501(c)(3)
The section of the Internal Revenue Code that designates an organization as charitable and tax-exempt. Organizations qualifying under this section include religious, educational, charitable, amateur athletic, scientific or literary groups, organizations testing for public safety or organizations involved in prevention of cruelty to children or animals. Most organizations seeking foundation or corporate contributions secure a Section 501(c)(3) classification from the Internal Revenue Service.
- The tax code sets forth a list of sections 501(c)(4-26) to identify other nonprofit organizations whose function is not solely charitable (e.g., professional or veterans organizations, chambers of commerce, fraternal societies, etc.).
509(a)
The section of the tax code that defines public charities as opposed to private foundations. A 501(c)(3) organization also must have a 509(a) designation to further define the agency as a public charity.
Articles of Incorporation
The corporate charter of an organization, as filed with the Secretary of State.
By-Laws
The constitution of organization. It can be amended by the Board of Directors (or the members of the organization, if the document so provides).
Committees
The By-Laws may authorize one or more committees to focus on particular aspects of the organizations operations. Committees also may be created by board resolution.
Director
A person who serves on the governing board of the institution, with full voting powers as distinguished from trustees or advisory board members who have the right to attend board meetings, but may not vote. A quorum under Illinois law, consists of one third of all voting members.
Disqualified Person
As applied to public charities, the term disqualified person includes (1) organization managers, (2) any other person who, within the past five years, was in a position to exercise substantial influence over the affairs of the organization, (3) family members of the above, and (4) businesses they control.
- Paying excessive benefits to a disqualified person will result in the imposition of penalty excise taxes on that person, and, under some circumstances, on the charity’s board of directors.
Donor vs. Donee Organizations
A charitable or other exempt organization may be established to receive and disburse funds, or to receive and spend funds, or both.
Endowment Funds
There are two kinds of endowments.
- Donor-restricted endowments are accepted according to the terms of the gift. A donor might require that the principal remain intact in perpetuity, or for a defined period of time or until sufficient assets have accumulated to achieve a designated purpose.
- Board-directed endowments are funds with removable or changeable restrictions as defined by the Board of Directors.
Exempt Organizations
Organizations that do not have to pay state and/or federal income taxes. Organizations other than churches seeking recognition of their tax-exempt status under Section 501(c)(3)of the Internal Revenue Code must apply to the Internal Revenue Service. These organizations may also be exempt from sales taxes. Under Illinois law, not for profit status does not exempt an organization from paying property taxes, unless it is also classified a public charity or has another qualifying status.
Form 990
The IRS form filed annually by public charities. The IRS uses these forms to assess compliance with the Internal Revenue Code. Both forms list organization assets, receipts, expenditures and compensation of officers. A 990-T is a sister form, declaring and paying taxes on unrelated business income (at standard corporate rates).
General Operating Support
A grant made to further the general purpose or work of an organization, rather than for a specific purpose or project; also called an unrestricted grant (sometimes also referred to as operating support).
Grant
An award of funds to an organization or individual to undertake charitable activities.
Lobbying Activities
501(c)(3) organizations are restricted in their ability to engage in direct or grassroots lobbying activities.
- The filing of an amicus brief is not lobbying activity.
- The submission of a statement or testimony pertaining to pending legislation is not lobbying activity IF the statement or testimony is at the request of the legislative body or committee chair.
Officers
The President, Vice-presidents, Secretary, Treasurer and Assistant Secretaries and Treasurers and such other persons who are designated as officers in the Articles or By-Laws. Officers may serve as members of the Board of Directors, but at least half of the voting Board members should not be officers or employees of the organization. Charitable watch organizations, such as the Better Business Bureau, often have more stringent requirements.
- An Executive Director is usually a compensated staff member, and may or may not be a member of the Board of Directors.
- General Counsel, Comptrollers, Internal Auditors and similar professionals may have fiduciary (and sometimes statutory) duties as the CLO (Chief Legal Officer), CFO (Chief Financial Officer), CCO (Chief Compliance Officer). Sometimes they also are officers of the corporate organization.
Public Charity
A nonprofit organization that is exempt from federal income tax under Section 501(c)(3) of the Internal Revenue Code an that receives its financial support from a broad segment of the general public. Religious, educational and medical institutions are deemed to be public charities. Other organizations exempt under Section 501(c)(3) must pass a public support test to be considered public charities, or must be formed to benefit an organization that is a public charity.
- Charitable organizations that are not public charities are private foundations and are subject to more stringent regulatory and reporting requirements.
Public Foundation
A nonprofit organization that receives at least one-third of its annual income from the general public (including government agencies and foundations). Public foundations may make grants or engage in charitable activities. Public foundations, along with community foundations, are recognized as public charities by the IRS. Although they may provide direct charitable services to the public as other nonprofits do, their primary focus is on grantmaking.
Public Support Test
There are two public support tests, both of which are designed to ensure that a charitable organization is responsive to the general public rather than a limited number of persons.
- One test, sometimes referred to as 509(a)(1) or 170(b)(1)(A)(vi) for the sections of the Internal Revenue Code where it is found, is for charities like community foundations that mainly rely on gifts, grants and contributions.
- To be automatically classed as a public charity under this test, organizations must show that they normally receive at least one-third of their support from the general public (including government agencies and foundations).
- However, an organization that fails the automatic test may still qualify as a public charity if its public support equals at least 10 percent of all support and it also has a variety of other characteristics, such as a broad-based board, that make it sufficiently “public.”
- The second test, sometimes referred to as the section 509(a)(2) test, applies to charities, such as symphony orchestras or theater groups, that get a substantial part of their income from the sale of services that further their mission, such as the sale of tickets to performances.
- These charities must pass a one-third/one-third test. That is, they must demonstrate that their sales and contributions normally add up to at least one-third of their financial support, but their income from investments and unrelated business activities does not exceed one-third of support.
Ratification
A Board of Directors can retroactively approve of past actions nunc pro tunc [now for then].
Restricted Funds
Income or assets that are restricted in their use, in the types of organizations that may receive grants from these funds, or in the procedures used to make grants from such funds.
Unrestricted Funds
Normally found at community foundations, an unrestricted fund is one that is not specifically designated to particular uses by the donor, or for which restrictions have expired or been removed.