Incorporating Your User Group

Recently our local SQL group went through a leadership change, and was faced with an important question:

Should we incorporate as a non-profit organization?

This question was largely the result of the new leadership group wanting to remove any tax/financial liability from the personal taxes of the User Group & SQLSaturday organizers. On the plus side, creating a corporation would also have the added benefit of putting into place an organizational structure that would help distribute the User Group’s operational responsibilities. On the negative side, we knew there would be additional government paperwork that would have to be done (IRS and State Government annual filings). Once we made the decision to incorporate, the question became: How? We talked to a couple other groups that had incorporated (Bob Pusateri had some good advice), heard about some of the pitfalls to the process, and reached our second major decision.

Should we use an attorney?

This was a difficult decision. After some research, our list of pros & cons came down to:

• Using an attorney will result in a corporate entity that meets all of the state/federal requirements.
• An attorney would give us a resource to make sure we are aware of, and in compliance of, any new legislation.
• An attorney (on retainer) can act as the Registered Agent for any official inquiries/notifications. (This meant that we were less likely to have ‘lost mail’ issues as the group leadership changes and people move houses.)
• An attorney is going to be expensive (initial estimates were $2000 – $3000), plus filing fees.
  • The price of the attorney could be reduced by using one of the areas free/low-cost law clinics. A couple of the local universities have these to give experience to their law students (who are supervised by a practicing attorney).

We decided that using an attorney was the best option (for us), and found a local attorney who worked with us at a rate that was within our budget. Once we had the attorney retained, he was able to explain the full process and provide a rough timeline to us.

To get started, the attorney asked us to answer a few questions:

What type of corporation did we want to create?

Possible Options:

1. 1. Stock or Non-Stock
      • Most non-profits are non-stock corporations.
   2. LLC, S Corporation or C Corporation
      • • LLC
          1. A separate legal entity that requires Articles of Organization be filed with the state.
          2. Limited liability protection. Typically this means that the owner(s) or members are not personally responsible for business debts.
          3. LLC status is not recognized by the IRS. An LLC is taxed as an S Corporation, partnership, sole proprietorship or other designation.
        • S Corporation
          1. A separate legal entity that requires Bylaws & Articles of Incorporation be filed with the state.
          2. Required to hold annual Board of Directors meetings and make annual reports.
          3. Limited liability protection. Typically this means that the owners/directors/shareholders/members are not personally responsible for business debts.
          4. Files an informational federal tax return, profits are passed-through to the ‘owners’ who report them on their personal taxes.
          5. In our state, fiscal year end for S corporations must be December 31.
        • C Corporation
          1. A separate legal entity that requires Bylaws & Articles of Incorporation be filed with the state.
          2. Required to hold annual Board of Directors meetings and make annual reports.
          3. Limited liability protection. Typically this means that the owners/directors/shareholders/members are not personally responsible for business debts.
          4. Files a corporate tax return and pays taxes at the corporate level.
          5. In our state, C corporations can choose when their fiscal year ends. This option would allow us to keep all of the fundraising income and expenditures for our annual SQLSaturday event within a single fiscal year.

After discussing the options, we opted to create a Non-Stock C Corporation at the state level and then apply for tax-exempt status with the IRS as a 501(c)(3). Once the IRS approves the 501(c)(3) status, then the state will also designate the corporation as a non-profit.

Who will be on the Board of Directors?

This was one of our easiest decisions. We wanted to have an odd number of ‘decision makers’, and there are 3 people that manage our user group (sponsor organizer, speaker organizer, and general administration).

What positions will each person have on the Board?

This was one of our hardest decisions (or at least we discussed it the longest). Historically, we’ve made most ‘management’ decisions by a democratic vote of the members of the leadership team. While structuring the corporation we didn’t want to give the impression that there was an owner or a person who was more ‘in charge’ than the rest of the group. So we spent a fair bit of time discussing the possible position titles:

• contemporary names – President, VP, Secretary, Treasurer, etc.
• C-Suite names – CEO, CFO, CIO, CAO, etc.
• Portfolio directors – Board Director of (Administration, Finance, Operations, etc.)
• Chair positions – Chair(person) of the Board, Finance Chair, etc.

I have to admit that I had a certain amount of preference for the Chair position names. To me, the Chairman of the Board title has a certain amount of class to it. Probably because I’ve been a Rat Pack fan since I was a kid, and Sinatra definitely had class. In the end, we opted to go for the contemporary titles (Pres, VP, Secretary, Treasurer). I should also clarify that these are Board positions, not operational duty statements. The President of the Board oversees the board meetings, and the Treasurer of the Board oversees the financial meetings. However, operationally, any officer of the corporation can be assigned any duties that the Board decides on. So the Treasurer can be responsible for managing an event (like our SQLSaturdays), or the Secretary can be responsible for arranging and paying for food at a user group meeting.

How long will people be elected to the Board, and how many times can they be elected?

Often Board members are elected for 1-3 year terms, and can only serve for a few consecutive terms. This restriction is a good idea for the longevity of the corporation, and helps ensure that new ideas are brought into the management. Historically, however, our group has had limited success with finding new volunteers to take on long-term duties. As such, we were reluctant to implement term limits that might require replacing the entire Board at a time when we don’t have enough volunteers to fill all of the positions. So we opted to implement a 3-year election cycle to start and will review implementing term limits at a Board meeting on a later date.

What Bank will the corporation use?

Some banks offer accounts that are tailored for non-profit organizations. These accounts often have no minimum balance requirement, along with no monthly fees, and have a reasonably high transaction limit (200-500) per month. In our area, C&F Bank offers a Community Checking Account for non-profits. They also have branch offices nearby each of our Board members’ work or home, which is an added convenience.

Once all of the questions were answered our attorney was able to put together an initial draft of our Articles of Incorporation and begin the state filing process. Overall, the process of creating a non-profit corporation for our user group took 2-3 months and had a significant cost. The price could have been lower if we had done all of the filing paperwork ourselves. However, we felt the cost was justified by ensuring that all of the necessary paperwork was completed correctly the first time, and we now have a reliable resource we can contact with future questions/issues/concerns. Also, during the organization process, our attorney helped to keep us focused on the critical organizational structure decisions (when we tended to get side-tracked with ideas/questions on operational processes).

Below are some links to examples of the various documents and forms that were filed during the process of creating our user group’s non-profit corporation.

Incorporation Documents & Filings

• Articles of Incorporation
• ByLaws
• Organizational Actions
• IRS form SS-4 (Application for Employer Identification Number)
• IRS form 1023-EZ (Streamlined Application for Recognition of Exemption Under Section 501(c)(3))

Annual Filings

• IRS 990-EZ

Other Documents

• IRS W-9 (Request for Tax Payer ID)