Chapter Incorporation and Tax Exemption Issues

1. Chapter Incorporation and Tax Exemption Issues C. Scott Litch, Esq. CAE Chief Operating Officer and General Counsel slitch@aapd.org

2. Why incorporation matters • AAPD Bylaws Chapter VII, Section 1.B. provide that: “State Units shall be duly incorporated, non-profit organizations governed by an adopted constitution and bylaws which shall not be in conflict with or limit the constitution and Bylaws of the Academy.” • Legal protection is important – incorporation protects against individual liability of officers and directors.

3. A brief word about directors and officers liability insurance • The AAPD provides directors and officers (“D&O”) liability insurance for each of the recognized district and state chapters. This coverage is provided under the AAPD’s overall D&O policy. Note that coverage also extends to those Canadian provinces with state-equivalent chapters. The AAPD pays the premium for this insurance. • This membership benefit for chapters hopefully frees up additional resources in your budget. The D&O policy covers directors, officers, employees and the association as an entity, with aggregate coverage of $5,000,000 (including Employment Practices Liability and Third Party Liability) and $2,000,000 aggregate coverage for Fiduciary Liability. Further, legal defense costs are covered outside of the liability limit. • The D&O carrier, Arch Insurance, was selected by the American Society of Association Executives their endorsed D&O carrier for associations.  

4. D & O Coverage Coverage includes: • Up to $250,000 for crisis management costs (including legal and public relations) for fund-raising fraud, management crisis, public relations event, or regulatory crisis. • Up to $100,000 for crisis management costs for network security breach and privacy violation. • Up to $50,000 in business travel accident coverage. • Unlimited extended reporting period for all past board members. • Up to $25,000 for conference cancellation.

5. How incorporation works • Most chapters are incorporated in their home state. Exceptions: Maryland, Massachusetts and Minnesota are incorporated in Illinois which has a very user friendly non-for profit corporation statute. • You can check the status via your Secretary of State’s website. • Annual reports with a modest fee must be filed each year to keep the incorporation valid. This can be done online. • If your chapter is NOT incorporated let AAPD know. We can help with filing in your state. Our outside law firm Barnes and Thornburg in Chicago has assisted chapters with incorporation.

6. WHAT GOVERNS YOUR OPERATIONS • State Not-For-Profit Corporation Law • Articles of Incorporation • Bylaws- • AAPD keeps a number of chapter bylaws on file and appreciates being apprised of any updates. • Not being in conflict with or limiting AAPD Bylaws does not mean having the exact organizational, board, membership and committee structure as the AAPD.

7. WHAT GOES IN THE BYLAWS? Bylaws typically contain: • Membership criteria • Powers, manner of selection, and terms of office of officers and directors • General information about committees • Indemnification and insurance provisions • Procedures for member termination • Required notifications, including quorum, for board meetings and actions, and membership meetings and actions • Financial management duties • Procedures for amending the Bylaws

8. OTHER DOCUMENTS? • More detailed operational procedures can be included in a policies and procedures manual. • Bylaws are not intended to describe details such as how CE course speakers are selected, how meeting venues are chosen, what are the association’s legislative priorities, who updates the association’s website, etc. • Policies and procedures can be modified more frequently and easier than Bylaws.

9. bylaws take precedence over policies • However, board meetings and annual membership meetings should take place exactly as described in the Bylaws. Pay special attention to quorum provisions. • The same goes for selection of officers and directors. • In some cases the incorporation statute may indicate you can do things a certain way unless your Bylaws say otherwise. But in other cases the incorporation statute will say the Bylaws MUST contain certain provisions (e.g. minimum number of board members).

10. Tax Exemption • This is an income tax exemption with the IRS. • This is not a state sales tax exemption (those are much harder to obtain– e.g. neither AAPD nor HSHC has an Illinois state sales tax exemption). • Chambers of commerce and associations are generally considered by the IRS to be “business leagues” as defined by Section 501(c)(6) of the IRS Code. • Many associations and chambers operate a general education foundation which is organized under the provisions of Section 501(c)(3) of the IRS Code. This can be directly related to or affiliated with the 501 (c)(6) association without affecting the tax exempt status of either entity. Hence, AAPD is a 501 (c) (6) entity whereas HSHC is a 501 (c) (3) entity.

