Historical Societies As Nonprofit Organizations

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:

1. The name of the organization
2. The address, including street and number, if any, of its initial regis­tered office
3. A brief statement of the purpose or purposes for which the organi­zation is incorporated
4. A statement that the organization does not contemplate pecuniary gain or profit, incidental or other­wise
5. The term of existence, which may be perpetual
6. A statement whether the organiza­tion is to organize upon a non­-stock basis or stock basis
7. If the organization is to have no members, a statement to that effect
8. The name and address of each of the incorporators
9. Any other provisions that the or­ganization chooses to insert and which pertain to the subject matter of the bylaws of the organization
10. 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:

1. To sue and to be sued, complain and defend
2. To have a corporate seal
3. To acquire, own and dispose of any real or personal property or any interest therein
4. To sell and convey, lease away, exchange or otherwise dispose of all or any part of its property and assets
5. To guarantee, become surety for, acquire and dispose of obligations, capital stock and other securities, and evidences of indebtedness
6. To borrow money, and issue evi­dences of indebtedness
7. 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
8. To make contributions and dona­tions for charitable purposes
9. 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
10. To transact any lawful business which the board of directors or other body considers to be in aid of governmental authority
11. 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
12. To grant allowances or pensions to its directors, officers and em­ployees and after their death, to their dependents and beneficiaries
13. 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
14. To enter into any obligation ap­propriate for the transaction of its affairs
15. To have and exercise all of the powers and means appropriate to effect the purpose or purposes for which the organization is incor­porated
16. 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.