Understanding participation in None Profit User Organizations

From: Elaine T. Hunt (elaine.hunt@ces.clemson.edu)
Date: Fri Mar 06 1998 - 16:13:39 EET

Since most folks drift along with the tide thought I'd make it easy for you
and share a bit of wisdom with you that I learned the hard way. In the USA
you'll find the same laws applies to your participation even in little
league teams, sailing clubs, school booster organizations, etc. The
following excerpts have been taken from: "A Financial Reporting model for
Not For Profit Associations", E. Lewis Bryan UMI Press; "Am I covered
for.....??? A Guide to insurance for nonprofit organizations", Terry S.
Chapman, 1984; "Financial and accounting Guide for not-for-profit
organizations", Malvern Gross, Jr. 1991, John Wiley & Sons.

Non profit organizations seek to serve a wide range of objectives to meet
the needs of the selected sector of society. The proposed method by which
these nonprofit associations seek to render their service to the membership
is defined within their by-law structure. The Internal Revenue code has a
significant effect on the objectives of such association when the tax
exempt status is given to an organization under the Internal Revenue code
section 501 (C) (6). The organization's activities must serve to advance
the common business interest of a profession as a whole rather than those
of individual members and can not be of a kind carried out by a for-profit

The financial reporting of such a nonprofit organization should provide
information about the association's financial performance during a
particular period and how officer discharges their duties and
responsibilities to its membership. These financial statements should
report the amount of available resources, the use of these resources, and
the net balance. These reports will effectively show the activities that
were completed and the associated costs. The dependability of data used
in such reports require a plan of internal controls. These controls are
devised by the organization to protect the assets and promote efficient use
of the resources.

Few members start out with the intent to take money but when a personal
crisis occurs and if they are in a place of trust and opportunity, they
give in to temptation. Strong internal controls are not meant to prevent
embezzlement but instead removes the temptation. Most embezzlers are so
desperate that being caught has little impact on the decision to take
money. Instead, internal controls are used to prevent the loss of assets
as well as protecting an honest member from making a mistake that could
ruin the rest of their lives. While organizations have the moral
responsibility to remove undue temptation from officers, it also has the
responsibility to protect its assets for the membership and the general
public. Often experience has shown that banks do not catch forged check

A simple budgeting system with monthly comparisons to actual figure can
help spot potential problems before they escalate. Defined duties of each
officer with a system of checks and balances also help protect individuals.

Control over receipts"
1. Pre-numbered receipts with duplicates issued for all money received.
"Voided" receipts should be kept and accounted for both original and
2. Periodic comparison of receipts to deposits should be made.
3. A summary of receipts should be maintained so that they can be
reconciled with bank statements.
4. Cash collections should be under the control of two people.
5. Checks should be promptly endorsed( a stamp required) for the organization.
6. A summary of checks received should be maintained so that they can be
reconciled with bank statement.
7. No cash should be used to pay expenses but a check should be issued.

Control over disbursements:
1. All disbursements should be made by check.
2. No check should be made out to cash.
3. Checks more than $10,000 should require two signatures.
4. Bookkeeper should not have access to signed checks.
5. A different person other than bookkeeper should received the bank
6. Reconciliation of bank statements should be done by someone other than
the bookkeeper or check signer.
7. Forged checks can be removed from bank statements.
8. Excess cash should be maintained in a second account that requires two
signatures to transfer funds.

Fidelity Insurance:
1. Prevents loss of funds due to embezzlement.
2. Protects from employee's dishonesty not an outsider.
3. Records must be maintained since coverage does not provide internal
4. Insurance will not pay if records can not prove loss.
5. Small premiums considering amount of protection.

Insurance: Expense reimbursement or director's liability.

Anyone who serves as a member of a board can be sued for making or failing
to make a decision. Non-profit codes for each state set for the clear
provisions under which board members can be sued, specifying who can sue
and under what circumstances.
1. Indemnification of board members and officers must be in bylaws. The
corporation must assume liability and pays for the cost of defense and the
payment in a judgment.
2. Homeowners does not cover Business related liability.
3. Service as officers and board members is regarded as business related
activity under a homeowners policy.
4. When indemnification is not in bylaws then the policy acts as a direct
liability insurance for officers. It would cover past, current, and future
5. It should include the cost of defense and total limit of liability.
6. Coverage should provide details such as amounts of coverage, premiums,
participation, extended coverage, as well as state who is covered, when
coverage begins, coverage for what types of acts(dishonest, honest),
deductibles, termination procedures, exclusions, maintenance procedures,
claim procedures, and compliance procedures (Failure to comply with Federal
7. If there is no indemnification in the bylaws, the liability is borne by
each individual officer or member that is joined in a lawsuit.
What is necessary:
        Application from insurance carrier
        Most recent audited financial statements
        Articles of incorporation
All answers given in an application becomes a warranty under the policy.
Coverage may be denied if information is misstated or incorrect.
Bylaws must comply with nonprofit code for the state issued and should be
reviewed by a lawyer.
The members should pay close attention to the minutes and their accuracy.
There should be complete published minutes of discussion and votes.
Education of members is a necessity.
Punitive damages arise when damages are awarded as a punishment for
outrageous conduct and to deter from future transgressions.
Recent years have brought trivial actual damages and substantial punitive
Most insurance policies exclude punitive damages.
To decide on coverage amounts, the maximum and minimum amounts of cash
handled should be determined.
Any loss that can be proven only be inventory or profit or loss computation
are usually not covered.

