In today’s episode, Toby Mathis, Esq. speaks with Karim Hanafy, Esq., about the top ten most common mistakes that are made when setting up a non-profit 501(c)3. From issues with state vs. federal requirements, to describing your charitable activities, compensation of your board, and the ever-important asset protection, Karim has seen every mistake possible and wants to help you have a seamless experience when setting up your non-profit organization. See the links below for a free workshop from Anderson Advisors.
Highlights/Topics:
- Karim’s background/expertise in non-profits
- Top 10 mistakes in no particular order
- Accidental setups in the wrong structure: For-profit, B-corps, LLC’s
- State requirements for Articles of Incorporation vs. Federal
- Describing your charitable activities
- Incorrect terminology that triggers investigation and delays
- Public charity or private foundation?
- Compensation for directors and officers, board members
- Filing tax returns
- Donating different types of assets – professional appraisals and the correct forms
- Donor thank you letters and the IRS-required language
- Asset protection
Resources:
Start Your Nonprofit Plan in 45 Minutes For Free
Full Episode Transcript:
Toby: Welcome back to the Anderson podcast. My name is Toby Mathis, and I am joined by Karim Hanafy. Welcome back, sir.
Karim: Hello. Thank you. It’s great to be back.
Toby: All right. Today, we’re going to go over the top ten mistakes that people make when forming and operating nonprofits and it seems experts in this area that there’s nobody better to have come in and discuss it.
In just a few lines, what is your background in the nonprofit world? People should know, and they might remember that you’re an attorney. But what gives you specific credibility here?
Karim: Well, I’ve been working in this area for over 20 years, and I did start at the IRS. I was in the tax exempt in the government entities division, where we basically just reviewed applications for exemption, the 1023 applications for organizations that want to become a 501(c)(3). I’ve reviewed hundreds and hundreds of different types of applications, public charities, and private foundations.
I’ve seen everything. I believe I have, not only within the IRS, but in private practice as well. I’ve been in private practice for over 15 years now. Again, working with clients to set up these nonprofit organizations to set up these 501(c)(3)s and apply for exemption. I feel like I’ve seen almost everything you can imagine, because I’ve looked and probably reviewed and prepared over thousands of applications up to this point easily.
Toby: Wow. You have a little bit of experience in that area, you came from the IRS, and you’ve seen a ton of mistakes probably made. Let’s dive in so we wanted to go over ten. We’re going to go over the top ten mistakes, not in any particular order. We’re just going to go through it. All right, so let’s go through and what do you think’s number one?
Karim: Well, the first one is, and this is something that we’ve seen quite often when I was at the IRS, is the improper structure from the very start. Many organizations think and I’ve seen this, it’s unbelievable. But for profit corporations have been a common thing that we have seen. Instead, what you should do is set it up as a nonprofit corporation.
You have other options. But without a doubt, the simplest is a nonprofit corporation. But instead, we’ve seen organizations set up as a for profit, we’ve seen as a B Corp, which is basically a for profit, that’s certified as a nonprofit. We’ve seen it also as LLCs, even though it’s very popular in the for profit area, it’s not as popular within the nonprofit area, and even trusts.
Of course, the for profit and the B Corps, those are not permissible, not allowed. Then within an LLC, those caused some delays for the application process. Without a doubt, the easiest is just setting it up as a nonprofit corporation. You get all the benefits and you get the protections and as long as you prepare the articles of incorporation correctly and submit it, then it will be approved and it’s not going to be delayed like it would with these other entities.
Toby: That’s in a particular state. When we’re talking about filing for a nonprofit corporation, we’re talking very state specific. It’s not a federal filing. Then there’s magic language you have to include in those.
Karim: Yeah, and that’s the second mistake is the articles of incorporation. You’re completing it according to the state requirements. I can give you an example. If you go to a state like Florida, you’re going to complete it according to the requirements for the state, but it may not be according to the IRS requirements.
If you apply it in Florida, the articles of incorporation, they have a template there. You’re going to set it up as a nonprofit corporation. You fill out the form. You fill out everything that is required that’s asking you to do, from the name of the organization, the address, the officers, the charitable purpose, and then a registered agent. You include all of that, and you submit it with Florida and the Secretary of State will approve it.
