Caritas: The Formation of Charity

Encompassing the principles of solidarity and subsidiarity, the virtue of charitable organizations consists in the promotion of charitable activities and the proper classification of such activities as separate from both the government and the marketplace. For the virtue of charity is neither compelled by taxation nor motivated by profit, but rather charity freely wills the good of others. This is the purpose of the nonprofit sector.

The Nonprofit Corporation

The essential distinction between nonprofit organizations and for-profit organizations is that while nonprofits are indeed permitted to earn a profit, nonprofits are nevertheless subject to the “non-distribution constraint” to which for-profit organizations are not subject. The non-distribution constraint prohibits nonprofit organizations from distributing earnings (e.g., as dividends) to individuals who exercise control over the nonprofit. Rather, earnings are capitalized within the organization, i.e., retained and devoted to furthering the nonprofit organization’s purposes.

While a charity may be organized as a nonprofit corporation, trust, unincorporated association, or other legal form recognized by law, the nonprofit corporation is the predominant form of tax-exempt organization. In order to create its corporate existence, a charity must begin with incorporating as a legal entity under state law.

A charity that is organized as a corporation typically is governed by a board of directors that is either self-perpetuating or elected by members. A charity should have at least three directors on the board. Typically, it is best to have five or more directors so that at no point will the number of directors drop below three.

Once the Articles of Incorporation have been accepted by the Secretary of State and a Certificate of Incorporation has been issued, an organizational meeting will be held, at which meeting the bylaws will be adopted, the initial board of directors will be elected, and the opening of bank accounts and other necessary operational items will be authorized.

Section 501(c)(3) Status

After incorporation at the state level, a nonprofit will want to ensure its tax-exempt status under federal law. The primary benefit associated with federal tax-exempt status is the ability for donors to make tax-deductible contributions for income, estate, and gift tax purposes. The charity would obtain tax-exempt status by completing Form 1023. An IRS Determination Letter then serves as the proof for the recognition of such exemption.