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Single-member 501c3

Corporate Law Discussions

Single-member 501c3

Postby Ariel » Sat Oct 08, 2016 11:10 am

Dear Harvey, I have read about the option to setup the bylaws of my newly-forming nonprofit using a single-member structure to protect the founder and my vision as the founder of the organization.(ex. http://www.seg.org/web/foundation/misc/foundationbylaws#B3) After researching, it seems to be legal in most states, including mine(GA). However, it does not seem to be common, which is okay with me but it raises some concern as to IF there is a concerning reason for this.

My question to you is two-fold: Is a single member structure likely to negatively impact the IRS decision in my application for 501c3 status?

If it is okay in the eyes of the IRS, is there a "single member" preference: such as do they care if the single member is structured as an individual, an incorporation, an LLC, a B-corp, an L3C or a 501c3...or does it matter to the IRS?
Ariel
 
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Joined: Sat Feb 01, 2014 6:02 am

Single-member 501c3

Postby Woolsey » Tue Oct 11, 2016 10:48 pm

Dear Harvey, I have read about the option to setup the bylaws of my newly-forming nonprofit using a single-member structure to protect the founder and my vision as the founder of the organization.(ex. http://www.seg.org/web/foundation/misc/foundationbylaws#B3) After researching, it seems to be legal in most states, including mine(GA). However, it does not seem to be common, which is okay with me but it raises some concern as to IF there is a concerning reason for this.

My question to you is two-fold: Is a single member structure likely to negatively impact the IRS decision in my application for 501c3 status?

If it is okay in the eyes of the IRS, is there a "single member" preference: such as do they care if the single member is structured as an individual, an incorporation, an LLC, a B-corp, an L3C or a 501c3...or does it matter to the IRS?
Woolsey
 
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Joined: Tue Feb 11, 2014 9:46 am

Single-member 501c3

Postby Selvyn » Tue Oct 11, 2016 11:21 pm

A quick summary of the differences between public charities and

private foundations can be found at:

www.guidestar.org/news/features/foundations.jsp

www.npccny.org/Form_990/Exp_Private_Foundations.htm

is also a good article.

The IRS wants at least 3 unrelated directors for public charities

and, in any case, the board should not be controlled by related

persons.

See:

www.irs.gov/pub/irs-wd/1002041.pdf

which is denial of exemption based, in large part, upon the fact

that there was only one effective leader of the organization. At

the bottom of pdf page 4, the IRS indicates what I have found in

the past, i.e. that, when a organization files for public charity

status has only one director, the IRS sends out a notice

recommending that, to increase the possibility to gain exemption

determination, the organization add at least 2 other, unrelated

directors. That 2009 denial on the bottom of pdf page 5 cites to

Revenue Ruling 55-656, 1955-1 C.B. 262,"the control of one

person or a small, related group suggests that an organization

operates primarily for non-exempt private purposes, rather than

exclusively for public purposes."  The organization would then

have a burden to show that it is not operating for the benefit of

the sole director.

"Although control by ... a small group may not necessarily

disqualify [an organization] for exemption, it provides an

obvious opportunity for abuse of the claimed tax-exempt status."

Church of Ethereal Joy, 83 T.C. 20 at 23(1984). That case is

cited in the United States Fifth Circuit Court of Appeals case

St. David's Health Care System v. U.S., 349 F.3d 232(2003)http://pages.citebite.com/o1n5g1q6c0htj  The IRS grants 501(c)(3) organization exemption status to LLCs

that are properly organized and operated.  However, it only would

grant exemption to an LLC whose members are all themselves exempt

organizations.

"Because state laws generally provide LLC members with ownership

rights in the assets of the LLC, the Service is concerned that

allowing non-exempt members would result in potential inurement

problems.  Thus, the LLC cannot have private shareholders

or individuals as members, and its organizing documents must

state a purpose to further the members' charitable purposes.  It

should be noted, however, that the presence of solely charitable

members does not ensure that the organization will be operated

exclusively for charitable purposes. "

www.irs.gov/pub/irs-tege/eotopicb01.pdf

at pdf page 4 about 1/2 of the way down the page

If you want donors to be able to deduct donations and not

to have your sales income, if any, taxed as long as you

comply with fundraising guidelines for 501(c)(3)

organizations, you would need to establish a charitable

trust, incorporate under a state's nonprofit corporation

law, or set up an unincorporated nonprofit association. Harvey Mechanic, Attorney at Law - [email protected]

P.S. This response is intended to be a general statement of law, should not be relied upon as legal advice and does not create an attorney/client relationship.  
Selvyn
 
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Joined: Fri Mar 07, 2014 5:56 am


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