But the problem is that even though it’s going to follow the state requirements, it doesn’t follow the IRS requirements. Specifically, the IRS wants some additional language in there. They want you to include at a minimum, the dissolution clause, which states that if the nonprofit ever dissolves the assets of this nonprofit must go to another 501(c)(3) organization. Because if you don’t include it, then it means that the nonprofit could take these taxpayer dollars and give it to the officers and directors and the IRS does not want that.
I can tell you when I worked at the IRS how many times we had seen the articles of incorporation that were deficient because it didn’t include the dissolution clause, and they would always tell us it was approved at the state level and which is a valid point. But that’s only necessary to help you set you up as a nonprofit. That’s a state term.
If you want to be a 501(c)(3), you have to include the dissolution clause. In a state like Florida, it can take five weeks to get the articles of incorporation approved. But to revise the articles of incorporation to add that dissolution clause, it can take up to twelve weeks.
Imagine five weeks plus twelve weeks plus another six months that it takes for the processing times with the IRS. You’re looking at up to a year that your organization’s 501(c)(3) application can get approved. It can take up to a year simply because you didn’t include the dissolution clause within the articles of incorporation. It is extremely important that you get it right the first time to avoid any delays.
Toby: There’s magic language in the articles of incorporation. You have to make sure that you’re setting it up right. There are probably different variations with all the states, depending on how many directors you can have, what they can and cannot do, where you should set it up, all that fun stuff. But then you also have to worry that the feds say it’s not all just 501(c)(3)s out there. You have business organizations, fraternal organizations, […] societies. There are all these different types of nonprofits. How many are there?
Karim: 29.
Toby: There are 29 different flavors. If you’re going to be a 501(c)(3), one of those flavors, you’re going to receive charitable donations, and you have that special language in there. Let’s talk about the special language. What’s number three?
Karim: Well, the third most common mistake is describing your activities as being charitable. A lot of times we’ve seen the application, again, whether it’s with the IRS, or in private practice, a lot of times the organization’s they’re describing it like it’s an investor letter. You’re describing it as if it’s profitable. How you can get a return on your investment thing and the approach, rather than describing it as to why the activities are charitable. That’s the important thing.
It’s not about a for profit motive. Even though you can operate with a for profit, you can be profitable, which is perfectly fine. But you have to explain exactly why the activities are charitable. Always tell the story, given the background. For example we see a housing shortage, under-built by $7 million up to this point and you see that there are low income families who are getting priced out of this area of being able to afford a house.
Perhaps your nonprofit wants to provide affordable housing for low income families. You see that there’s a problem, that there’s a shortage. You see that basically the prices keep going up. The nonprofit wants to come in. We’ll make housing available to low income families who otherwise cannot find housing, maybe they cannot afford it, either so you’re working with them to provide the housing.
Perhaps it’s medical cost, another example. You can’t afford medical insurance, or you can’t afford to pay for your medical bills, and the nonprofit sees the need there. You’re going to help to cover these costs, or for students providing scholarships for students who can’t afford an education as well. You see, this is where the problems are. This is where the needs are.
The nonprofit has the solution. This is what they’re going to do to fix it: they’re helping a charitable class. Organizations just don’t do a good job of explaining how they are serving a charitable purpose, and serving and benefiting that charitable class. They don’t do enough of that. They like to explain their backgrounds and what they’re doing, the affiliations that they may have with other organizations, but again, not focusing on what the charitable activities are.
Toby: Okay, so we have the first three: improper structures, screwing up the articles of incorporation, not putting in the magic language, and then they’re not describing their activities. Let’s dive into number four.
Karim: Yeah, the fourth is using the wrong terminology. There may be words that you’re using within the application, that you don’t realize it’s going to trigger a delay. For example, you can’t use words like partnerships. They hate that. A partnership to the IRS means you are working with a for profit entity and the for profit entity has a for profit motive.
They want to make money for their investors and their shareholders. Whereas the IRS wants to see that the nonprofit has control over it. If there is ever a dispute between a for profit and a nonprofit that the nonprofit has the veto power, that it’s being done for a charitable purpose over a profitable purpose and motive.
