Historical Societies As Nonprofit Organizations
Written by Matthew Magda in the Features category and the Spring 1979 issue Topics in this article:Incorporation
The long-range interests of groups such as historical societies are best served by incorporating them as nonprofit organizations. Incorporation creates a legal identity for your society and consequently conveys important legal protections. Once incorporated, your members are secured from society debts, individual liabilities and other legal actions; your collections of historical materials and your property, bo.th land and buildings, will belong to the society and are protected from acquisition by any individual once your society dissolves; finally, your status as a nonprofit organization makes it easier to attract donations and gifts.
Procedures for Incorporation
Each state has its own specific procedures for incorporation. You should write the Secretary of State of your state for information. It is also advisable that you examine your state’s most recent nonprofit corporation law.
Although the procedures for incorporation vary from state to state, there are some universal aspects of incorporation for which Pennsylvania will serve as an instructive example. The first step for historical societies in Pennsylvania is to obtain application from DSCB 15-7316 for riling articles of incorporation as a nonprofit organization from the Corporation Bureau, Department of State, Room 308 North Office Building, Harrisburg.
Before you file the articles, it is necessary that your organization’s name be approved and registered by the Corporation Bureau. There are regulations forbidding the use of any name that is misleading or one that is deceptively similar to that of another organization. To discover whether your organization’s name is available, you should file form DSCB 17.31 A, Request for Corporate Name Search. If your name is cleared you may then file form DSCB 17.31 B, Application to Reserve Corporate Name.
Under the Pennsylvania Nonprofit Corporation Law of 1972 (See: Title 15, Purdon’s Pennsylvania Statutes) the articles of incorporation are to be signed by each of the incorporators and are to include the following:
- The name of the organization
- The address, including street and number, if any, of its initial registered office
- A brief statement of the purpose or purposes for which the organization is incorporated
- A statement that the organization does not contemplate pecuniary gain or profit, incidental or otherwise
- The term of existence, which may be perpetual
- A statement whether the organization is to organize upon a non-stock basis or stock basis
- If the organization is to have no members, a statement to that effect
- The name and address of each of the incorporators
- Any other provisions that the organization chooses to insert and which pertain to the subject matter of the bylaws of the organization
- The written consent of those persons selected as directors, to serve in such capacity.
You can find sample articles of incorporation and bylaws in Clement M. Silvestro’s Organizing a Local Historical Society (Nashville, TN: AASLH, 2nd rev. ed., 1975). The sample documents are good models for your organization.
Once the articles have been drawn up, the incorporators of the organization must officially publish a notice of intention to file or of the filing of articles of incorporation. This notice may appear prior to or after the day the articles were filed in the Department of State. The public notice must state the name of the organization, present a statement of intent to incorporate or of present incorporation, present a summary of the purposes of the organization, and state the date of filing of articles of incorporation in the Department of State. A $75 fee is charged for the filing of articles of incorporation. (See Title 19 of the Pennsylvania Code for fee charges and sample application forms for filing of articles of incorporation.)
Incorporation completed, your organization assumes certain legal powers. Among the more important powers listed in the 1972 Pennsylvania Nonprofit Corporation Law are:
- To sue and to be sued, complain and defend
- To have a corporate seal
- To acquire, own and dispose of any real or personal property or any interest therein
- To sell and convey, lease away, exchange or otherwise dispose of all or any part of its property and assets
- To guarantee, become surety for, acquire and dispose of obligations, capital stock and other securities, and evidences of indebtedness
- To borrow money, and issue evidences of indebtedness
- To invest its surplus funds, to lend money and to take and hold real and personal property or security for the payment of funds so invested or loaned
- To make contributions and donations for charitable purposes
- To be a promoter, partner, member, associate or manager of any partnership or enterprise or in any transaction, undertaking or arrangement in which the organization conducts itself
- To transact any lawful business which the board of directors or other body considers to be in aid of governmental authority
- To continue the salaries of members serving in the armed forces of the United States, or the national guard, or any other organization established for the protection of the lives and property of the United States, during their term of service or whatever term
- To grant allowances or pensions to its directors, officers and employees and after their death, to their dependents and beneficiaries
- To elect, approve, and remove officers, employees and agents of the corporation, define their duties, fix their reasonable compensation and the reasonable compensation of directors, and to indemnify corporate personnel
- To enter into any obligation appropriate for the transaction of its affairs
- To have and exercise all of the powers and means appropriate to effect the purpose or purposes for which the organization is incorporated
- To dissolve and wind up.
