Forming an Oklahoma Nonprofit

INTRODUCTION

I was recently asked by a client to do some research involving creating a nonprofit 501(c)3 organization here in Oklahoma. Since all boats rise together, here is a summation of the research I found. If you have any comments or questions regarding this article, please give me a call at the contact information below.

The first, and most important, piece of advice I can provide to you is this: Find an accountant or accounting firm. There is a slew of requirements to obtain and maintain a non-profit’s IRS 501c3 status. Failure to file or filing the wrong form can be disastrous to a non-profit. Also, as a note of advice, an accounting firm will probably charge you less than an attorney when it comes to formation of a nonprofit. However, here are the basic steps and some best practices:

FORMING A NONPROFIT

The first step to creating a nonprofit corporation in Oklahoma is to actually form the corporation itself. Therefore, you must select the name of the corporation that complies with the Oklahoma naming requirements. The name of your organization must contain: “association, company, corporation, club, foundation, fund, incorporation, institute, society, union, syndicate, or limited” (or select abbreviations of those). Further, you have to check if the name is already taken on the Oklahoma Secretary of State’s website found here. You might also want to consider other factors including the name of a potential website and social media accounts.

Next you have to choose your registered agent. This is the individual/entity authorized to receive mail and legal documents on the corporation’s behalf. It is also Oklahoma’s point of contact for your corporation. This agent should have a permanent address and must be a resident of Oklahoma. Often, this point of contact is one of the founders of the corporation.

The next decision to be made is to select your directors and officers. Directors (or your board of directors) are responsible for overseeing the operations of a nonprofit. The officers include positions like secretary, president, etc. Under Oklahoma law, the nonprofit organization must include at least 3 directors who are not related. In this context related has a specific legal meaning (see under common questions for more of an in-depth answer). Secondly, the organization must have both a president and secretary executive officer.

One of the most important steps comes next: Bylaws and Conflict of Interest Policy. As a requirement of the IRS’ 501c3 filing, your organization must have both bylaws and a conflict-of-interest policy. Bylaws are the general rules and procedures concerning the operation of the nonprofit. These include the procedure for member voting; how/what/when payment is made to the officers & directors; and your purpose. As a nonprofit, your purpose must include one or more of the following: “charitable, religious, scientific, educational, literary, fostering national/international amateur sports competition, preventing cruelty to animals/children, or testing for public safety.” This is an IRS requirement to obtain 501c3 status.

Note: Both the conflict of interest and bylaws must be adopted by the nonprofit during its first meeting. This is also when the directors and officers are officially appointed.

Finally, you have to file your certificate of incorporation with Oklahoma’s Secretary of State. The necessary contents of a certificate can be found here. This states your intended organizational purpose (which should be already stated in the bylaws). This also states what/how the assets of the organizational will be used and the procedures for dissolution (ending) the nonprofit. What/how the assets are used must also meet other 501c3 requirements including:

(1) Must be used for your stated charitable purpose

(2) Not operated for benefit of private interests such as the creator or the creator’s family, shareholders of the organization . . . . no part of the net earnings of a 501c3 should vest to benefit any private shareholder or individual (i.e. you cannot profit from a non-profit).

(3) Cannot be used to influence legislation as a substantial portion of the organization’s activities — may not participate in any campaign activity for or against specific political candidates — and what influence the organization may invoke has to involve legislation affecting their stated purpose. This is not an exhaustive list of the anti-lobbying requirements for a 501c3. If your purpose has a high likelihood of involving lobbying, please give us a call.

COMMON QUESTIONS

(1) Can a nonprofit pay its employees? If so, how much?

Well, it depends. Classic attorney answer, but the IRS guidelines and requirements in this area are not all that clear. What is clear is that a member of the Board of Directors cannot obtain the president seat and be paid for that position. For example, for a small 3-person nonprofit, Person 1 cannot be both on the board of directors and be paid as the Nonprofit President. Those 3 people can choose to hire person 1 as the president, but person 1 must forgo their board of directors position. This makes sense. The IRS does not want a board member to have all the power and be paid (exactly like a for-profit corporation).

Further, there has to be ample funds for the nonprofit. Let’s take a homeless shelter for example. The purpose is to take care of the homeless and the initial/majority of the funds must be put to that use (buying beds, clothes, food, etc.). Only after that is done can a salary be taken. The IRS will quickly audit a nonprofit that pays their executives but does not have enough funds to further their charitable purpose.

So, a rule of thumb is that the Board of Directors should not be paid positions. This Board of Directors must also be unrelated to one another and should not have a conflict of interest with the nonprofit or its purpose. Nonprofit executives can be paid a “reasonable” salary that coincides with the benefits the executive provides to the nonprofit. “Reasonable” to the IRS is “the value that would ordinarily be paid for like services by like enterprises under like circumstances.” Keep in mind these salaries are also public through Form 990 filings.

(2) Can a nonprofit charge for its services?

At the most basic level, yes, a nonprofit may charge for its services. However, you have to beware of unrelated business income. The IRS defines this in two parts: (1) “income from a trade of business regularly carried on” and (2) “not substantially related to the charitable . . . or other purpose that is the basis of the exemption.” Of note, selling donated merchandise or volunteer labor/goods like a volunteer bake sale are excluded from this tax. To put it plainly, tax exempt business income may actually be taxable, unless that income is from a couple of exceptions. Yes, it’s complicated but it makes sense. The IRS does not want a nonprofit company using its status to dodge taxes for business income if that income has nothing to do with the charitable purpose in question.

(3) Who can or should serve on the Board of Directors?

Oklahoma (and the IRS) impose different duties (including obedience, care, and loyalty) on members of a nonprofit’s board. Under law, there must be at least 3 board members that are not related to each other. “Related to each other” has a specific legal meaning her being blood, marriage, or outside business relationships. Further, these are limited. Once blood and marriage relationships go beyond the immediate family (mother, brother, sister-in-law, grandfather etc.) then you are probably outside the IRS’ definition of related. Therefore, cousins or uncles-in-law are likely okay. Further, in regard to shared business interests, the members must own 35% or more of a for-profit company (or are co-workers that have a superior/subordinate relationship) to be considered related. Both owning shares in the same company does not rise to the “related requirement” here. Just remember, organization-level decisions will be made by the members of the Board of Directors — choose wisely.

CONCLUSION

This is just the beginning! Establish a non-profit and maintaining a tax-exempt status is a complicated burden to be sure. For more information or a fee consultation concerning the establishment of a non-profit, give Hohenheim Legal a call.