Toby: Are there other terms that you see too that cause this delay?
Karim: Yes, the term advocacy. Advocacy can mean ten different things, but to the IRS, advocacy means either you’re working with candidates that are running for office, whether you are supporting or opposing a candidate that’s running for office, which is completely prohibited, or you’re doing advocacy, which means that you are working with congressional members to pass a bill perhaps or maybe you’re reposing and want to veto a bill or law that’s going to be passed within Congress as well.
This is considered to be advocacy and you are limited to how much you can do in terms of these types of activities. You can only do an insubstantial amount, which is a low amount. When they see the word advocacy, they’re assuming that you are doing these types of activities, which can be prohibited altogether, or you’re limited by what you can do.
Then finally, another example, which is an interesting one, is financial literacy. This is a term that the IRS looks at, and they think of credit counseling. Credit counseling is one that is under heavy scrutiny by the IRS. It has been for almost 20 years at this point, because they realize that credit counseling organizations and agencies, a lot of times, collect the fees up front without doing anything to benefit and help the individuals who are having issues with their credit or with their finances.
Financial literacy is actually a question that’s asked in applications in many organizations. If you check yes on that, then it’s going to get delayed, because they’re going to follow up with you about wanting to know whether or not you are a credit counseling organization.
Toby: What would you do instead? If you had somebody that’s like to write financial literacy, would you just say education?
Karim: Yeah, exactly. You can mention that you are educating them. If you want to use financial literacy, you can, but rather than doing that, another option is you can also describe the activities of what you’re doing. Perhaps you’re going to describe them about investing in the market, investing in real estate, how to repair your credit score, how to invest into your 401(k). You can always describe the types of activities that you’re doing without actually using the term financial literacy.
Toby: Through no fault of your own, you might say something, as you understand it as financial literacy, and you don’t realize it’s a buzzword, where the IRS like, anytime somebody says that they do a deep dive, and it’s going to be delayed for six months. Somebody who knows what they’re doing deals with this stuff and says, yeah, here are the words we never use. Make sure that you don’t use one of those words. How about this, make sure you use somebody who knows what they’re doing.
Karim: Absolutely.
Toby: Let’s go to number five. What’s number five?
Karim: Number five is the improper classification. As a 501(c)(3), you’re either a public charity, or you’re a private foundation. Both of them, you’re going to get the tax benefits. But it’s also a good idea to get an understanding, because it’s not one size fits all. It’s going to depend on what you want and what your objectives are.
If, number one, your objective is tax deductibility, you want to get the deductions for your charitable contributions. Well, if you donate appreciated assets, for example, and let’s say it’s worth $25,000, that’s how much you paid. Now it’s worth $250,000. Within a private foundation, you can only deduct your cost, which is $25,000.
But within a public charity, you can deduct up to $250,000. The fair market value of that appreciated asset without having to pay taxes on it so you get a more favorable deduction. It depends on what type of assets you want to contribute to the nonprofit.
Number two, if you’re going to operate internationally, it’s going to be more difficult doing it with a private foundation, versus a public charity. Then if you’re applying for grants as well, it’s going to be almost impossible to receive grants, if you are a private foundation, especially if it’s a private foundation that is the funder, because they have to give out to other 501(c)(3) public charities. They can’t give it to other private foundations.
Toby: What’s an easy way to understand the difference between a public charity and a private foundation?
Karim: It really is a classification. Number one on the 1023 application, it asks, how do you want to be classified? Are you a public charity or private foundation? Many people assume that the private foundation is because of the fact that it’s funded by one individual. It’s also funded and it’s operated and controlled possibly by one family. This is the common characteristics of what you see with a private foundation.
However, you can have something like that within a public charity as well that you can have these characteristics within it initially. But you have to be able to receive public funding and public support. You need to be receiving donations from the public, whether it’s from individuals, whether it’s from other nonprofit organizations, private foundations, or government grants, as well.
You need to be receiving that funding within a public charity, whereas the private foundations typically don’t receive that type of funding. It’s usually set up by the founder with an initial amount that’s being put in and it’s able to sustain the operations of that private foundation for a number of years.