Taxation
Tax Exemption
While incorporation is proceeding, your society should apply for federal tax exemption status with the Internal Revenue Service. Historical societies are covered for exemption status under Section 501(c)(3) of the 1954 Internal Revenue Code which reads:
Corporations, and any community chest, fund or foundation, organized and operated exclusively for religious, or educational purposes, or for the prevention of cruelty to children or animals, no part of the net earnings of which inures to the benefit of any private shareholder or individual, no substantial part of the activities of which is carrying on propaganda, or otherwise attempting to influence legislation, and which does not participate in or intervene in (including the publishing or distributing of statements), any political campaign on behalf of any candidate for public office.
Application for tax exemption is to be made on Form 1023 with the District Director of the IRS. Be sure that your articles of incorporation limit your organization’s purposes to those qualifying for exemption by the 1954 Code. Also required in the articles is a provision mandating, in the event of dissolution, the distribution of assets for an exempt purpose. IRS regulations insist that upon dissolution your organization cannot distribute earnings to any private shareholder or individual; the assets must be distributed for an exempt purpose, and if a beneficiary acts as distributee, such distributee must qualify as an exempt organization.
In order to maintain your tax-exempt status you must file an annual financial report with the IRS on Form 990. If the IRS rejects your application for tax exemption, or is unduly delaying a ruling on your organization’s tax classification, you can take legal action. The 1976 Tax Reform Act permits organizations engaged in disputes with the IRS concerning their tax status to obtain quick judicial review in tax court, court of claims or a U.S. District Court. There is also a provision in the reform act which guarantees the deductibility of certain contributions during the period of litigation.
Social Security Taxes
Nonprofit organizations with 501(c)(3) status are tax-exempt from almost all forms of taxation such as income, property and sales. Many nonprofit organizations, however, do not realize that they are also exempt from social security taxes and yet continue to make social security payments. Despite these payments, their employees are not officially covered under social security. If nonprofit organizations wish to have their employees covered by social security they should file Form SS 15 with the IRS. By this act the organization waives its immunity from social security taxes and requests coverage for its employees. Included with the form should be a list of the names and signatures of the employees wishing to be covered by social security.
Income and Revenues
So long as the money is applied to the maintenance and operation of the organization, and is not divided or distributed in any manner whatsoever among the members, directors or officers of the organization, all income or revenues derived from the business operations of a nonprofit organization are tax-exempt and legal. Remember the general rule is that income must be plowed back into your organization’s operating budget. Failure to do so will result in loss of your tax-exempt status and other legal actions.
Some words of caution are appropriate. Be aware that IRS codes and tax laws are constantly being modified and changed. For example, in late 1975 the IRS did rule that nonprofits had to pay income tax on sales at exhibitions or trade shows. Therefore, in some cases income from rentals, investments or sales may be taxable. Tax-exempt organizations must also beware of engaging in too much commercial activity. Nonprofit organizations must limit their commercial operations so that they are secondary to the functions of the organization. Should the commercial side loom too large, they could lose their tax exemption.
Whenever you are confused by tax questions, be sure to engage a competent tax lawyer or accountant. Frustration may result because you do not always get the same answer, so be sure to verify legal advice with supporting sources. Your local bar or accountant association may lend assistance on these matters.
Gifts and Donations
For nonprofits, an important aspect of their tax-exempt status is that donors are permitted to deduct from their federal income tax lawful gifts of money, bonds, stocks, real estate and other property, plus deduct the fair market value of library, museum and art objects they may give to your organization. In this way the financial burdens of the donor are eased. However, this privilege can be abused both consciously and unwittingly, resulting in the crimes of tax fraud and avoidance. Be sure to consult a tax lawyer and use the services of a good appraiser. A useful discussion of the questionable practices such as multiple deductions, conniving appraisals and fake gifts is given in AASLH Technical Leaflet, 39, “Tax Problems of the Collector,” by Ralph G. Newman.
