TWEETS OF THE WEEK

Nonprofit Tweets of the Week – August 29, 2014

Equality For Woman sign on a virtual screen

Last Tuesday was Women’s Equality Day. Have a listen to Nellie McKay‘s Mother of Pearl while perusing our curated nonprofit tweets of the week:

  • Women’s Foundation: Women #vote in higher percentages than men, but are still underrepresented in public office: http://bit.ly/1nSIHJE
  • CalNonprofits: We’re in today’s Huffington Post! Read about our new economic impact report #CausesCount & share your comments! Huffington Post
  • Jan Masaoka: Weighing in on #Ferguson @CalNonprofits: Nonprofit Values and the Events in Ferguson CalNonprofits
  • Cynthia Choi: In response to #Ferguson philanthropy groups call on the sector to work together http://bit.ly/1lm2vus @aapip
  • Sustainable Law Group: #IRS releases recommendations for taxing unrelated earned income for #nonprofits Lexology #tax #charity
  • Gene: Stay on that Nonprofit Board! http://bit.ly/1qcgnXX – @EugeneFram
  • Catalytic Women: 5 common traps of #philanthropy: @BridgespanGroup tells how we can avoid common mistakes in giving http://ow.ly/AN1DX
  • GuideStar USA: #NPONews you can use: how will @alsassociation spend ice bucket millions? http://npo.gs/ALSAssoc http://npo.gs/FortuneALS
  • Jeremiah Owyang: NEW BLOG POST: Cold Hard Facts on the Ice Bucket Challenge #icebucketchallenge Web-Strategist
  • Gene: I accepted the ALS #IceBucketChallenge from @KenatSukis and donated to a veterans org – see why here
FISCAL SPONSORSHIP IRS & FEDERAL TAX ISSUES STARTING A NONPROFIT

Nonprofit Limited Liability Company

LLCA limited liability company (LLC) is a legal form of enterprise, owned by one or more members, that may be organized and operated for a wide variety of purposes, including charitable purposes. One of the major advantages of an LLC is the limited liability protection it offers to its members. Members are generally not liable for the debts and obligations of the LLC except to the extent of their investments in the LLC.

While technically, there is no such thing as a nonprofit LLC, there are tax-exempt LLCs, and these entities are commonly referred to as “nonprofit limited liability companies” or “nonprofit LLCs”. For the purposes of this article, I’ll refer only to tax-exempt LLCs that are organized and operated for charitable purposes.

 

Federal Tax-Exemption

An LLC may be recognized by the IRS as tax-exempt for federal income tax purposes in any of these scenarios:

  1. The LLC may apply for recognition of exemption under Internal Revenue Code 501(c)(3) by filing Form 1023. See IRS Website.
  2. The LLC may be a disregarded entity for federal income tax purposes and take on the tax characteristics of its sole member, a 501(c)(3) organization.
  3. The LLC may be considered a pass-through entity for federal income tax purposes and accordingly its income (and expenses) will be attributed to its members, all of which are 501(c)(3) organizations.

Generally, a domestic LLC exempt under Section 501(c)(3) of the Internal Revenue Code will be eligible to receive (a) deductible charitable contributions and (b) private foundation grants without the need for expenditure responsibility. See IRS Notice 2012-52.

See Instructions for Limited Liability Company Reference Guide Sheet (IRS).

 

State Tax-Exemption

While an LLC may be recognized by the IRS as tax-exempt for federal income tax purposes, this does not necessarily mean that it will be recognized as exempt from state income taxes or state property taxes. In California, an LLC (other than one electing to be taxed as a corporation) will be recognized as tax-exempt for state income and franchise tax purposes only if it is qualifies as a title-holding company under Revenue and Taxation Code Section 23701(h) or 23701(x). it will be recognized as exempt from state property taxes if it separately qualifies under the welfare exemption.

See Limited Liability Companies and Tax-Exempt Status (Franchise Tax Board); Limited Liability Companies As Tax-Exempt Organizations; Limited Liability Companies and Qualification for the Welfare Exemption.