Toby: What if you have a charity that I think you mentioned housing and things like that, and you’re doing low income housing? But if you throw some houses in there, then it’s producing income. Does that help at all or no?
Karim: Absolutely, it does, especially for a public charity. The reason why is because if you receive funding for Section 8 housing, for example, if you receive it from HUD, these are treated as government grants, and not donations. Government grants work more favorably than individual donations. Absolutely, you can do that.
As a public charity, alternatively, it could be a private operating foundation, which is also a very favorable classification. You have one of these two options, if you’re going to do affordable housing.
But we’re always going to recommend first and foremost, it wouldn’t be the public charity, because it’s easier operationally and behaviorally for many of the clients to be able to operate as a public charity, because you don’t have the same number of restrictions that you have, as you do with a private foundation. We do have clients who are private foundations that exist, but more of them are public charities, because it is easier behaviorally for that.
Toby: You get a higher degree of deduction. If I give cash to a public charity, I can write up 60% of my adjusted gross income and when it is as high as 100% during COVID. Whatever it may be, there’s a cash contribution and it’s cut in half, essentially. It’s like 30% when it’s a private foundation.
Karim: Yeah, that’s correct.
Toby: If you’re donating money and you’re a heavy giver, you might want to make sure that whether or not that triggers. Alright, let’s jump into number six, I think we’re at
Karim: Yeah, number six is compensating directors and officers. Within the application, it does ask if you will be compensating directors and officers. You know, there’s nothing wrong. There’s nothing prohibited with compensating directors and officers. But what we’ve realized is that the reality is directors and officers don’t tend to work that often within the nonprofit, generally speaking.
I actually worked with the Coca-Cola Foundation. One of the directors was Warren Buffett, and he showed up for an annual meeting. That’s pretty much the extent of what he does, not too involved in any of the day to day operations in the activities that you see there. That’s typically how directors are.
But for many of our clients, their directors, they may be officers, but they’re also involved in the day to day operations. It seems that the appropriate fit for many of them is to pay yourself as an employee. You’re an executive director, you could be dealing with social media. You could be dealing with the management of the operations of the organization.
You could be an admin, in fact, if you want to, because you’re involved in the day to day operations, whereas a director, typically a couple hours in a month, maybe a couple hours quarterly, maybe even less than that. You’re not really involved that much as a director, and even as an office if you’re not as involved.
But as an employee, you are involved quite a bit. My recommendation is, first of all, again, compensating as a director and officer could cause a delay in the application process. But if you pay yourself as an executive director, for example, that’s an appropriate fit for the type of work that you’re doing. That’s always our recommendation is to pay yourself as an employee and not as director or an officer.
Toby: As an officer and director, you just say, no, nobody’s going to get compensated. But if you do work, it doesn’t prohibit you from paying yourself as an employee. In your application, just don’t put you’re going to pay your officers and directors.
Karim: Yeah. Pay yourself as an employee. Pay yourself as an employee, as an executive director, for example, if you want. Just say no to directors and officers. Yeah.
Toby: Nancy Reagan just said no. All right, what’s number seven? We’re up to seven. Well, you got ten of these.
Karim: There could be more even. Number seven is let’s say you have the 501(c)(3), congratulations, you’re exempt now, but perhaps you haven’t done the activities and you don’t realize it. Even though you haven’t funded it, you haven’t made any donations at the nonprofit, you’re still required to file a tax return. We’ve seen many organizations that don’t file their tax returns.
If you don’t do it for three years, if you fail to file your tax returns for three consecutive years, the IRS will automatically revoke your exemption. You would have to apply for reinstatement of your organization as a 501(c)(3). We have done this a number of times for many organizations that forget to file their own tax returns so their status has been revoked.
In fact, you can even go to the IRS website and you’ll see a number of them that says auto revocation is what it says on there because of the fact that they don’t file a tax return. You have to keep up with your annual filings for your organization, even if you’re not operating at this point, as long as you’re a 501(c)(3), you have to file a tax return.
Toby: You still have to do it even if it’s really small, like if you’re not making what is it? $50,000 for the contributions, it’s a postcard.