State Financial Reports and Licensing
A recent article reported that over half of the fifty states now require nonprofit organizations holding property or soliciting contributions to register and file financial reports. In many states, as in Pennsylvania, these reports must be accompanied by the opinion of an independent accountant. These reports are to be filed with a state agency. In Pennsylvania, Forms CC0-100, Application for Certificate of Registration as a Charitable Organization, and CC0-1, Annual Report of Charitable Organizations, are to be filed with the Commission on Charitable Organizations, Department of State, Room 301 North Office Building, Harrisburg.
Most of the states, however, do exempt certain categories of organizations from filing. For example, in Pennsylvania, organizations which annually receive less than $7,500, plus those organizations which could be classified as religious, educational (those having a curriculum), nonprofit hospitals, and those organizations that solicit funds solely from their membership and which have no paid fund raisers are exempt from filing.
Trustees
Vital managerial and financial responsibilities are held. by trustees. They set the priorities of the organization, fix salaries and hours, and administer the assets, both monetary and property, of the organization. You can find a good general survey of the duties and responsibilities of trustees in AASLH Technical Leaflet, 72, “The Role of Trustees: Selection and Responsibilities,” by Mrs. Lammont du Pont Copeland.
Trustees and Dangers of Over-Extension
Because of their responsibilities and the vital functions they perform, trustees should be selected with great care. Potential trustees should be measured in terms of their managerial abilities, open-mindedness, personal integrity, decisiveness and honesty. A trustee must be willing to devote substantial amounts of energy and time toward fulfilling his or her duties. A prominent member of the community may be enlisted, but a person of lesser status may be a wiser choice. Such a person may be able to devote more time to his trusteeship duties than the person of social prominence. Plus, the person of lesser status may be less likely to succumb to the dangers of overextension.
One of the dangerous temptations of a nonprofit organization is to overextend its financial resources by over-investment in new properties. The root cause of this temptation is the organization’s tax-exempt status from both income and property taxes. For too many trustees, especially those having great social prominence, the success of the organization is defined in terms of bigger is better. When “bigger” becomes a central motivational role, over-investment begins raising fixed costs. This process eventually drives the organization into bankruptcy because the organization can no longer maintain its newly acquired properties.
Standards of Care
The standards of care for the directors of regular business corporations have been defined by many years of litigation. However, there is no similar compilation of litigation to provide exact guidelines for trustees of nonprofit organizations. Therefore, many nonprofit trustees have relied on the standards set for the directors of regular business corporations. These standards have been defined so that the directors must “exercise that degree of diligence, care and skill which ordinarily prudent men would exercise under similar circumstances.”
In some cases these standards have been transposed onto statutes covering nonprofit officers. For example, the Pennsylvania Nonprofit Corporation Law of 1972, Title 15, Purdon’s Pennsylvania Statutes, Section 7734 states:
Officers and directors shall be deemed to stand in a fiduciary relation to the corporation, and shall discharge the duties of their respective position in good faith and with the diligence, care and skill which ordinarily prudent men would exercise under similar circumstances.
Unfortunately, the vague language of such a provision leaves the standards of care for trustees somewhat open-ended. Indeed, some trustees have felt secure with these standards precisely because of the wide flexibility thus granted. Nonetheless, trustees should be aware that there are some general guidelines which trustees should follow if they are to protect themselves from liabilities for good faith errors.
A trustee must reveal any financial interest he or she has in any business transaction that is pending. In order for the transaction to be legal, the trustee must make a “full disclosure of the material facts” of his or her interest in the pending business to the board of directors and the membership. (Title 15, Purdon’s Statutes, Section 7728).
The trustees must submit an annual financial report to the members of the organization. This report must include a detailed summary. of the assets and liabilities of the organization, and of the financial and institutional affiliations of any officers or trustees with other organizations or businesses. (Title 15, Purdon’s Statutes, Section 7555).
In the area of investment policy, trustees should protect themselves from charges of negligence and error. Trustees can remain within the bounds of good faith and avoid legal liabilities if they abide by the following general suggestions. A trustee should not fail to attend meetings on investment policy. A trustee should be sure that’ he or she reviews investment reports and supervises related personnel.
Although trustees may be conscientious and diligent in their handling of the organization’s business, the uncertainties that still surround the “standards of care” for nonprofit trustees make it wise to take a final protective step. Trustees may request that their organization indemnify them against personal liabilities and litigation costs stemming from their service as trustees. Such indemnification can be backed up with insurance. The Pennsylvania Nonprofit Corporation Law authorizes such indemnification for officers and members, and any organization which wishes to do so may state such indemnification in their articles of incorporation and bylaws.
