Incorporating Your Think Tank and Filing for Tax-Exempt Status
Tara Judge and Brad Lips, Atlas Economic Research Foundation
Tara Judge and Brad Lips answer 13 key questions in regard to establishing a tax-exempt think tank in the U.S. The flow of questions serves as a step-by-step guide. This document is offered for informational and educational use only.
Points covered
- Why one should, and how to, incorporate
- Why one should, and how to, apply to become a 501(c)3 public charity
- Tips for completing the process
This document was compiled by Tara Judge and Brad Lips to explain important steps toward establishing a tax-exempt think tank in the U.S. It serves as a complement to the Atlas starter kit, “ Guidelines and Recommendations for Starting an Institute, ” which concentrates mostly on strategic, operational and financial planning. Atlas offers this information for informational and educational use only. It was last updated in March 2003.
Why should I incorporate my institute?
Though you do not have to incorporate your institute, there are many advantages to doing so. First and foremost, incorporating allows you to reduce your personal liability by separating your personal identity from that of your business. Incorporating also adds an element of credibility and conveys that you intend for your think tank to become a lasting institution, with a life separate from your own.
How do I incorporate my institute?
To incorporate your institute, you have to file Articles of Incorporation (herewith, Articles) to the state of your choice for ratification and pay necessary fees for being registered with the state government. If documents are prepared correctly, incorporation is relatively quick, perhaps a week to ten days before you receive the ratified version. There are companies that have streamlined the process of incorporating and maintaining good standing with the appropriate state agencies. One service that Atlas has used in the past is The Company Corporation (TCC).
What are Articles of Incorporation?
The Articles of Incorporation is a short document that outlines the most essential facts of the structure of your organization, for instance: 1) name of corporation, 2) registered office and registered agent, 3) purpose of the organization, 4) proposed tax status, 5) capital stock, 6) clause concerning organization’s dissolution, 7) name and mailing address of incorporator.
A registered agent is required in virtually all states. This is a person or entity, physically located within the state of incorporation, responsible for receiving important legal and tax documents. The Company Corporation is an example of an organization that will act as the registered agent for an out-of-state corporation.
Once filed successfully, the Articles guarantee that your organization’s name has been reserved exclusively for you. The Company Corporation will check, at no extra cost, the availability of the name you choose. If the name of your corporation is too similar to an existing entity, you may be asked to change it so as to avoid confusion in the future.
In which state should I incorporate?
Based on Atlas’ experience with setting up new institutes, we have found it most efficient to incorporate in the state of Delaware. Delaware is one of the few states in which you can incorporate while having your business in another, and offers relatively low costs of incorporating. Moreover, many businesses choose to incorporate in Delaware because its business court, known as the Court of Chancery, has written much of the modern business case law, and is viewed as reliable and just. On the whole, Delaware has a reputation for being a “business-friendly” state.
Atlas does, however, encourage each individual who is thinking about incorporation to consider his situation independently and evaluate the relative merits of incorporating in his home state, Delaware or another state.
What are the costs (in terms of time and money) associated with incorporation?
Incorporating takes very little time, especially if the Articles are well written and no amendments need to be made. Once the Articles are handed over the State of Delaware (via TCC) they are processed immediately and then sent back to you, the owner. If there are any discrepancies (e.g., the name you have chosen is similar to an existing organization), you will be contacted and asked to rework the particular section of the Articles.
To file in Delaware, you will pay a corporation fee ($74 at time of writing this document). Additional fees would be paid to the TCC (or another registered agent of your choice) for the actual preparation and filing of the Articles of Incorporation. TCC (for approximately $169) will provide full-year registered agent service and full-year compliance watch, an online service that allows you to keep track of meeting minutes and other important legal documents and tax-related items.
What other documents do I need?
Many states, but not all, require that a copy of the Bylaws of the organization be filed with the Articles of Incorporation.
Even if they are not required, bylaws are extremely important for your organization. They lay out the ground rules of how business will be conducted: specifying the authority and responsibility of board members and officers, the processes governing election and dismissal, and other important matters.
Atlas has posted – for reference only – sample articles of incorporation and sample bylaws.
What do I do after I have incorporated my institute?
You may now apply for your Employee Identification Number. This is the nine-digit number assigned to corporations and other entities for tax filing purposes. Once you have filed for an EIN, you business tax account is then established automatically.
How do I apply for an Employee Identification Number?
You can apply for an EIN one of two ways: by telephone or by mail. Either way, you will be responsible for submitting Form SS-4 to the Internal Revenue Service (IRS), which can be downloaded here (opens as PDF file).
If you apply for an EIN by telephone, you will receive the EIN immediately. This can benefit the applicant if he needs to file a time-sensitive return or make a payment. In order to file over the phone, you must have the SS-4 form ready because the IRS agent will take the information off of the form in order to process your request. Once you are assigned an EIN, you must write that number in the upper right corner of Form SS-4 and date it. You now have 24 hours to mail or fax the form (with new EIN signed and dated) to the IRS Tele-TIN Unit at the service center of your state.