Karim: Exactly. It takes no more than five minutes to do it.
Toby: No reason not to do it.
Karim: Yeah, if you have to do the postcard, it will take no more than five minutes for sure.
Toby: All right, so that’s number seven. Let’s go back through these real quick. Improper structure, screwing up your articles, messing up the way you describe your charitable activities, using the wrong terminology, using one of these trigger words that caused them to do a deep dive into you, improper classification, then saying you’re going to compensate officers and directors, and then not filing tax returns. What’s number eight?
Karim: Number eight is you should consult with an expert before you’re going to make donations that have certain types of properties or assets. For example, donating crypto has a reporting requirement that’s different from donating stocks. Even though there’s a market that’s available, and you can look at anytime, 24 hours a day, seven days a week, unlike the stock market, to determine what the price of crypto is, you still have to get it appraised by a qualified appraiser, even though you can find out what the price of it is.
You have to use a qualified appraiser. You have to fill out specific forms as well, whenever you are making donations for something like crypto. In addition, if you donate property that has a mortgage on it, this can have a detrimental effect on you and your taxes. We have seen situations where clients donated the property that had a mortgage. When we ran the numbers, it turned out they actually owed money for this donation, instead of getting a charitable contribution and getting a deduction for it. They actually owed money for it.
Toby: Is that because the charity is now responsible for the mortgage or something and you have mortgage relief?
Karim: Well, what happens is that when it comes to a mortgage there, it’s a relief. What they’re looking at is they’re treating it as a sale, and they’re treating it as a sale by the individual. Part of that sale compares the mortgage that you have versus what you paid for it. They treat that as a sale, whereas the part that doesn’t have the mortgage is treated as a donation.
It’s a really confusing formula as to how they do it. But the fact that you are donating the property with the mortgage means that they’re treating it as a sale, that’s not beneficial as it would be if you were selling the property, as if that was a primary residence because you do have the capital gains exclusion under that. You don’t get that when you’re donating it with a mortgage to the nonprofit, you don’t get that exclusion for that.
Toby: Have somebody run the numbers before you do it. You’re saying don’t just give money to a charity, actually look at the tax ramifications of what if you do. There’s everything from carry forwards like hey, sometimes people give an asset that’s a higher percentage of their income than they’re allowed to deduct. They don’t know what will happen. You carry that forward for five years, things like that. You just want to talk to somebody who knows the rules.
Karim: Yeah, it is a good idea. Because we can tell you what the deductions are, we’ve set 30% of your adjusted gross income for non-cash and 60% for cash. But it’s always good to run the numbers to see how it’s going to work in your favor. Because for the 30% of your adjusted gross income, as you’d see for the non-cash contributions, you may see that you’re not going to be able to get that full benefit in the first year. It may have to be carried forward over the next five years. It’s always a good idea to speak with someone before doing that.
Toby: Make sure that you’re documenting appropriately. If it’s over a certain dollar amount, you have to have an appraisal. What’s that dollar amount?
Karim: It’s $5,000.
Toby: $5000, so you have to be careful. All right, what’s number nine?
Karim: Number nine is the nonprofit forgets to send a donor letter to anyone who makes a contribution to the nonprofit. You see this with larger organizations, when you make donations, they send you that email. They send you a letter, but it turns out it’s IRS compliant. The IRS requires certain language to be included within a letter. The IRS requires the nonprofit to require the donor to receive a donor acknowledgement letter for any contributions that they make to a nonprofit organization.
It’s not the nonprofit’s requirement, it is the donor’s requirement, but because of the fact that we know that donors don’t always remember this rule. It’s important for the nonprofit to send that letter. Even if it’s your nonprofit that you’ve set up and that you’ve donated, that nonprofit needs to send you a letter.
The IRS disallowed it. They’ve won time and time and time again, that if it doesn’t follow the correct rules and the requirements that the IRS requires for it, it can be disallowed. We’ve seen it for as low as hundreds of dollars to millions of dollars where the IRS in these situations have won. They acknowledged that a donation was made. They’re not disputing the fact that the donation was made.
Toby: That seems evil.