Principle Federal Tax and Compliance Requirements

All exempt organizations must be aware of the requirements of federal tax
laws. All exempt organizations with gross receipts of $25,000 or less must
file tax returns with the IRS.

Submit a Form 1023 to the Internal Service within 5 months of operation.
Must file within 15 months of the start of business to have exempt status
apply to entire organization existence. Otherwise the exempt status
recognizes only the date of application.

Most organization must file a Form 990 Return of Organization Exempt from
Tax by the 15 day of the 5 month after the end of the fiscal year. These
return do not need the certification by an outside auditor.

All organization exempt from Tax under section 501(a) or (d) must make
their annual Return of Organization Exempt for Tax available for public
inspection. The Internal Revenue Service makes the annual return minus a
list of contributors, available to the general public.

Trade Associations:
The activities of a trade association must be directed towards the
improvement of business conditions. Contributions are not deductible as
charitable contributions but are as a business deduction.

Trade Associations are taxed on net unrelated business income the same way
charitable organizations are taxed. Meeting and conventions receipts are
not income from an unrelated trade or business.

The Tax Reform Act of 1976 provides an exclusion from unrelated business
income for certain organizations such as business leagues who hold
conventions or trade shows as part of their exempt activities. In order
for the exclusion to apply the convention or trade show must stimulate
interest in, demand for, and industry's product in general. The show must
promote that purpose through the character of the exhibits and the extent
of the industry products displayed.

Who must file:
        Churches and certain other religious organizations
        Organizations that are a part of a federal, state, or local governmental
        Employee benefit plans
        Organizations other than private foundations with gross receipts of
$25,000 or less.
Private foundations
Gross receipt means that total amount received during the year including
contributions, investment income, and proceeds form the sale of goods
before any expenses or costs are deducted. This means that most not for
profit organizations must file this return, including social clubs,
educational institutions, and membership organizations. Gross receipts for
filing are not the same as total income. Gross receipts represent the total
cash received during the year as shown on the bank statement. If the gross
receipts are under $25,000 then the rest of the return need not to be

When must the form 990 be filed:

Request for exemption should be made as soon as organization.

        The return is due not later than the fifteenth (15) day of the fifth (5)
month after the end of the fiscal year. There is a penalty of $10.00 per
day for the failure to file unless it can be shown there was a reasonable
cause for not filing. Continued failure to file can result in personal
penalties imposed on responsible persons associated with the organization.

The first fiscal year must end within 12 months of an organizations
inception. The organization can choose any month as its end of year but
once the election made, it cannot be easily changed without notification to
the IRS and with IRS approval.

The election is made automatically when the first return is filed. The
return can cover a period as short as one month but cannot be longer than
12 months.

The preparer should use the Employer identification number assigned by he
IRS. Care should be taken to use the correct number. If there is a state
registration number then this number should also be used when complying
with state code.

A schedule must be attached to the return listing all gifts aggregating
over $5,000 or more from one individual during the year. This schedule
must show name, address, date received, and the value of all gifts.

Expenses incurred for the purpose of the exempt status mush show that a
substantial portion of the contributions and dues is being expended to
justify the continuation of the organizations exempt status.

A brief description of the activities conducted by the organizations should
show the basis for the organizations' exempt status.

Net worth is shown by whatever methods chosen by the organization's record
keeping of the excess of assets over liabilities.

Organizations meeting regularly without the protection of by-laws and tax
exempt status are meeting as an un-incorporated corporations where each
participant bears equal liability.

Is there any legal eagles who wishes to add, subtract, or divide the above


Opinions, suggestions, and other controversial matter VOID where prohibited.
Elaine T. Hunt, Director
Clemson University Laboratory to Advance Industrial Prototyping
206 Fluor Daniel Bldg. Clemson, SC 29643-0925
864-656-0321 (voice) 864-656-4435 (fax)

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