Lobbying
Nonprofit organizations are not barred from lobbying, but they stand to lose their tax-exempt status if they violate the provision of the tax code which states that “no substantial part of the activities [of a 501(c)(3) organization] is carrying on propaganda or is otherwise attempting to influence legislation.” Loss of tax exemption would mean that the organization would then be subject to federal income tax and that contributors would no longer be able to deduct their gifts as charitable deductions. Therefore, it is important to know what activities are banned and which are permitted.
Nonprofit organizations cannot participate in election campaigns or in any other form of partisan activity. The IRS has avoided setting any specific standards on the acceptable amounts of lobbying under the “substantial part” provision. However, a small amount, such as 5 percent of overall activities, may be regarded as a safe level of lobbying. Generally, lobbying includes the following activities: attempts to influence either administrative decisions, the writing of regulations or the actions of regulatory agencies at all levels of government. Nonprofits may also engage in “selfdefense direct lobbying.” In such cases an organization may lobby against any possible decision which “might affect the existence of the organization, its powers and duties, its tax-exempt status, or the deduction of contributions to the organization.”
A lobbyist generally means any person who is employed or engaged for compensation by any other person, corporation or organization to lob by. Activities that are not generally regarded as lobbying are the providing of technical assistance or testimony to a legislative body or committee upon request at all levels of government and the activities of an organization member who is also an employee or official of the government provided he or she is acting in their official government capacity.
Usually lobbyists must register as such with their state government in order for their activities to be legal. Under the Pennsylvania Lobbying, Registration and Regulations Act of 1976, a lobbyist must submit to the Chief Clerk of the House of Representatives and the Secretary of the Senate a registration statement made under oath of affiliation before an officer authorized by law to administer oaths. The registration is to include the name and business address of the lobbyist, and the name and address of the person, organization or corporation by whom the lobbyist is employed or engaged. Twice a year a lobbyist must also submit a sworn statement of expenses and obligations, which includes specific disclosure requirements. Any violations of the law will result in legal and financial penalties.
Insurance
(Much of the following is a synopsis of AASLH Technical Leaflet, 50, “Insuring Against Loss,” by Beverly M. Du Bose.)
Although the courts have traditionally been lenient with nonprofit institutions in cases of claims filed against them, it is not good policy to rely on the courts for protection. Insurance should be purchased.
Historical societies should obtain coverage for four potential kinds of insurance problems: injury to the public, property damage, employee injury and loss caused by dishonest employees.
For property insurance, a society should be insured under the Public Institution Form which covers both buildings and contents. If a society operates a library and museum, it should be covered under a Valuable Papers policy. A Fine Arts policy will cover museum paintings, artifacts and other valuable holdings.
Employee injury is covered by Workmen’s Compensation. In some states, carrying Workmen’s Compensation is not mandatory if you employ less than a certain number of employees. It is suggested, however, that you carry the insurance because it sets specific limits on payments in the event of a loss. Without Workmen’s Compensation you may be subject to unlimited liabilities in court.
Liability and General Liability insurance will cover your responsibilities to the public for any injury, death or damage to their property. Your liability policy should include coverage for all automobiles used by the historical society, whether owned, rented or borrowed. The policy should also include protection against liabilities for negligence at the premises of the society or at any other business operations of the society. Be sure that your organization’s premises are free of any potential obstacles or sources of loss. Personal injury coverage may be added to protect the society in cases of libel, slander and false arrest.
Fidelity Bond will cover you from possible losses stemming from the acts of dishonest employees. Your policy should cover losses due to property damage or theft caused by employees. The Fidelity Bond can be expanded into a Crime policy to cover any possible loss of money, including check forgery.
All of these forms of insurance may be combined into one package policy by insurance companies who offer rate savings for consolidated contracts.
Employee benefits is the final area of insurance, which includes hospitalization, group life and pension. This insurance is usually handled separately from the other casualty and fire insurance. Your policy should cover both regular hospital and major medical expenses, plus coverage for life. Pension plans are complex areas of insurance, and should be carefully examined by historical societies on an individual basis.
Matthew Magda is a doctoral candidate in American history at the University of Connecticut. His article is adapted from a paper written for the Pennsylvania Historical and Museum Commission, Part II of which will appear in the Summer issue.