Karim: Yeah, it is but it was disputed, because they didn’t follow the IRS rules and regulations for the requirements and what that letter must contain.
Toby: But the donor couldn’t argue. Mutual mistake between the charity and the donor and say, give me my money back. I was mistaken, that we both thought this was a deductible expense. It was predicated on the deduction. Doesn’t that get people in hot water, though? I imagine people aren’t going to go back.
Karim: Yeah, I don’t think it would work at that point. Once you’re audited, and you’re down that path, and you’re down that road.
Toby: It just seems really bad that you did so I didn’t get a letter. Usually, it’s the letter though. It says that nothing of value was exchanged for that type of thing.
Karim: Yeah. For cash, if it’s just a cash contribution, you want to include the language that says no goods and services were given an exchange at a minimum, you need to include that. If it’s for non-cash, then again, you need to follow the requirements where you have a qualified appraiser, and the appraiser has to fill out a form. It can be form 8283, or one of the forms.
We’ve seen it was disallowed, because the form was not signed. The form was filled out but it wasn’t signed. That became an issue and a problem as well. It is a strict compliance rule. It’s not substantial compliance. Under these cases, it’s strict compliance. If you don’t comply with this 100%, they can disallow it. Again, there was one as high as $64 million that recently came out over the past year. These are some harsh rules here. You want to make sure.
Toby: There must be something else going on. Because if you’re giving $64 million to a charity, you’re doing good. The IRS doesn’t imagine they wouldn’t want to thwart that. But maybe there’s something else going on with that individual. They’re saying, well, technically, we can deny you this, maybe they’re using it as a tool. But it just seems like it flies in the face of logic.
Karim: I agree. It’s a possibility but I have seen disputes. I’ve worked with them as well with some of these disputes, where they were significant amounts. Many times, either what would happen is they would settle for a different amount, rather than disallowing the full amount, or they would disallow the full amount for it because of the fact that again, with each scenario, they weren’t disputing the fact that it was made, and that it was donated, and one was highly publicized that I had dealt with as well.
It was highly publicized about the donation. The IRS knew about it. They were fighting the organization over the fact that they had claimed that they didn’t comply with the IRS rules and regulations. IRS Publication 1771, definitely, highly recommended that you look at that to understand the rules.
Toby: That’s horrible, but it’s understood. Make sure that you do it. I always assume that there’s something else going on, maybe the value of the donation tanked, maybe it was FTX, or something like that, or somebody was doing it. They’re like, oh, I get this big write off, and the IRS is just finding a way to say no. What’s the last one? I think that was number nine. We should be at number ten.
Karim: Yeah, number ten is asset protection. We’ve discussed affordable housing. Let’s assume that as a nonprofit, you purchase 1, 2, 3, 10 houses, don’t put them all into the same nonprofit. If something happens on the premises of one house, one property, then it’s possible and you face the risk that a creditor if they went into a lawsuit can take all the other assets to cover that lawsuit.
Our recommendation and it’s something that we certainly do within Anderson very well, is asset protection. Out it in as an example, a single member LLC that’s owned and operated and controlled by that nonprofit. The fact that the organization is a 501(c)(3) means that the single member LLC is automatically going to be a 501(c)(3) as well if they are owned and controlled by the nonprofit. It’s a simple process to do and it protects all of the other properties and assets that you have within those nonprofits, and it’s often overlooked.
Toby: If you do so just because it’s a nonprofit, the nonprofit may offer you some asset protection from its activities. But if you have things in there that’ll create liability, you’re saying, isolate them just like you would in any other business or in your own world.
Karim: Yeah. It is a misconception. I’ve heard it many times thinking that you can’t sue a nonprofit or you can’t recover from nonprofits. It’s ridiculous. You can go after a nonprofit just like any other organization, and you can go after those assets, just like any other organization. Yes, they are at risk as well whether it’s the asset protection with a single member LLC, or even directors and officers, insurance, something like that. These sorts of things will at least reduce the risks, or at least minimize the liability that you would have in terms of any organization or any creditor coming after that nonprofit.
