Seven Important Questions to Ask

About How to Start a Nonprofit Organization

Discussing Common Misconceptions NJ Ethics

The legal process of how to start a nonprofit organization can be surprisingly complex.

 

One of the more notable aspects of the Nissenbaum Law Group’s nonprofit legal services is the degree to which the firm is required to customize its legal representation to accommodate the unique needs of such clients. Those needs tend to drastically change based upon each such organizations’ aims and goals.

For example, some of the law firm’s nonprofit clients have been heavily involved in legislative lobbying, while others have scrupulously avoided the political sphere. Some are well-funded and directly connected to a larger parent organization, while others have no significant funding nor associations with other nonprofits, whatsoever. Indeed, many nonprofits that seek the Nissenbaum Law Group’s representation are churches, temples, mosques or other houses of worship.

The term “nonprofit” applies to such a wide range of entities that it can mislead one into assuming that forming such an entity is as straightforward as incorporating a for-profit company. That is not the case; there is a surprisingly complex set of questions that need to be answered before a nonprofit can be formed and begin to fulfill its mission.

 

Seven Important Questions to Ask When Starting a Nonprofit Organization

The following is a nonexclusive list of six such questions that frequently come up when forming these entities. They should be considered by the potential nonprofit’s attorney (and preferably, accountant) before the entity commences operations.

1. What state should the nonprofit use as its place of incorporation?

Generally speaking, the nonprofit corporation must first be created under state law and only then apply to the government for 501 status. The process for doing so is relatively the same in such states/commonwealths as New Jersey, New York, Pennsylvania and Texas, as well as a variety of other states throughout the nation. Nevertheless, it is still important to carefully consider in which state to file. That decision will impact a range of legal issues, such as, for example, where the nonprofit would likely be sued if a claim against it were made. That is more than simply a question of whether the lawsuit would be local to the nonprofit’s base of operations, but also what state’s case law, statutes and regulations would govern. It is a significant decision that needs to be considered before proceeding.

2. How involved are the IRS’ 501(c)(3) formation requirements?

It depends upon how much fundraising the entity intends to obtain in its initial operation. If it does not exceed a certain threshold, the simple IRS form 1023-EZ can be utilized. If not, the more elaborate 1023 form must be used.

3. Is it necessary to name the initial members of the board of trustees and to have an agreed-upon mission statement before proceeding?

Yes to both questions. It is normally necessary to have at least three persons on the board of trustees at the outset, and they must generally be identified in the filing to the IRS for 501 status. This is important because the IRS wants to know whether they have potential or actual conflicts of interest stemming from their relationship to one another to any anticipated personal financial benefit they may expect from the nonprofit’s activities. Likewise, a mission statement should be included with the bylaws or organizational resolutions submitted with the application. This is important so that the IRS can evaluate whether the nonprofit is applying under the correct federal statute and whether it qualifies for nonprofit status at all.

4. Does the nonprofit intend to engage in lobbying activities for legislative change?

A 501(c)(3) entity is allowed to engage in a certain limited amount of legislative lobbying. However, when that threshold is exceeded, it may be necessary to form a second entity under section 501(c)(4) of the IRS code. In such event, the client will effectively be split in two and the lobbying activities will generally take place under the (c)(4) rather than (c)(3).

5. Can a nonprofit pay its officers the same way a for-profit company can?

Yes and no. A nonprofit may provide market-rate compensation to the people who work for it. However, it is important to be able to verify through objective criteria that the compensation is not excessive beyond the general market for those services in the prevailing community. Moreover, a nonprofit cannot provide such additional compensation such as stock options, nor can it enter into a buy-sell agreement. That is because it does not issue shares of stock; it is not “owned” by the individuals who are involved in running it, the way a for-profit presumably would be.

6. Can a nonprofit obtain a trademark for its name and logo?

This question comes up a fair amount of the time in our firm’s intellectual property practice since most people associate trademarks with a means of identifying a for-profit business in the stream of commerce. However, federal law is clear that a nonprofit entity—which is obviously not in business, as such—may also apply for federal trademark status.

7. Are the rules relating to nonprofits different based upon where the office is located within the state?

One might assume that the most important question relating to the location of an office is the particular state in which it is situated. However, it is also important to assess whether the county and even municipality will be favorable. There can be a big difference between locating a nonprofit’s office—and hence, the place where it will conduct most of its day-to-day activities—in Lancaster or Pittsburgh, in NYC or Albany, in Hackensack or Princeton, in Austin or Houston.

The main difference relates to fundraising. There are a number of municipalities and counties that restrict the way in which a nonprofit may solicit funds from the public. Frequently, it is necessary to obtain permits or otherwise register before doing such things as organizing a raffle, soliciting door-to-door through a particular neighborhood or organizing a gathering at a local park or town square. These requirements can differ based upon the state in which the nonprofit is formed. In that regard, here are the links for the New Jersey Independent Paid Fund Raiser Registration, New York Charities Registration, Pennsylvania Charities Registration and Texas Charitable Trust Registration. These restrictions are not always obvious and intuitive; it is important to have counsel review the means of fundraising that is contemplated in any given instance.

 

Please Consider Contacting the Nissenbaum Law When Starting a Nonprofit Organization

Our law firm encourages nonprofit organizations to contact us when (a) starting a nonprofit; (b) addressing governance issues and the documentation needed in that regard; (c) dealing with internal or external disputes that may arise; and (d) dissolving the nonprofit and arranging for a disposition of its assets.

PUBLICATIONS & PRESENTATIONS

Gary D. Nissenbaum, Esq.

  • Presented Seminar, The New First Amendment Challenges Confronting America in 2017, American Civil Liberties Union of New Jersey, May 2017
  • Presented Seminar, Top 10 Legal Issues Confronting Nonprofits, State Council of New Jersey Junior League’s Get On Board Conference, April 2017
  • Receiving Classified Information: Government Secrecy and the Litigation Process (Co-author), NJ Lawyer Magazine, October 2009
  • In the Arena: Litigating for the American Civil Liberties Union-NJ, NJ Lawyer, December, 2007

 

Laura J. Magedoff, Esq.

  • Presented Seminar, Nonprofit Board Role & Responsibilities, State Council of New Jersey Junior Leagues Get On Board Conference, Morristown, NJ, April 2018
  • Presented Seminar, GOB Matching: Next Steps to Board Involvement, State Council of New Jersey Junior Leagues Get On Board Conference, Morristown, NJ, April 2017
  • Presented Seminar, Nonprofit Board Role & Responsibilities, State Council of New Jersey Junior Leagues Get On Board Conference, Morristown, NJ, April 2017

AWARDS & RECOGNITION

Gary D. Nissenbaum, Esq.

  • Awarded (Nissenbaum Law Group, LLC), Law Firm/Corporate Legal Department Pro Bono Award for Small Law Firms, New Jersey State Bar Association, 2019
  • Awarded, 2012 Winifred Latimer Norman Award by the Unitarian Universalist District of Metropolitan New York, For Extraordinary Commitment and Service in the Area of Social and Racial Justice, 2012

 

Laura J. Magedoff, Esq.

  • Appointed, Vice-Chair and Training Chair, State Council of the New Jersey Junior Leagues, 2017- Present
  • Appointed, Housing Resource Specialist, National Leadership Team, Kappa Delta Sorority, Inc., 2016-Present
  • Appointed, Board Member, Junior League of Summit, Inc., 2013-2016 (Various Positions)

PODCASTS

Gary D. Nissenbaum, Esq.

 

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