 

Use of an LLC by a Nonprofit

A nonprofit may want to establish and own an LLC for multiple reasons, including:

  1. To protect itself from the risks and liabilities associated with the assets or activities of the LLC. This isolation-of-risk strategy may be particularly appropriate where the LLC’s assets (e.g., real property with environmental risks) and/or activities (e.g., adventure camps) have a higher risk profile than the nonprofit’s assets and activities.
  2. To operate a business that is not substantially related to advancing its exempt purpose without exposing itself to revocation of its 501(c)(3) exempt status. This strategy is commonly employed where a nonprofit desires to carry on an unrelated business that is substantial in scope and size. In this case, the LLC will not be tax-exempt.
  3. To operate a joint venture with one or more other entities. The LLC housing the joint venture may be tax-exempt if all of its members are tax-exempt or taxable if its members consist of both nonprofit and for-profit organizations.

See Single Member LLCs: The flexibility of limited liability companies is one asset for nonprofits (Alliance for Children & Families Magazine).

 

Fiscal Sponsorship using an LLC (Model L)

A nonprofit fiscal sponsor may want to establish and own an LLC to protect itself from the risks and liabilities associated with the assets or activities of the sponsored project. If appropriately structured, an LLC solely owned by a fiscal sponsor may be considered tax-exempt as a disregarded entity and seek out its own deductible charitable contributions and private foundation grants, as described above.

The Model L fiscal sponsorship strategy may be worthy of consideration under a couple of circumstances:

  1. Where comprehensive fiscal sponsorship (Model A) is being considered but the risks and liabilities associated with a new project are of significant concern to the fiscal sponsor.
  2. Where an existing nonprofit wants to dissolve and transfer its programs to a fiscal sponsor but the fiscal sponsor is concerned about potential successor liability.

Issues

Among the issues for fiscal sponsors to be aware of before setting up a Model L fiscal sponsorship:

  1. The activities of the LLC may be attributed to the fiscal sponsor for tax purposes. If the LLC engages in substantial lobbying (relative to the fiscal sponsor’s limits) or prohibited political intervention activities, the fiscal sponsor’s 501(c)(3) status may be jeopardized.  And the LLC’s unrelated business activities may result in unrelated business taxable income to the fiscal sponsor.
  2. The LLC is itself a charitable asset owned by the fiscal sponsor impressed with a charitable trust. Accordingly, the board members of the fiscal sponsor have a duty to protect such asset from misuse. The fiscal sponsor’s selection of a manager to manage the LLC should accordingly be made with reasonable care (query whether it would be prudent to eliminate a manager’s fiduciary duties to the fiscal sponsor, if possible). The fiscal sponsor itself will likely not want to be the manager in order to mitigate against the possibility of ascending liability.
  3. The selection of the state in which the LLC is to be organized.
  4. The LLC may need to be adequately capitalized to mitigate against the risks of veil piercing and ascending liability.
  5. There may be different ways for the fiscal sponsor to be paid for such arrangement, including through fees or distributions to the sole member. However, the payments should be clearly defined in a written agreement to mitigate against the risks of veil piercing and ascending liability.
  6. The LLC will not be disregarded for employment tax purposes and will have all of the responsibilities of an employer to the extent it has any employees.

See The Use of LLCs in Fiscal Sponsorship – A New Model (Taxation of Exempts); Successor Liability in a Model A Fiscal Sponsorship (Nonprofit Law Matters, Adler & Colvin).

 

Low-profit Limited Liability Companies (L3Cs)

An L3C is a special form of LLC that significantly furthers the accomplishment of one or more charitable and/or educational purposes. Generally, an L3C can be used in place of a traditional LLC in any of the scenarios above. See our earlier posts on the L3C.

 

TWEETS OF THE WEEK

Nonprofit Tweets of the Week – August 22, 2014

Family

Spent a wonderful week with family (including my two nieces pictured above) in beautiful Vancouver. Have a listen to Vancouver-based Marianas Trench’s Celebrity Status while perusing our curated nonprofit tweets of the week:

  • Emily Chan: Charities Seek Their Own Ice Bucket @WSJ http://on.wsj.com/1pXPCFL | >1000% increase in donations to @alsassociation http://bit.ly/1AuN9Y3
  • La Piana Consulting: How-tos, case studies & more on nonprofit collaboration & strategic restructuring, here http://ow.ly/ArDST & here http://ow.ly/ArEfx
  • C. Garber Siegrist: Interesting resource: Research, Reports, and Data on the Nonprofit Sector http://ow.ly/AxtWI via @NatlCouncilNPs
  • Gene: California charities – expect more enforcement of registration & reporting requirements – AB 2077 status http://www.legtrack.com/bill.html?bill=201320140AB2077
  • Council of Nonprofits: Let’s bust some myths re: compensation in the #nonprofit world http://buff.ly/1pHPJWD Yes, you can pay #nonprofit employees a bonus [Ed. But be careful - if the possibility of bonuses has not been agreed upon as consideration of employment, payment of a bonus may be a possible violation of charitable trust laws.]
  • Gene: Privacy and Data Security for Your Nonprofit? Venable
  • Law for Change: You asked: Is $ raised through a #fiscalsponsor by an LLC for charitable purposes taxed as income? Answer: http://law4ch.org/1tmdi85 #Nonprofit
  • Stanford Social Innovation Review: A new paradigm playing out across the world isn’t about profit or #nonprofit, but about open or closed: http://ow.ly/AvmTo #socent
  • Social Enterprise Alliance/SF Bay Area: We feel so trendy: Companies with Benefits  New Yorker
  • The Atlantic: The wonderful, weird economy of Burning Man http://theatln.tc/YoffGx
TWEETS OF THE WEEK

Nonprofit Tweets of the Week – August 15, 2014

ice

Sad week: Ferguson, Robin Williams … Have a listen to Friend Like Me while perusing our curated nonprofit tweets of the week:

  • Rick Cohen: Missing in Action in #Ferguson: Key Government Leaders Don’t Show up – NPQ – Nonprofit Quarterly
  • Independent Sector: Robin Williams spread joy off-screen through charity work  … [LA Times] #RobinWilliams pic.twitter.com/NlFFCI8VhB
  • Nonprofit Quarterly: The #IceBucketChallenge: What can #nonprofits take away from this social media trend? http://ow.ly/Alhdm
  • Lucy Marcus: Boardroom 101: What do directors do? http://bit.ly/wdbdtw Above Board with Lucy Marcus for @BBC_Capital #corpgov
  • Gene: Any IRS moratorium on enforcing electioneering restrictions against churches lifted, but … [see below] JD Supra
  • Gene: Moratorium on IRS investigations of tax-exempts during Congress’s probe of IRS audits of conservative nonprofits [is still ongoing] JD Supra
  • National Council of Nonprofits: Charitable registration legalities (e.g. mysteries) Resources updated! http://buff.ly/1kP0KWu
  • Alliance Magazine: This is COMMON SENSE philanthropy: a response to ‘Strategic Philanthropy for a Complex World’ http://ow.ly/AeBvo
  • HuffPost Impact: 10 reasons why investing in girls’ education is an absolute must http://huff.to/1pMgW9M #globalmotherhood #jnj
TWEETS OF THE WEEK

Nonprofit Tweets of the Week – August 8, 2014

Merger

I’ll be on Nonprofit Radio today talking with host Tony Martignetti about nonprofit collaborations. Hope you catch us live (10 am PT / 1 pm ET) or later on iTunes. Have a listen to Michael Winslow (Police Academy sound effects dude) performing Led Zeppelin’s Whole Lotta Love while perusing our curated nonprofit tweets of the week:

  • USD Nonprofit Institute: USD and CalNonprofits release first authoritative study on the economic impact of CA NPs http://ow.ly/zM0o3 #USDSOLES #CausesCount
  • Erin Bradrick: Nonprofits generate 15% of California’s GDP, 4th largest industry http://shar.es/LFVac @calnonprofits
  • Robert Egger: GREAT video from @CalNonprofits detailing the economic impact of #nonprofits (including $40B in out-of-state money) http://ow.ly/zVNAY
  • Kim Keel: Can your #NPO answer these questions? #duediligence @BridgespanGroup [How to Research a Nonprofit’s Organization and Operations]
  • Nonprofit Quarterly: How the #nonprofit sector better serve young professionals? http://ow.ly/A1sxe #millennials
  • For Purpose Law: Distinguishing a Board’s Steering and Rowing Work – NPQ – Nonprofit Quarterly
  • Nonprofit Quarterly: A free guide for executive #leadership for #nonprofits http://hubs.ly/y037dh0
  • Gene: How Does a Nonprofit Board Know When a CEO Is ‘Just Minding the Store’? http://huff.to/1zLs0Za @eugenefram
  • Harvard Business Review: So You Want to Join a Board http://s.hbr.org/1o6nHFb
  • Bolder Advocacy: Can a #nonprofit say that on social media?? Find out! #webinar [August 12]
  • Nonprofit Times: Employment Agreements http://bit.ly/1nsfdlK #nonprofit
  • National Council of Nonprofits: Looking for a fiscal sponsor? Tips and resources http://buff.ly/1svAdhH
  • Nonprofit Quarterly: 5 Bad Reasons to Choose a For-Profit Social Enterprise over Nonprofit http://hubs.ly/y03lQl0
  • HuffPost Environment News: The Three Core Questions to Determine: When Is a Company Serious About Sustainability? http://huff.to/1rZPhFx
ADVOCACY & LOBBYING

Charities and Issue Advocacy: Doing it Right – Part Two

 

This post is a continuation of last week’s post on issue advocacy:
Charities and Issue Advocacy: Doing it Right - Part One.

A communication is particularly at risk of political campaign intervention when it makes references to candidates or voting in a specific upcoming election; however, the IRS has emphasized that “the communication must still be considered in context before arriving at any conclusions.” The IRS has further stated that “[a]ll the facts and circumstances need to be considered to determine if the advocacy is political campaign intervention.”

For example, let’s take the case of a charitable organization whose mission is to educate the public about community development issues. Right before an election, the organization released an ad regarding community development issues, including the need for mass transit. Funding issues regarding the new mass transit project have been hotly debated by two state senate candidates competing for the same elected office, with one candidate in favor of the project and the other against it. The ad does not name a candidate or a particular political party, but it does encourage voters who are in support of the mass transit project to show their support when electing their next state senator. The IRS found that such an ad would violate the prohibition on political campaign intervention because (1) the ad was released shortly before the election and (2) the ad took a position on an issue that was a prominent issue in a campaign that distinguished the candidates.

On the other hand, if the organization had a pattern of engaging in such advocacy during non-election years using the same means and scope, and it just happens this election year the candidates have taken a strong platform position on the issue, which is out of the control of the organization, then the IRS may view such activity as issue advocacy and not as prohibited political campaign intervention. Although there are no clear answers, the IRS factors can help a charity determine if its issue advocacy communications fall dangerously close to prohibited political campaign intervention.

Charities are not prohibited from engaging in all election-related activities. Charities can engage in nonpartisan and neutral activities, such as publishing voter education guides, and activities intended to encourage people to participate in the electoral process, such as voter registration and get-out-the-vote drives. However, if voter education or registration activities show bias that (a) would favor one candidate over another, (b) opposed a candidate in some manner, or (c) have the effect of favoring a candidate or group of candidates, then these activities would constitute prohibited political campaign intervention.

Finally, charities should be aware that activities by their employees can unintentionally expose them to engaging in prohibited political campaign intervention. Individuals have First Amendment rights of free speech and can engage in political campaign activity in their individual capacity. And charity employers do not want to stifle their employees’ rights, but they must protect themselves from exposure to charges of engaging in prohibited political campaign intervention. Organizations should have clear policies in place, and provide their employees with training on these policies. Here are a few tips to help avoid prohibited political campaign intervention by employees:

  • Do not allow employees to use the organization’s assets or facilities for their electoral work, including the organization’s issued emails or staff’s time.
  • Do not allow employees to use their work email account to pass on information about individual candidates.
  • Do not publicize an individual’s personal election choices in organizational materials.
  • Do not support or oppose candidates at an organization-sponsored event.
  • Use visible disclaimers.
  • Check that appropriate disclaimers are used by others (e.g., when an individual is speaking in his or her individual capacity, that individual’s title in the organization, if stated, should be for identification purposes only).

Issue advocacy is a powerful tool for charities to impact public policy issues. Charities should continue to speak out on causes and issues that are important to them, but they also should be aware that the difference between issue advocacy, lobbying and prohibited political campaign intervention are important to recognize and can affect charities’ tax-exempt status.

