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Giving Back Through Not-For-Profit Corporation Scholarship Funds

December 5, 2011

Despite the challenging economic times we are experiencing, it is encouraging to receive inquiries regarding how to set up Not-For-Profit (NFP) corporate entities in New York for providing scholarships to students. In response to the interest we have received on this issue, what follows is a basic idea of what is involved in getting a corporate NFP underway for this worthwhile purpose.

The first step entails choosing a business name that is legally available and meets the legal naming requirements. The Certificate of Incorporation is then prepared and filed with the Department of New York State Division of Corporations ($75 filing fee applies). An Employer Identification Number (tax ID number for the corporation) must then be applied for with the IRS. Corporate bylaws are created which set forth the rules and procedures for running the NFP corporation. Additionally, an initial Board of Directors consisting of a minimum of three individuals over eighteen years of age (there are some exceptions to this age requirement) is selected or recruited. It is not necessary that the board members reside in New York State to serve on the board.

Subsequent to the formation of the NFP corporation, an organizational meeting would then be called to officially appoint the organization’s directors and corporate officers, adopt the corporate bylaws, establish the corporation’s budget for the fiscal year, and designate a bank for the corporation. Establishment of a Corporate Records Book containing meeting minutes and pertinent corporate documents is also necessary.

The NFP corporation must also register with the Office of the Attorney General of New York State, and with the New York State Tax Department for state business tax purposes.

Once these steps have been completed, application for federal tax exemptions is then made by filing an IRS Exemption Organization Determination Letter Request (IRS filing fees for this range from $400 to $850), and by filing an Application for Recognition of Exemption under IRS §501(c)(3), Form 1023. However, there is no requirement to file under §501(c)(3) to obtain federal tax exemption status if an organization has gross receipts in each taxable year of normally not more than $5,000. In such case, filing under §501(c)(3) may still be advisable to receive an IRS Determination Letter recognizing its tax exempt status for its records. Such filing must generally be made within 27 months after the date of incorporation.

Filing for a §501(c)(3) tax exempt status is somewhat involved. Among other things, the federal government requires submittal of the following information from organizations that are planning to award scholarships:

Criteria used for selecting recipients, e.g., academic performance or financial need, including the rules of eligibility;

  • How and by whom the recipients are or will be selected;
  • A copy of the scholarship application form and any literature describing the scholarship program;
  • How the award will be administered;
  • Description of how the scholarship will be paid;
  • Where the scholarship funding will come from.

Once a federal tax exemption is obtained, New York State requires filing of its Form ST-119.2 to achieve state and local tax exemptions for a NFP corporation. Subsequent to obtaining a tax exempt status from the federal and local governments, there will of course be on-going obligations for the newly formed NFP corporation, such as annual meetings and administrative activities, including the filing of annual tax returns.

Hopefully, this provides you with an idea of the steps involved in this process. Should you wish to discuss any of this information, please give us a call.