By MELINDA J. OVERSTREET
for Glasgow News 1
Nonprofit organizations play important roles – sometimes vital – in many communities, including Barren County, but they can be quite different in the approaches they take and the goals they have within the broad category of “nonprofit.”
Glasgow News 1 is undertaking a new series project to help community members learn more about some of the local organizations that fit in that category. Our first installment was actually published in January and focused on Community Relief Fund of Glasgow-Barren County, and the second is Next Step, to be published in tandem with this introductory piece that explores information like what “nonprofit” even means, a few of the requirements, and where to find basic information about such groups like who its leaders are. We will focus mostly on the smaller ones here that are typically charitable, civic, social and/or educational – serving – in nature and plan to include home-grown ones like these first two as well as some that are chapters, branches, etc. of regional, national or even international organizations.
To profit or not to profit
Whether or not individual persons or a group plans to profit for themselves or engage in activities for the greater good of their community, to be officially recognized in the Commonwealth of Kentucky as a legal entity, the organization must be register with the Kentucky secretary of state and file certain initial documents to get incorporated and subsequently file annual reports. In the process, the intention regarding profits is designated.
“You’ve got to file it with the state …,” said Glasgow attorney Brian Pack, who, by multiple accounts, handles the majority of legal work for nonprofits locally. “Otherwise, you don’t exist.”
Pack said that Kentucky law actually requires that nonprofit organizations also register with the local county clerk’s office, which was particularly helpful before the Internet came along when people may have had to call or go to Frankfort to get the information they wanted about one. Now that anyone with Internet access can look on the secretary of state website and get most of that information, it’s not uncommon for attorneys and others not to do so, so the local listing may not be as up to date.
With a for-profit organization, which most businesses are, making a profit is one of the top – if not at the very top – goals on the list. With these, the earnings from revenues beyond those needed to cover expenses go into the hands of the members or shareholders who own the company, and those individuals can spend that money however they want.
One way to define a nonprofit is as an organization without any owners, Pack said. It has a board of directors, with a minimum of three members, none of whom are supposed to receive any “significant” benefit.
“I’m not saying they can’t be reimbursed; they can even legally be paid a salary as long as it’s reasonable,” he said.
That board sets the purpose and policies and creates the bylaws.
The formal definition in Kentucky Revised Statutes [KRS 273.161(4)] of a “nonprofit corporation” is “a corporation no part of the income or profit of which is distributable to its members, directors or officers.” That doesn’t mean it can’t have more revenue than expenses or profits, per se; it’s just that those profits stay within the organization itself to advance its mission.
At least in some places, a separate category of “not for profit” organizations exists, and there are a few relatively minor differences between that and a nonprofit that won’t be explored here.
Kentucky statutes also set forth a variety of purposes for which a nonprofit would be organized and function.
KRS 273.167 states: “Except as otherwise prohibited by law, corporations may be organized under KRS 273.161 to 273.390 for any lawful purpose or purposes, including without being limited to any one (1) or more of the following purposes: charitable; benevolent; eleemosynary; educational; civic; patriotic; political; governmental; religious; social; recreational; fraternal; literary; cultural; athletic; scientific; agricultural; horticultural; animal husbandry; and professional, commercial, industrial, or trade association.”
Pack said it’s not uncommon for the purpose to be listed in the incorporation application.
Many churches have taken that route of being an unincorporated association, Pack said, which is a type of nonprofit.
“There are several types of organizations that don’t take the time to incorporate with the Kentucky secretary of state. They’re called unincorporated associations,” he said. “It’s been recognized by the law for a long time, but the Kentucky legislature has now actually created something, and you can actually file something with the Kentucky secretary of state saying you’re an unincorporated association and it gives you limited liability.”
That limited liability was one of the primary reasons organizations had incorporated in the past, he said.
“That’s the most important thing they want,” Pack said. “They don’t want to do all this mission work, have something happen and then get sued, and they’re personally on the hook. They’re not profiting, so why should their personal pocketbook be exposed to a lawsuit, so you got incorporated to limit the liability to the assets of that corporation.”