Toby: Well, that was great. We just made the top ten mistakes people make when forming and operating a nonprofit. That’s a pretty comprehensive list. I know you said that there was more, but I think that you just gave a lot of people a lot to think about. But let me just run through them. We’ll go ten to one. You run over asset protection, making sure that you’re secure isolating the assets inside that charity. Just like you would in any other in your individual realm or in a business, you still want to mitigate the liability that comes with certain risk assets.
Sometimes the charity doesn’t send out a donor letter and it disallows the deduction. Make sure that you get that donor letter. Sometimes somebody did not consult with their expert, or with their professional before donating assets, and for whatever reasons, they didn’t follow the rules with regards to getting an appraisal or whatnot, and could cause you to lose the donation or there’s a tax consequence to the donation, like when you have a mortgage.
Number seven was, hey, you forgot to file your tax returns. They didn’t file tax returns on your charity. As a result, it was administratively dissolved by the IRS. I guess the state would still be going on but the IRS terminates its tax exempt status, which can be a pretty, pretty rude awakening there.
Number six is don’t put it in that you’re going to compensate your officers and directors, unless you absolutely have to, because that’s a big red flag for the IRS. Number five was you improperly classified the type of charity and it’s going to cause you delay that is unneeded. Then number four is you use the wrong terminology. This was the one I said was buzzwords. You’re using buzzwords that are going to cause the IRS to dig into and to delay the whole process.
Number three was, hey, you got to make sure that you’re describing your activities as being charitable. This is not a business plan for a for profit, or for angel investors. This is, hey, this is why we’re doing what we’re doing, it’s for the public good. The IRS approves you. Number two is articles of incorporation user professional because there’s magic language that you have to put into those articles.
The state doesn’t require it, but the IRS does, you will not get your exemption unless you have this magic language in there. Make sure you have the magic language in the articles of incorporation. Number one was the improper structure from the start. People don’t realize that just because it’s a federal exemption that they skip past what you do with the state or they do something really simple like, hey, I set up an LLC with the state.
As a result, it causes you all sorts of problems and delays, trying to get your exemption that there is a way to do this the right way that the IRS is used to. That is to use a corporation, a nonprofit corporation. Don’t use a for profit corporation. But that’s number one. That was ten. Did I miss any?
Karim: No.
Toby: We nailed it. Karim, thank you for coming on and giving us the top ten mistakes people make when forming or operating a nonprofit. Anything else you want to add?
Karim: No, I mean of course, my plug is going to be using Anderson. Use us because we’ve done this hundreds and hundreds of times. It’s probably new to you, but it’s not new to us. We are aware of what it is that can delay your application. We are aware of the issues that can come up after you have the 501(c)(3) because we’ve done this so many times.
Please use an expert to help you with this. You’re always welcome to reach out to us. We’d be happy to work with you to make sure that everything gets done from start to finish and it’s done correctly. Then of course you get the exemption and that you are in compliance with the federal and the state requirements as well.
Toby: All right, I think that’s fair. You don’t know what you don’t know so use somebody who does and in that way it goes through much smoother. Your job is to go out there and if you’re in the nonprofit realm is to go have a great effect on the public and take your idea and make it into reality.
Let the pencil pushers do all the compliance stuff so that you don’t have to get in the way of that. Because a little mistake could lead to disastrous consequences. Reach out to Karim. I’ll put your information in the show notes down below so that they can link and click and get with your team. You have a full team. You guys do the compliance, the setup, the formation of the entities and make sure that it runs and hums.
Karim: Yeah, we have a dream team. They do a fantastic job. We also have a weekly Q&A session, which I’m proud of as well. You can hop on every single week on Tuesdays for one hour, ask all your questions. We answer anywhere from 30 to 50 questions as well. We’re always accessible, always available. There’s always opportunities to ask us any questions. Again, I’m proud of the team that we have. It is a fantastic team. They do a fantastic job.
Toby: Well, that’s fair enough. Thank you for going over the top ten mistakes people make when forming or operating a nonprofit. If you know anybody that could benefit from this information, forward on to him. As always, go out there and do good things and good luck. Karim,thanks again for coming on. You brought your A game and you gave us a lot to think about. Thanks again.
Karim: Thank you. It’s great to be here.
