Three other types of non-profit corporation in the US.

in steemalliance •  26 days ago

Yesterday I wrote a lot about starting a 501(c)(3) charitable nonprofit. If you're in the US, that's probably what you think about when you hear the word "nonprofit:" an organization with a public purpose which, when you donate to it, you can deduct that money from your income tax. But a 501(c)(3) organization is only one of three types of nonprofit corporations in the US; it offers the most tax benefits but also has by far the most onerous requirements. Today I'm going to talk about three others, in the hopes of once again providing more information for the people who end up proposing and evaluating structures for @steemalliance.

As usual, this is limited by my expertise which is exclusively based in the US and primarily based on 501(c)(3) organizational formation. Non-US options may be better. The goal here is to communicate what I know for others to use in their research, not to be complete.

The "standard" non-profit corporation

While the public image of a nonprofit is a large 501(c)(3), the actual basic nonprofit is much, much simpler. The US has a very weird system where corporations are governed at the state level, while taxability is largely governed at the federal level. Every corporation, including every nonprofit corporation, must be chartered in a state, but the state doesn't do tax exemptions. So every non-profit starts off as a "standard" nonprofit, and many of them stay there, while others go on to become 501(c)(3) organizations.

A standard nonprofit is organized along similar lines as a class C equity corporation, except without the shareholders. While it varies from state to state, basically all you need to incorporate is three unrelated board members who serve as officers, a will to do it, and a filing fee. Having done this part before, it's going to take me longer to write this post than it would to incorporate a new standard nonprofit.

A standard nonprofit is just a corporation without an equity structure; it is treated as owning itself, it has no shareholders and does not return profit to anyone. Beyond that, every path that's open to an equity corporation is open to this type of nonprofit. While these organizations are not exempt from corporate income tax on any income-generating activities, gifts to them remain generally non-taxable, but do not provide any tax benefit for the donor.

(None of this is tax advice anyway, but I cannot find a solid confirming source for gifts being non-taxable right now, or whether maximums apply. This is how we were told it works. We never filed a non-exempt return. My best guess tonight is that regular gift tax rules would apply, which is not an issue for gifts under $15,000/year but would be for something like Steemit funding SA. Corporate gift tax rules are... well, just don't.)

The compliance burden for a standard nonprofit is similar to that of a similar-sized equity corporation; they have similar filing requirements and do not face the same charitable activities restrictions of a 501(c)(3). This is a much simpler way to establish a corporation with a collective purpose that is not seeking profit than going all the way to 501(c)(3).

Fiscal Sponsors

When a nonprofit in the class above (or any other person, group, or corporation) wants to be able to take tax-deductible donations for its mission, it sometimes uses a fiscal sponsor. The fiscal sponsor is an established 501(c)(3) organization which takes donations and administrates them on behalf of the operating organization, usually in return for a percentage fee. This is most commonly used by organizations in the process of filing for exemptions; we used as our fiscal sponsor an established nonprofit whose mission was supporting local arts organizations. They were able to take tax-deductible donations on our behalf and redistribute them to us.

There is somewhat larger compliance burden, primarily on the fiscal sponsor organization. Not only do they issue all of the tax paperwork, they are required to maintain oversight on whether funds passed through a fiscal sponsorship are used for the sponsor organization's declared mission. This generally is reflected in the sponsor's cut of the donation rather than in increased compliance burden for the recipient.

While this is usually a temporary solution, there are organizations which are comfortable with a fiscal sponsor handling their compliance and continue to use them indefinitely. It is often possible to fund a somewhat broader range of activities with deductible gifts through fiscal sponsorship than it would be with a traditional 501(c)(3), because the eligible activity does not need to be the only activity of the recipient organization. You can think of this as a streamlined way of allowing donors to issue their own grants, if you like.

Exempt but non-deductible nonprofits

There's another, looser category of federally exempt nonprofits under other parts of chapter 501 that do not offer deductible donations but are considered exempt from income and sales taxes. These have a fairly similar application and filing burden to a 501(c)(3) but allow broader purpose and have somewhat easier rules to follow. The most applicable to Steem Alliance (or potentially an independent Steem-related project) is likely the 501(c)(6) Business League, which joins together contributions from businesses in an industry to promote their common interests.

This would essentially be a Steem trade organization, but since we are all, in a sense, businesses, we could all choose to be part of it while it pursued our common interests.


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Again, very helpful.

I trust you can remind the new WorkingGroupV.2of some of these issues?

I guess it is generally useful for all despite the facts I don't come from USA or live in USA

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I hope they are taking this into consideration to avoid bumps in the future road. My concern is that regulators are always dying to make example of those trying to live on the edge of interpretation and practice which would make any blockchain type initiative a target. Thanks for your efforts!

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