Resources:

Political Ads: Issue Advocacy or Campaign Activity Under the Tax Code? (Erika K. Lunder)

Nonprofit Radio: Your Nonprofit in Politics (Emily Chan)

Revenue Ruling 2007-41

The Restriction of Political Campaign Intervention by Section 501(c)(3) Tax Exempt Organizations (IRS)

 

- Michelle Baker

Michelle Baker is is a San Francisco-based attorney interested in social impact.

TWEETS OF THE WEEK

Nonprofit Tweets of the Week – August 1, 2014

Business man showing superhero suit

Happy to be in L.A. for the CalNonprofits Policy Convention where I’m joined by several of the tweeters below. Have a listen to John Legend‘s If You’re Out There while perusing our curated nonprofit tweets of the week:

  • Nonprofit Times: New on the blog: @Ms_Nonprofit shares tips for new #nonprofit CEOs http://bit.ly/1zcmTkg
  • Robert Egger: Complaint filed with IRS regarding tweet from nonprofit Growing Hope on mayoral election MLive [Ed. 501(c)(3) organizations are prohibited from engaging in certain political intervention activities, including endorsing candidates for public office. Consider whether a tweet from an authorized user of your Twitter account can get you into trouble.]
  • Rebecca HamburgCappy: Mad about Hobby Lobby? Then you should be furious about #forcedarbitration: AFJ … via @AFJustice
  • Law Firm for Nonprofits: The #IRS is still crippled by the tea party scandal http://wp.me/p3yhYM-zz #teaparty #nonprofits
  • Gene: How many funders will not fund newer charities that filed a 1023-EZ to get 501(c)(3) status because of the need for greater diligence?
  • San Francisco Chronicle: #Oakland nonprofits on edge as measure could boost minimum wage to $12.25 http://sfchron.cl/1rytRvF
  • For Purpose Law: Bylaw[s] Are Sometimes Like a Decades-Old Hairdo – Yours May Need Some Updating http://bit.ly/1nO2jmN
  • V.R. Thompson: Recruiting and Vetting Nonprofit Board Members Bridgespan
  • Gene: Is corporate philanthropy being replaced by corporate citizenship and #CSR? Is that a good thing? Nonprofit Quarterly
  • Rick Cohen: Social Impact Bonds: Phantom of the Nonprofit Sector – look for the high dudgeon reactions of some true believers Nonprofit Quarterly
EVENTS

CalNonprofits Policy Convention: Hot Topics in Nonprofit Law

Hot

Today, Public Counsel senior staff attorney Sarah Stegemoeller and I will be presenting a workshop on Hot Topics in Nonprofit Law for the CalNonprofits Policy Convention. We’ll be presenting on the following topics:

  1. Anatomy of a Fundraiser
  2. Unrelated Business Income
  3. Social Enterprise
  4. Employee, Independent Contractor, or Volunteer?
  5. Permissible Lobbying for 501(c)(3)s
  6. Election Year Challenges for 501(c)(3)s
  7. Social Media
  8. Charitable Asset Diversion

Referenced Resources:

Fundraising Issues for Nonprofit Organizations – Public Counsel

Unrelated Business Income Tax Explained - Michele Berger

What’s a Social Enterprise? – Social Enterprise Alliance

Worry-Free Lobbying For Nonprofits: How To Use The 501(h) Election To Maximize Effectiveness – Alliance for Justice

Electoral Activity – Bolder Advocacy, Alliance for Justice

Influencing Public Policy in the Digital Age – Alliance for Justice

 

 

ADVOCACY & LOBBYING

Charities and Issue Advocacy: Doing it Right – Part One

Glossy validation button

Advocacy is a broad term that covers a range of activities that seek to bring about change. One form of advocacy is lobbying, defined as activities that attempt to influence specific legislation. Charities are permitted to engage in lobbying activities, so long as those activities represent an “insubstantial” part of their overall activities.

Another form of advocacy is known as issue advocacy, which includes public support for or opposition to a particular cause or policy without a call to action on specific legislation (lobbying) or a candidate for elected office (political campaign intervention). Charities can engage in unlimited issue advocacy that does not fall within the definition of lobbying or political campaign intervention.

