Know your “friends”

Fascinating story about a “friends of” organization for a library that decided to close its store because of an issue over control of its decision-making. Since many markets have these type of supporting organization relationships, it’s very important that they understand how these work, especially in understanding the different types of a supporting org, according to the IRS:

Type I 

A Type I supporting organization must be operated, supervised or controlled by its supported organization(s), typically by giving the supported organization(s) the power to regularly appoint or elect a majority of the directors or trustees of the supporting organization. The relationship between the supported organization(s) and the supporting organization is sometimes described as similar to a parent-subsidiary relationship.

Type II

A Type II supporting organization must be supervised or controlled in connection with its supported organization(s), typically by having a majority of the directors or trustees of the supported organization(s) serve as a majority of the trustees or directors of the supporting organization. The relationship between the supported organization(s) and the supporting organization is sometimes described as similar to a brother-sister relationship.

Type III

A Type III supporting organization must be operated in connection with one or more publicly supported organizations. All supporting organizations must be responsive to the needs and demands of, and must constitute an integral part of or maintain significant involvement in, their supported organizations. Type I and Type II supporting organizations are deemed to accomplish these responsiveness and integral part requirements by virtue of their control relationships. However, a Type III supporting organization is not subject to the same level of control by its supported organization(s). Therefore, in addition to a notification requirement, Type III supporting organizations must pass separate responsiveness and integral part tests.

The friends of entity in this story wasn’t one of those types, but instead was set up as its own 501 (c) (3) which was part of the issue.

From the story:

Friends board member Beth Schneider said the nonprofit will still raise funds for the Santa Maria Public Library. They are running a book sale from September 20–22 and donate books online through Amazon. Schneider asserts that the relationship between the library and the Friends remains: “We’re still the Friends of the Santa Maria Public Library.”

Mary Housel, library director, said that the library and the city will need to sign some form of contract in the future, although what that would entail, and why it is necessary if they are not utilizing city property to function, was not disclosed. Schneider said that they weren’t likely to take on any contract—“not as long as the city has taken the stance that it has.”

Advertisements

Can your organization become a B Corp?

When food and civic organizations start to think about how they might incorporate, they often stop as soon as they get their company registered in their state which for many, may be enough protection and structure.
Some also immediately apply for a 501 (c) federal tax status, some to specifically to get 501(c) 3 status, knowing it will become more likely to be a foundation-funded organization and to offer tax-deductible donation options. On listserves, there are many stories of farmers markets and organizations being denied a 501 (c) 3 status. My impression is that people think there is a “moratorium” on new 501 (c) 3 awards or that the IRS has redlined farmers markets which, based on the amount that continue to get that status, seems unlikely. I think instead that many organizations expect that the embedded “educational” benefits of markets make 501 (c)3 status likely when really, a much higher rate of proactive educational activities must be offered to achieve it and maintain it! Many other markets have successfully received 501(c) 6 status, (as articulated in the comments section by Oregon market leader Rebecca Landis.)
From the IRS website:
To be tax-exempt under section 501(c)(3) of the Internal Revenue Code, an organization must be organized and operated exclusively for exempt purposes set forth in section 501(c)(3), and none of its earnings may inure to any private shareholder or individual. In addition, it may not be an action organization, i.e., it may not attempt to influence legislation as a substantial part of its activities and it may not participate in any campaign activity for or against political candidates. Organizations described in section 501(c)(3) are commonly referred to as charitable organizations.
The organization must not be organized or operated for the benefit of private interests, and no part of a section 501(c)(3) organization’s net earnings may inure to the benefit of any private shareholder or individual. If the organization engages in an excess benefit transaction with a person having substantial influence over the organization, an excise tax may be imposed on the person and any organization managers agreeing to the transaction. Section 501(c)(3) organizations are restricted in how much political and legislative (lobbying) activities they may conduct. For a detailed discussion, see Political and Lobbying Activities. For more information about lobbying activities by charities, see the article Lobbying Issues; for more information about political activities of charities, see the FY-2002 CPE topic Election Year Issues.

So, I won’t advocate for or against any particular incorporation (especially since I am not equipped to offer legal or financial services) but will just say that all markets should do their due diligence to find the appropriate level of protection and status needed for their situation. However each organization gets there, it’s just important that the officers of the company have some cover from personal liability and that the status chosen is not too time consuming or complicated to manage. And when doing their research, to look at new incorporation methods and added layers of social good designation that may help clarify and safeguard the future. B Corp is one of those designations, but be careful-it can be confusing. The value of the B Corp certification is access to resources and an added level of clarity about the company or organization’s mission in regards to social good.

This is from the B Lab website:

Benefit Corporations and Certified B Corporations are often, and understandably, confused. Both are sometimes called B Corps. They share much in common and have a few important differences.

Certified B Corporation is a certification conferred by the nonprofit B Lab. Benefit corporation is a legal status administered by the state.

Benefit corporations do NOT need to be certified. Certified B Corporations have been certified as having met a high standard of overall social and environmental performance, and as a result have access to a portfolio of services and support from B Lab that benefit corporations do not.

The value of meeting the legal requirement for B Corp certification is that it bakes sustainability into the DNA of your company as it grows, brings in outside capital, or plans succession, ensuring that your mission can better survive new management, new investors, or even new ownership.

The benefits of the B Corp legal requirement:

1. Give legal protection to directors and officers to consider the interests of all stakeholders, not just shareholders, when making decisions

2. Create additional rights for shareholders to hold directors and officers accountable to consider these interests

3. Limit these expanded rights to shareholders exclusively

B corp site

Here is an example of a market organization that has been listed as certified as a B Corp: Down to earth markets

And a story about how the process can be assessed as to the public good offered by that company: students use b impact assessment

The Internal Revenue Service today introduced a new, shorter application form to help small charities apply for 501(c)(3) tax-exempt status more easily.
“This is a common-sense approach that will help reduce lengthy processing delays for small tax-exempt groups and ultimately larger organizations as well,” said IRS Commissioner John Koskinen. “The change cuts paperwork for these charitable groups and speeds application processing so they can focus on their important work.”
The new Form 1023-EZ, available today on IRS.gov, is three pages long, compared with the standard 26-page Form 1023. Most small organizations, including as many as 70 percent of all applicants, qualify to use the new streamlined form. Most organizations with gross receipts of $50,000 or less and assets of $250,000 or less are eligible.

Instructions for new form