Information on 501c3 organizations
Problem to be solved
When ATX Hackerspace was formed the LLC business form was selected as an expedient and as a way to get things going quickly and simply. As a result we have a form where the LLC can veto any decision of the board or membership. This worked when we were a small cohesive group because we all know and trust the LLC members. However, as we grow into a large diverse group, we may be better served with an organizational form that relies less on interpersonal trust and more on clearly defined roles, responsibilities and limits of power. A 501(c)3 nonprofit may be one way to accomplish this.
What is a 501(c)3
501(c)3 refers to a section of the IRS tax code that provides for a nonprofit organization limited to (among other things) charitable, educational, and scientific purposes. 501(c)3 organizations are exempt from taxes, and can receive donations on a tax deductible basis to the donor.
Membership fees, however, are not tax deductible.
A 501(c)3 can be a "public charity" or a "private foundation". We would want to be a public charity if at all possible. Some hackerspaces that have organized as public charities include HacDC (Washington), Noisebridge (San Francisco), Harford Hackerspace (Baltimore), Makers Local 256 (Huntsville), and HeatSyncLabs (Mesa).
A 501(c)3 organization can make a "profit", but the profit must go to further the organization's nonprofit mission. It cannot go to benefit individuals. 501(c)3 nonprofits can hire employees and contractors, and can pay for services.
There are other forms of tax exempt organizations that do not allow for tax deductible donations, but they appear to require similar effort and expense to set up.
- We would be able to receive donations of equipment or funds on a tax deduction basis. This might help us get more neat stuff.
- We would be able to receive assistance from other 501(c)3 organizations.
- We may be able to apply for and receive grants, most of which are restricted to 501(c)3 nonprofits.
- The ideals we have for the space would be formalized.
- Application involves considerable time, effort, and expense.
- There is a $850 application fee. Also, we may require professional assistance with our application.
- We may need to modify our charter and bylaws.
- The LLC as it exists cannot become a 501(c)3. We would have to create a new legal structure, either standalone or as a subsidiary of the LLC.
- We would need to find a way to make the transition that is fair to the LLC.
- This includes recognizing the capital investments of the founders.
- We would need to become more disciplined in recording meeting notes and results of voting.
- We would be absolutely prohibited from participating (as a hackerspace) in the political process. (Individuals, of course, could do whatever they want).
Questions and Answers
- What is the difference between nonprofit, tax-exempt and 501(c)3?
- nonprofit is between us and the State of Texas. "Nonprofit corporation" means a corporation no part of the income of which is distributable to members, directors, or officers [BOC, Section 22.001(5)]. ... Section 252.001 of the BOC defines an unincorporated nonprofit association as an unincorporated organization consisting of three or more members joined by mutual consent for a common, nonprofit purpose. link
- tax-exempt is between us and the IRS and means we are exempt from federal taxes. These are also called 501(c) organizations. There are several types of tax exempt organization such as social clubs, labor organizations, credit unions, etc. See IRS pub 557 p. 51.
- 501(c)3 means a tax exempt organization that is organized and operated exclusively for an exempt purpose (such as charitable, religious, educational, etc.) Contributons to a 501(c)3 are deductible as charitable contributions on the donor's federal tax return. IRS pub 557 p. 23.
- Can the LLC become a 501(c)3?
- " An LLC may only have 501(c)3 members to qualify for an exemption." IRS form 1023 instructions p. 7.
- "To qualify, the organization must be a corporation, community chest, fund, articles of association, or foundation. A trust is a fund or foundation and will qualify. However, an individual or a partnership will not qualify." IRS pub 557 p. 23.
- Can a 501(c)3 have memberships/collect membership dues?
- "The one-third support test will be met if an organization normally receives more than one-third of its support in each tax year from any combination of: (1) Gifts, grants, contributions, or membership fees, and (2) Gross receipts from admissions, sales of merchandise, performance of services, or furnishing facilities in an activity that is not an unrelated trade or business, subject to certain limits..." IRS pub 557 p. 40.
- (The above refers to factors that would classify a 501(c)3 organization as a "public charity" rather than a "private foundation". Public charities give greater tax advantages to donors.)
- Can members or others make products for a profit at the hackerspace if we are a 501(c)3?
- Here are a couple of examples:
- Grand Junction Business Incubator Center provides, among other things, a commercial kitchen for use of entrepeneurs
- Rutgers Camden Technology Campus "Rutgers Camden Technology Campus, Inc. (“RCTC”) is a not for profit 501(c) (3) mixed use business incubator... It currently accommodates 41 client companies, the majority of which are private, for-profit ventures."
- Other examples may be found by googling "501(c)3 business incubator"
- Here are a couple of examples:
- Will my membership dues be tax deductible?
- " You may be able to deduct membership fees or dues you pay to a qualified organization. However, you can deduct only the amount that is more than the value of the benefits you receive. " IRS pub 526 p. 4
- (in other words, consult your tax advisor.)
Q&A with Mitch
- Mitch of Noisebridge Answered some of our questions in an interview about charitable hackerspaces
How we would do this
- We would obtain a new IRS tax ID number and form a Texas nonprofit corporation ($25).
- We would need to modify our bylaws
- Our mission statement needs to be limited to charitable, scientific and education objectives (this can be done by referencing IRC 501(c)3)
- We would need to write a "dissolution clause" that says if we disband our assets would go to another 501(c)3 or to the government
- We may need additional clauses prohibiting private benefit and political activity. example
- We fill out IRS form 1023 (instructions) -- all 12 pages plus attachments -- and send it in with a check for $850
- If we are complete and clear enough the IRS bureaucrat may give us a ruling that gives us 501(c)3 status
- Otherwise our application will be given to an IRS agent who will ask additional questions. We would have a limited time to submit answers and additional documentation
- If all goes well the IRS sends us a "ruling letter" advising us of our exempt status. We can then advertise ourselves as a 501(c)3 nonprofit organization.
- Every year, in lieu of a tax return, we need to submit IRS form 990 (instructions) advising the IRS of our activities and finances as a nonprofit.
- i3detroit's tutorial on nonprofit basics.
- IRS pub 4220, Applying for 501(c)3 Tax Exempt Status
- Noisebridge has posted their 501(c)3 application documents online.
- Noisebridge's 2010 IRS form 990
- IRS pub 557, Tax Exempt Status for Your Organization. All the gory details.