Charities are absolutely prohibited from directly or indirectly participating in, or intervening in, any political campaign on behalf of, or in opposition to, any candidate for elective public office. Charities cannot contribute to or fundraise for political campaigns; cannot endorse or oppose a candidate; and cannot use charity resources without giving equal opportunity to other candidates. This applies to all political campaigns for elective office at the federal, state and local level. Charities that violate these rules can lose their tax-exempt status.

Although charities can engage in unlimited issue advocacy, they must avoid issue advocacy that functions as political campaign intervention. The IRS takes a case-by-case approach, looking at the facts and circumstance of each case, and focusing on whether an ad or statement includes anything that indicates a candidacy should be supported or opposed based on the issue. If an activity exhibits a preference for or against a candidate, then the IRS is likely to find that an organization has engaged in prohibited political campaign intervention. A preference can be subtle, such as a reference to party affiliation or “distinctive features of a candidate’s platform or biography” that can identify a candidate.

Although there is no bright line test, the IRS has identified several factors to consider when evaluating whether a charity’s issue advocacy communication falls within the definition of prohibited political campaign intervention including the following:

  1. whether it identifies one or more candidates for a public office;
  2. whether it expresses approval or disapproval for one or more candidates’ positions and/or actions;
  3. whether it is delivered close in time to an election;
  4. whether it refers to voting or an election;
  5. whether the issue it addresses has been raised as an issue distinguishing candidates for a given office;
  6. whether it is part of an ongoing series of communications by the organization on the same issue that are made independent of the timing of any election; and
  7. whether its timing and the identification of the candidate are related to a non-electoral event, such as a scheduled vote on specific legislation by an officeholder who also happens to be a candidate for public office.

The IRS has also identified factors that tend to show that advocacy communication on a public policy issue does not constitute campaign intervention including the following:

  1. the absence of factors (1) through (7) above;
  2. the communication identifies specific legislation, or a specific non-electoral event outside the organization’s control that the organization hopes to influence;
  3. the communication’s timing coincides with a specific non-electoral event outside the control of the organization that the it hopes to influence;
  4. the candidate is identified solely as a government official who is in a position to act on the issue in connection with a specific event (such as a legislator who is eligible to vote on the legislation); and
  5. the candidate is identified solely in a list of legislation’s key sponsors.

 

See also Charities and Issue Advocacy:  Doing it Right – Part Two 

 

- Michelle Baker

Michelle Baker is is a San Francisco-based attorney interested in social impact.

TWEETS OF THE WEEK

Nonprofit Tweets of the Week – July 25, 2014

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Photo credit: Purvis

It’s been a challenging week for the world and an appropriate time for reflection. Have a listen to Van Morrison‘s Enlightenment while perusing our curated nonprofit tweets of the week:

  • Lucy Bernholz: What are nonprofits for? Chronicle of Philanthropy [Ed. Sometimes the issue with whether a nonprofit should have tax-exempt status as a charitable organization is not the absence of a public benefit but too much private benefit.]
  • Gene: Excellent analysis of problems for #nonprofit startups that file Form 1023-EZ Hunton & Williams
  • Sandra Feinsmith: How the IRS Revamped Tax-Exempt Applications – AICPA Insights http://shar.es/LaLgo
  • AFJ Bolder Advocacy: California Policy Update for Nonprofit Advocates … #CA #nonprofit
  • Nonprofit Quarterly: Why your organization needs board-adopted policies that distinguish between the “board” and “board member” http://ow.ly/zuZ0N
  • Bridgespan Group: Nearly 50% of 214 CEOs surveyed reported getting little or no help from their boards when first taking the position http://bit.ly/1sp76xE
  • Law for Change: Risk Planning & Board Liability by @mikevolkov20 http://law4ch.org/WyVr2x
  • Stanford Social Innovation Review: Examining the #HobbyLobby decision through a social enterprise lens: http://ow.ly/zpsHj @rtesposito @pelsinger @nyulaw
  • For Purpose Law: Is It Advisable To Have An Advisory Board?
  • Heidi Roizen: Hey entrepreneurs! Check out this free online course from @StanfordBiz taught by Bob Sutton @work_matters