 8 schedules. Most schedules will not apply to robotics teams, but please meet with your tax consultant and lawyer when preparing this document. At the end of the document is a form 1023 Checklist. Follow this checklist carefully. Your application can easily reach 100 pages. If you do not place everything in the correct order, and execute everything correctly, this is the quickest way to delay or cause problems with your whole 501(c)(3) application. Your organization may also have to include form 2848 Power of Attorney and Declaration of Representative, form 8821 Tax Information Authorization, form 5768 Election/Revocation of Election by an Eligible Section 501(c)(3) Organization To Make Expenditures To Influence Legislation, and/or form 8718 User Fee for Exempt Organization Determination Letter Request in your application to the IRS. Consult with your tax professional.
I will not go into detail on completing the 1023 form, since you should be fairly knowledgeable with the whole process by this point, and you should have found knowledgeable professional help to assist with completion of the task. We are currently completing our 1023 for submission. If I find anything unusual or noteworthy, I will add it to this document.
The IRS indicates that if your 1023 has no problems or missing information, your team should receive a determination from the IRS on exemption in about 8 weeks. If there is missing information, this can delay the process until you supply the IRS with the corrected or missing information. If your case for exemption is weak, and must be reviewed carefully by an agent, the determination may take as long as 8 months.
Congratulations your team has been granted tax exempt status as a 501(c)(3) nonprofit corporation! The corporation’s work is not finished. The organization will need to file several reports and filings with the state and the IRS. Some of the requirements are:
- Annual Corporate Report – This is usually required by the state your corporation was formed in. It may be a simple document which lists corporation address and Directors and Officers information, but may also require annual financial report, auditor’s report, and other information. Research what is needed in your state.
- Quarterly or Annual State Tax Returns – Some states will require tax returns. Even though your organization is tax exempt, you may be required to file merely as a reaffirmation that your corporation is still functioning and continues to meet the regulations applied to nonprofit corporations. Research what is needed in your state.
- IRS form 941 Employers Quarterly Federal Tax Return – If your corporation has paid employees this will be a required filing. Even if you do not have paid employees, some web sites have recommended filing a quarterly return anyway, especially for new nonprofits, better to be safe than sorry. Research your requirements with a tax professional.
- IRS form 940 Employer’s Annual Federal Unemployment (FUTA) Tax Return – Even if you do not have paid employees you must file this annual tax return. One of the first pieces of information on this form is for type of return, and one of the choices is “No payments to employees in YYYY”. Your corporation is recognized as a tax exempt entity, but employee wages are taxable. Research your requirements with a tax professional.
- IRS form 990 or 990EZ Return of Organization Exempt From Income Tax (and short from and schedules) – Yes, even though your group has been recognized by the IRS as exempt, you must still file a tax return each year. Certain income may still be taxable, what the IRS calls Unrelated Business Taxable Income. One source is income from advertising on your website like GoogleAds or advertising space sold in an event program to cover printing costs. Consult with your tax professional on what is unrelated taxable income.
- IRS form W2 – If your corporation pays wages or benefits to employees, officers, and directors, you will need to file W2 forms with the IRS and send copies to your paid employees for their federal tax returns. Research your requirements and how to withhold employee taxes, workman compensation, and other liabilities with you tax professional.
This may not be a complete list of annual filings and reports. Consult with your tax professionals and attorney to ensure that your corporation meets its reporting/filing requirements. Nothing would be worse than completing the work to achieve 501(c)(3) nonprofit exemption status, then running into trouble or losing your nonprofit status because the corporation failed to meet its reporting/filing responsibilities.
Hopefully, the details I have provided will help demystify some of the misconceptions about forming a 501(c)(3) nonprofit corporation for your robotics team. I have seen some statements on the web that people have completed the entire process without professional help. It is certainly possible if you are careful and thorough in approaching this task, but I would always consult with professionals to make sure I am doing everything needed to be successful. This is a somewhat time consuming process, about three to six month of research learning the process, crafting the bylaws, articles of incorporation, and other documents. Reviewing the documents with professionals and completing the filings are going much faster now. That will allow me to get back to the important part of mentoring on a robotics team, building robots.