With an unincorporated association, you could potentially be exposed to a liability.
An example would be a small-town youth sports organization worried it would get sued if a child got hurt, and it doesn’t necessarily want or need all the formalities of incorporation, so they could run the organization.
Incorporation/ information
The filing fee for a nonprofit incorporation is $8, Pack said. The filing fee for the annual reports is $15.
The organization must develop and approve the bylaws it wants to observe, and those would be included with the incorporation documents along with the minutes of any meetings.
An unincorporated association typically doesn’t have to have bylaws, he said, though its members may choose to establish internal rules they want to follow.
“It’s a lot less formal,” he said.
The secretary of state’s website can be searched by company/organization name, by ZIP code or by city name, but it does not provide the option to search just for nonprofit organizations, nor does the information regarding for-profit or nonprofit appear on the search results summary page. Once the name(s) come in search results, the person seeking that information must click on the name, and there they can find tidbits such as whether the corporation is in good standing or active, the organization date, the date of the last report, address of the principal office and the registered agent, assumed and former names of the organization, and the initial and current officers. A click on “Show Images” provides links to view annual reports and other documents.
An assumed name is one under which an organization actually operates and promotes itself, and it may be different from the real name. For example, Barren-Metcalfe Emergency Medical Services is an assumed name for Ambulance Service Corp.
If a person searches for the assumed name, a notification pops up to let them know that it is an assumed name, or DBA, and the person is redirected to the page for the real name.
Also, if the words “foreign corporation” appear, it just means it was started outside of Kentucky – not necessarily outside the United States, Pack said.
Tax exemption/deductions
An organization, particularly a larger one that plans to do a lot of fundraising, may choose to obtain an Internal Revenue Service 501(c)(3) designation, as allowed in the federal tax code by that number.
It costs a minimum of $275, but that amount could be “a lot more than that,” depending on the size of the charity, for example, Pack said.
“That’s an application process that takes quite a bit of time to get through,” he said. “There’s a lot to it. You then have to show the IRS that … this isn’t just to benefit somebody’s back pocket, so to speak, that it truly is a charitable or religious purpose, serves some kind of service to the community. If it’s already been in existence and they apply, they’ve got to show their last three years of income and expenses. If it’s brand new, you don’t have to do that.”
The type of purpose like those listed in KRS 273.167 must be included with this application as well as the mission statement. He said he encourages clients to include the purpose within that statement and even the bylaws.
The designation allows the organization to be exempt from paying certain kinds of taxes.
“Before the IRS is going to grant you that exemption, you’ve got to explain to them what you do,” he said. “And they will have somebody look at it and make sure it meets within their criteria. They’re pretty careful. I’ve never had one denied, but I’ve had several times where they’ll call me and say, ‘Hey, we need additional information because we’re just not sure.”
Generally, having the 501(c)(3) designation allows contributors to the organization to claim their donations as a tax deduction. Contributions to schools and churches are tax-deductible, though, without their having that status.
“In fact, they cannot be 501(c)(3)’s because the law just says they don’t need to be,” Pack said. “All other nonprofits have to be a 501(c)(3) in order for the donor to get the tax deduction.”
Sponsorships can be different in that, for example, if a company paid for a youth sports team’s uniforms but the company name is also on the uniform, then it can be considered an advertising/business expense and can be calculated into tax returns as such, he said.
Organizations that have been approved for a 501(c)(3) designation must file a report with IRS every year, even though they aren’t paying taxes, and those documents are public record. So someone thinking about contributing to a cause, for example, could use that to see things like how much of the money is going to top management versus fulfillment of the mission.
If the amount coming into an organization is less than $50,000 per year, though, the form that has to be submitted is rather minimal and is not a full accounting of the finances like is required for those who bring in more than $50,000 annually, Pack said.
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TO LEARN MORE
Kentucky Secretary of State Business Filings and Records Online Services
https://www.sos.ky.gov/bus/business-filings/OnlineServices/Pages/default.aspx
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