11. Tax exemption Things the IRS looks to determine whether an association qualifies as tax exempt: • that it not be organized for profit. • that no part of its earnings inure to the benefit of any private shareholder or individual (except as payment for services rendered to the association). • that the organization be an association of persons or firms having a common business interest.

12. Tax exemption - continued • that its activities be directed to the improvement of conditions in one or more lines of business. • that it not be engaged regularly in a business of a kind ordinarily carried on for profit. • that its activities not be confined to the performance of particular services for individual members. • that it be a business league and in the same general class as a chamber of commerce or board of trade.

13. Tax exemption option • Filing for exemption on your own (IRS form 1024) • Some chapters obtained their own income tax exemption years ago. • Others had to go this route because of glitches with the IRS group exemption– AAPD is paying legal fees for this filing impacting Alaska, Kentucky, Missouri, and South Carolina. The IRS computer system believes these chapters lost their tax exemption although AAPD can find no evidence of that. • Statement of the obvious: the IRS is not the easiest government agency to deal with, as it is not possible to simply convene a meeting or conference call with staff in their exempt organizations division to resolve issues. • An IRS glitch with our 990-N filings was resolved only after I was able to briefly speak with the IRS exempt organization director after her presentation at a law conference.

14. Annual filings for tax exempt organizations • A 990 form must be filed each year, or else exemption will lapse (this happened to our Pennsylvania chapter) • All associations and chambers of commerce must annually file IRS Form 990. • Form 990 is filed for informational purposes only. • Form 990 is filed by the fifteenth day of the fifth month following the end of the organization’s tax year. (May 15 for calendar year organizations). Extensions may be obtained. • Form 990 includes Part VI questions on governance, management, and disclosure. • For smaller organizations there is a form 990 EZ and if gross receipts are under $50,000 annually you can file a990-N e-postcard online. For chapters under the AAPD group exemption, AAPD handles the 990-N filing once we verify your financial information.

15. Annual filings for tax exempt organizations If an organization has gross receipts less than $200,000 and total assets at the end of the year less than $500,000, it can file Form 990-EZ, instead of Form 990. My advice: if you need to file a 990-EZ or 990, engage a local CPA to assist who is familiar with tax exempt organization filings. I will be happy to assist in supplying any information he or she needs regarding the group exemption (GEN 5907).

16. AAPD Group Exemption • Obtained by AAPD in 2012. • GEN 5907. • Requires annual filing by AAPD and we can add new chapters as needed (provided a chapter has not previously sought tax exempt status). • As of 2018 the following 13 chapters are included: Connecticut, District of Columbia, Iowa, Maine, Maryland, Massachusetts, Minnesota, Mississippi, New Hampshire, New York, Tennessee, and Wisconsin plus the Northeastern Society.

17. AAPD Group Exemption- 990-N filing • AAPD has filed a 990-N online each year for each chapter in the group exemption if the chapter qualifies (under $50,000 in gross annual receipts). • For the fiscal year ending June 30, filing must be complete by November 15, but I file these ASAP in early July each year. • Each chapter had gross receipts under $50,000 other than New York and the Northeastern Society. These chapters will have to file the 990EZ form.

18. Next steps? • Confirm not-for-profit/non-profit corporate status in your state and make sure annual reports are being filed with the Secretary of State. • Confirm tax exempt status. Under certain conditions AAPD may be able to add you to the group exemption. • Follow-up with AAPD as needed.

19. Next steps? • Consider allocating some amount in your chapter budget for legal expenses in these matters; AAPD can help but it is a shared partnership. • For example, the Wisconsin chapter for several years neglected to file corporate annual reports in the state so the corporation was dissolved. AAPD’s outside law firm Barnes and Thornburg did legal work to re-incorporate at a modest cost, and as noted Wisconsin has been added to our group exemption.

20. QUESTIONS?