Many people are involved with non-profit entities, whether they donate to them, sit on their boards, or simply use their services. Non-profit entities are unique business entities at both the state and federal levels which are fraught with compliance issues that can jeopardize their non-profit status and liability protection.
In Wisconsin, most non-profit entities are non-stock corporations subject to Chapter 181 of the Wisconsin Statutes. As the name implies, non-stock corporations do not issue shares of stock and do not have shareholders. Typically, a non-stock corporation’s board of directors controls the entity’s high-level activities and appoints officers to conduct the entity’s daily business. A key difference between a non-stock corporation and a business corporation (subject to Chapter 180 of the Wisconsin Statutes) is that a non-stock corporation’s volunteers, directors and officers are, subject to some exceptions, immune from liability arising out of their activities associated with the non-stock corporation.
Another key component of any non-profit entity is the acquisition of tax-exempt status from the Internal Revenue Service (“IRS”). There are many different types of tax-exempt entities, but the most prevalent is a 501(c)(3). Depending on the amount of the entity’s annual gross receipts, amongst other factors, an entity can automatically be tax-exempt or it must file either Form 1023-EZ or Form 1023 with the IRS to acquire tax-exempt status.
If a non-profit entity fails to file its tax return with the IRS, fails to file its annual report with the Wisconsin Department of Financial Institutions (“WDFI”), or fails to maintain corporate formalities, it can lose its tax-exempt status, its corporate status and its liability protection for its volunteers, officers and directors. Accordingly, the directors of a non-stock non-profit corporation should designate an individual to review the following items on an annual basis:
Registered Agent / Principal Office – Search the WDFI’s online corporate records and update them accordingly to ensure that the entity’s registered agent and principal office are correct.
File Annual Report – The WDFI will send an entity’s registered agent a postcard on an annual basis reminding the registered agent to file the entity’s annual report. If the registered agent fails to file the entity’s annual report timely, the WDFI may administratively dissolve the entity, which negates the entity’s corporate existence and liability protection under Chapter 181.
Charitable Organization Registration – Subject to several exceptions, if a non-profit entity solicits donations from the public, the entity must register with the WDFI as a charitable organization and must file a separate annual charitable organization report with the WDFI.
Sales and Use Tax Exemption – Under Wisconsin law, certain non-profit entities are exempt from paying sales and use tax on their purchases. However, they must acquire a Certificate of Exempt Status from the Wisconsin Department of Revenue (“WDOR”) and must submit Form S-211 to their vendors to ensure that their purchases are exempt from sales and use tax.
Sales Tax Collection - Despite being exempt from paying sales and use tax on their purchases, the WDOR requires some non-profit entities to collect and remit sales tax to the WDOR for their sale of certain items and services. A non-profit entity should review its sales on an annual basis to ensure that it is compliant with the WDOR’s rules regarding the collection and remittance of sales tax.
Federal Tax Return - By May 15 of each year, an officer should file the non-profit entity’s tax return with the IRS, which, depending on the gross receipts of the entity, amongst other factors, will be on Form 990-N, 990-EZ, 990-PF or 990. If an entity fails to file its tax return for three consecutive years, the IRS will automatically revoke the entity’s tax-exempt status. On an annual basis, an officer should search the entity’s name on the IRS’s online Tax Exempt Organization Search to ensure that it is still tax-exempt and that it can receive tax-deductible donations.
Corporate Governance – The entity should memorialize its corporate activities, including the election of its board of directors and officers, in written resolutions that it should include in its corporate record book.
With the transition of officers and directors and the complexity of the reporting requirements, it is easy for an entity to overlook a component of its legal compliance. An entity can correct these errors, but it is time consuming and costly to do so. Accordingly, it is important to be vigilant to remain compliant with all laws applicable to a non-profit entity.
For more information on conducting a legal review for non-profits, contact the Business Team at Conway, Olejniczak & Jerry.