Applying by mail is a lengthier process. You should complete the Form SS-4 at least 4 to 5 weeks before you will need an EIN. Once you have filled out the form, signed and dated it, then send it to the service center of your state. Your EIN should arrive in 4 weeks.
There is no cost for obtaining your institute’s EIN.
Why should I apply to become a 501(c)(3) public charity?
Most think tanks in the U.S. seek to obtain tax-exempt status under Section 501(c)(3) of the Internal Revenue Code. This means that the IRS recognizes your organization as a public charity, and you do not have to pay corporate income tax. Moreover, donors will be able to deduct the value of their donations from their taxable income when filing their own individual tax returns. This reduces the cost of giving for donors.
Please note that becoming a 501(c)(3) does not exempt your organization from having to pay state sales tax. Most states have different procedures for filing for this kind of tax exemption, which can help save money, especially if you are hosting a large conference. Often this type of exemption is available only to religious institutions or degree-granting educational institutions.
How do I apply to become a 501(c)(3) public charity?
To apply for tax-exemption, you must complete IRS mandated forms that require financial statements and activity reports.
Necessary Forms:
- Form 1023 : Application for the Recognition of Exemption Under Section 501c3 of the Internal Revenue Code (signed by authorized officer)
- Form 8718 : User Fee for Exempt Organization Determination Letter Request and applicable user fee ($500)
- Form 872-C (submit in duplicate originals, this form is included in Form 1023 package): Consent Fixing Period of Limitation Upon Assessment of Tax Under Section 4940 of the Internal Revenue Code
- Form SS-4 (copy): As submitted for obtaining the EIN
- Financial statements (containing proposed budget for the next 2 years showing the amounts and types of receipts and expenditures anticipated)
- Articles of Incorporation
- By Laws (optional, but strongly recommended)
Remember to keep copies of these records for yourself, as all documentation will be held at the IRS offices. Include your organization’s name, address and EIN on all pertaining documents.
For more information concerning 501c3 rules and regulations, consult the IRS Web site and read their documents on tax-exempt organizations.
What will it cost my organization to apply for a tax-exemption?
The only fee that is required of the applicant is the $500 applicable user fee. In terms of time, however, the cost can be high.
Once the appropriate forms are sent to the IRS, you will be sent a confirmation of the receipt of the materials. This confirmation explains that it can take up to 120 days (4 months) before you expect to hear from them.
One to two things can then happen. First and best case scenario, is that you receive a letter in the allotted time that grants your organization its 501c3 status. Now you have finished all the legal hurdles and can proceed with your fundraising efforts.
On the other hand, the IRS may deem that your initial application lacked sufficient information to qualify your organization as tax-exempt. The IRS will include a series of questions with this letter, questions that were not answered adequately in round one, or questions concerning items that you included in the initial application, but signal red flags for the IRS. At this time, the IRS will also give you a deadline to submit responses. If you fail to respond on time, your individual case will be closed. To reopen your case you will have to begin anew by resubmitting all the required forms taking into account the sections that rendered changes.
How long will it take to receive the tax-exemption?
In our experience, it usually takes at least 4 months for the IRS to approve an application for 501(c)(3) status, and often several more (sometimes up to one year) if you are asked to respond to follow-up inquiries.
If you receive approval, it will be an advance ruling that will allow you to operate as a 501(c)(3) operation for a period of four years. At that time, you will need to file Form 8734 (Support Schedule for Advance Ruling) to demonstrate that you meet the requirements of a public charity.
In establishing your charitable status, it is important to demonstrate a diversity of financial supporters (rather than a reliance on a few big donations). These rules, and the calculation by which the IRS determines your “public support level,” are very complex. Atlas has developed an Excel worksheet to help you evaluate what your public support percentage will be. This is for reference purposes only. We urge non-profits to consult a specialist for a better analysis of your particular situation.
Tips for Preparing Your Form 1023
When describing your program areas and activities, make a special effort to clarify how your activities would differentiate you from a for-profit enterprise, and further your charitable purpose.
As an example of the above, think tanks that expect to publish studies should explain how they will distribute such reports. Most think tanks distribute publications for free or at cost. It is important to clarify these matters, as well as question such as who own the rights to publications.
There are other topics that should be carefully explained, in order to demonstrate that the principals behind your organization do not intend to benefit inappropriately from the organization’s activities. These include holding seminars (what fees will be charged, how will speakers be paid?); hosting a Web site (will content be made available to the entire public?).
Carefully explain how the organization will solicit funds to show that the organization will be a publicly-supported charity, not reliant on a handful of donors.
Be as specific as possible in your financial projections. If you lump together expenses under vague heading like “Miscellaneous”, you can expect a request for clarification.
If you will be making grants to third parties, be clear in stating who will receive these grants and the amount and number of grants expected to be awarded annually. We also encourage you to mention that you will seek copies of relevant material produced with your monetary assistance, as well as interim reports from the grantees that could help in cutting back improper use of funds, an item about which the IRS is particularly concerned.
Again, the best approach is to provide as much clarity as you can about your intended operations. Because the process by which the IRS reviews these applications continues to evolve, you may save time and effort by consulting with a specialist who can better help anticipate elements of your plans that will need further clarification.