Starting a 501(c)(3) nonprofit | Legal issues | Forum

I notice that after a generous 3rd donation, we are now at $100.  If we include Rocket's pledged $20, that's $120.  I intend to make a donation afer I get paid on the 18th of December.  So in the next fortnight or so we are probably going to get to around the $150 mark.

This website sells a service whereby they do most of the work in setting up a non-profit in Delaware for you.  I'm not suggesting we actually use them, because frankly their site gives me a kind of seedy vibe (open question: can someone find a deal like this from a place that looks a bit more legit?), but my point is that their charge for this service is $118.  Assuming that they are making a profit, the actual cost of doing everything that is necessary to set up a on-profit must be less than this, which means we are now either at or extremely close to the point where we have enough money to buy a PO Box and incorporate with it, which would be a huge step.  We could then get a CSTART bank account and use a PayPal account linked to that to solicit donations for the extra money needed for 501(c)(3).

Since this is now within our grasp, I think we owe it to the people who are giving us money to forge ahead with this work, even if it isn't as fun or exciting as talking about hybrid rocket engines (not to say we should stop talking about those for now, but we shouldn't focus on them to the exclusion of the legal side of things).

I think the biggest things we should be focusing on are:

• By laws.
• Deciding who is going to be on the board

because this effort is a non-starter without those sorted out.  The board thing is perhaps the trickiest.  For one thing we don't have many people, and some of the people we do have may not want to make the commitment of being on the board.

The By laws feel a bit easier and we should probably start discussing them more.  Note that there is already a thread for this, so take ideas or questions there rather than here.

Post edited 9:43 am – December 5, 2009 by Luke Maurits

I too am very impressed and pleased to see we have hit $100 so quickly.

Regarding non-US citizens sitting on the board, johnnyping said earlier (page 1 of this thread) "Regarding boardmembers – I do not think they need to live in the US or be US citizens", but since he said "think" I am assuming this is not definite.

Somebody who actually specialises in NPO incorporation and 501(c)(3) issues would be hugely useful to us about now.  EDIT: To this end I have asked for some help on Reddit in /r/law.  Fingers crossed!

To be clear, our advisor's precise words were merely "natural person".  Since I have heard the word "naturalisation" used to refer to the process of becoming a citizen of a country, I assumed this meant someone who was considered a citizen.  This may have been wrong.  Wikipedia would suggest that a "natural person" is "a human being, as opposed to an artificial, legal or juristic person, i.e., an organization that the law treats for some purposes as if it were a person distinct from its members or owner".

This seems like an even weaker requirement, nationality is irrelevant, as long as someone isn't a cyborg they seem to meet the criteria.

A little more about doing this in Delaware.

The actual article of incorporation form to become an exempt corporation in Delaware is here.  It's extremely simple, as you can see.  The biggest complication is that you need to use just the right language when filling in the very few blanks that the IRS wants in order to certify you as 501(c)(3) exempt.  I haven't researched this language yet.  Filing the Delaware form costs $89 if we can fit it on one page plus $9 per extra page if we go over that.  If we could fit our form on 2 pages, which seems likely, we could afford to do this today.

Contrary to our earlier understanding, we will need to provide a physical street address and name of someone in Delaware for this form (part 2).  This can be any old person, or you can use a "Registered Agent", which is a company located in Delaware which takes care of this for you (and I suppose acts as a mediator between the incorporator and the state).  The Delaware state website has a list  of registered agents.  The first one I found who had a website was Corporations USA, who charge $49 per year for this service.  If we went down this route we would need to raise an extra $30 (including the $20 Rocket has pledged which is not showing up on ChipIn).  The only alternatives are to (i) find somebody we trust in Delaware or (ii) incorporate in another state.

As for what comes next, here is the advice I have received from a very helpful lawyer on Reddit:

The process is as follows:

1. The incorporator files the certificate of incorporation with the secretary of state. Once this is marked as "Filed" by the secretary of state, the company exists.
2. The incorporator passes an "Action of Incorporator", which does two things: (a) formally adopts the bylaws, and (b) appoints the initial board members.
3. The board of directors passes an "Action by unanimous consent" whereby you take care of the initial formalities. This includes discharging the incorporator of any further responsibility, filing your certificate of incorporation in the minute book, writing what will be contained in your minute book, appointing officers (president, vice president, et al).

Everything I have mentioned above pertains only to part 1.  I am intrigued that the company actually exists after this early stage, even before the bylaws or board are formally established.  I have asked whether or not we could operate a bank account at this early stage.  My intuition is that perhaps we would but there would be very little control over what the incorporator could do with money in it, so it wouldn't necessarily appear as a "safe" donation account to the masses.

Since the incorporation stage (part 1) is so easy and cheap I feel like we should try to do it ASAP.  This means finding out exactly what words to use in our incorporation document so that the IRS will play ball with us.

Here is the certificate of incorporation of the Open Web Foundation, a "an independent non-profit dedicated to the development and protection of open, non-proprietary specifications for web technologies", who are a 501(c)(3) organisation incorporated in Delaware.  You can see that it includes a lot of stuff beyond the simple 4 part version posted earlier.

The more I think about it, the more I think it may be worth while doing this through a registered agent.  This may raise the cost of incorporation about $50-$100 above the cost of doing it ourselves, but it would mean we could incorporate in Delaware (which apparently still has benefits even if you are tax exempt) without having to find someone who lives there and there would be an extra feeling of security that things were being done properly.

An interesting twist: this is the actual form you have to submit to achieve 501(c)(3) status.  On page 2 of the pdf is this text:

Part XI. Increase in User Fees.
User fee increases are effective for all applications
postmarked after January 3, 2010.
   1. $400 for organizations whose gross receipts do not
exceed $10,000 or less annually over a 4-year period.
   2. $850 for organizations whose gross receipts exceed
$10,000 annually over a 4-year period.
   See http://www.irs.gov web page link on Form 1023, page 12,
Part XI, User Fee Information, for the current user fees.
   Cyber Assistant, a web-based software program
designed to help organizations prepare a complete and
accurate Form 1023 application, will become available
during 2010. Once the IRS announces the availability of
Cyber Assistant, the user fees will change again.
   1. $200 for organizations using Cyber Assistant
(regardless of size) to prepare their Form 1023, or
   2. $850 for all other organizations not using Cyber
Assistant (regardless of size) to prepare their Form 1023.
   IRS will announce when Cyber Assistant is available and
the effective date of the user fee change. Sign up for the
Exempt Organization (EO) Update, EO’s subscription
newsletter, at http://www.irs.gov/charities, to automatically
receive an alert that Cyber Assistant is available.

If we are willing to wait a little bit, we will be able to file for 501(c)(3) online, presumably with a lot of hand holding from the web app to make sure everything is fine, and the cost will drop to $200, which is even cheaper than the current $300 price we were hoping to get.

I guess the only problem is that it doesn't say when in 2010 the Cyber Assistant will become available – it may not be until the final quarter of the year, in which case we would lose a lot of time waiting.

A possible minor advantage to incororating in NY as opposed to Delaware: there is a requirement to put at least 3 "initial directors", which means that all the authority over the organisation is distributed from the start.  In Delaware I think it is possible, and perhaps only possible, to just file with the incorporator, who maintains sole authority until appointing a board later.  It seems to be easier to find clear and simple information about the situation in NY, too.