Incorporation

Neighborhood Association Tool Kit

Section 5 – Incorporation

Deciding on Whether or Not to Incorporate

After your core group is established and the larger group has met to establish its goals, it’s time to consider what type of organization you will need. Whether or not to incorporate the organization is a key question for your neighborhood association.

Incorporating the association provides a structure for your group’s operations and creates a legal entity which can do business in its own name. Incorporating also limits and separates the organization’s liability risks. In other words, there are primarily two reasons for an organization to incorporate:

Assuming a person acts with reasonable care, a member of the board of directors of a corporation is not personally liable for actions or debts of the organization.

Incorporation establishes the association as a legal entity. This is useful when dealing with other organizations, businesses, or agencies.

The drawback to incorporating is that it requires quite a bit of paperwork and recordkeeping. Forms and papers must be routinely filed with the state and federal government. Financial records and other information must be maintained on a regular basis. All of the paperwork can be a bit overwhelming for a volunteer organization.

If your group is not interested in or not able to support the necessary administrative overhead of a corporation, there are other alternatives. Projects can be done and funds can be received under the name of an existing organization that is incorporated, such as an umbrella organization like UNOE. In order to do a project under UNOE, you must submit a request in writing for final approval.

Support Incorporation if:

▪ people want to create an ongoing organization with an individual identity.

▪ liability risks are high or substantial money is involved.

▪ you will deal with third parties who will demand to work with a legal entity.

Don’t Support Incorporation If:

▪ the project/organization is temporary.

▪ employees or grants will not be sought.

▪ people want a loose, unstructured network.

▪ the organization is really a committee or project of an umbrella organization.

Incorporating Your Neighborhood Association

If you decide to incorporate, there are routine steps to follow. If you decide not to incorporate, you will still want to develop by-laws to define you organization’s structure and the responsibilities of your leadership. Incorporating your neighborhood association requires patience and some legal assistance. Identify the assets of you neighborhood to determine if any individuals or businesses in your neighborhood have legal skills (See Section 7 for tips on determining the assets of your neighborhood).

Step One – Articles of Incorporation

This document, when filed with the State of Indiana, creates a new legal entity. For most non-profit organizations, the language is pretty much the same from one corporation to another. This document is filed with the Secretary of State’s office and the filing fee is $30. Before filing with the State, it is a good idea to check with them to see that the name of your corporation is not too similar to that of another corporation.

Step Two – By-laws

The purpose of by-laws is to lay out the rules of conduct and authority for the board of directors and members. By-laws rarely cover actual activities or programs of the neighborhood association. It is good to start with by-laws which are simple and can be amended easily (the process of creating by-laws is elaborated on below).

Step Three – Obtaining a Federal ID Number

You should file a Federal Employee Identification Number Form SS-4. This is like a Social Security Number for your organization. Your neighborhood association needs one to open a bank account, otherwise an individual’s Social Security Number must be used. To get this form, contact the IRS at (317) 226-5477.

Step Four – IRS Tax Exemption

Non-profit does not mean tax exempt. An organization can be incorporated and non-profit without being tax exempt. In addition, an organization can be tax exempt without being incorporated. The only way an organization can be determined to be tax exempt is to make application to the IRS.

There are many requirements that an organization must meet to become a 501(C) (3) tax exempt organization. UNOE and the IRS can provide you with information and the forms you must file to receive tax exempt status. Filing fees can range from $150 to $465, depending upon the gross receipts of your organization.

Step Five – Employment Issues

If you are hiring staff or even “independent contractors,” you have several issues that you must consider. Contracts, liability, workers compensation, Social Security and withholding taxes, and unemployment insurance are some of your chief concerns. Federal and State forms must be filed in a timely manner or you could face stiff penalties.

Step Six – Insurance Issues

It is difficult for new non-profits to get cost-effective insurance coverage. However, here are some standard types of policies that you should consider: general liability, directors and officers errors and omissions, workers compensation, fidelity bonds (to cover loss or theft by persons handling funds), property, and insurance for volunteers (to cover injuries to volunteers or to cover the group for any damage volunteers may do to others or to their property).

Step Seven – Financial Records

Indiana law requires a corporation to maintain correct and complete written financial records. If an organization does not maintain financial records and there is ever a dispute, the Board of Directors is at risk of being found negligent.

Most new, small, non-profit organizations start with a cash receipts and disbursements method of financial record keeping (cash in/cash out). If accurately kept, this method is fine for most groups. However, as the organization grows, there are certain points at which the organization needs to establish a more sophisticated accounting system.

As the organization grows, it will need a double entry accounting system and a general ledger of accounts capable of producing a balance sheet that show assets, liabilities, and fund balance. Income, expense, and budget reports are not enough.

Some of the points which indicate that it is time to set up a formal accounting system are:

when the organization has more than $25,000 in revenues per year and has to file IRS Form 990.
when an organization has an employee (because the organization must show the income tax and social security withholdings as a liability).
when the organization has any type of financial transaction which is not an income nor an expense item, such as a loan or a restricted grant.
when the organization has any assets other than cash, such as a building.

Step Eight – Keeping Minutes

Indiana law requires a corporation to maintain minutes of proceedings of members, board of directors and any executive or other committee meeting when, in general terms, any binding decision is made affecting a third party or rights and responsibilities within the organization. Minutes need not be in any particular form but should be clear about any decision made, list who was present and, if requested, state the name of anyone opposed to the decision made.

Even when no binding decisions are made, it is a good practice to keep minutes of meetings which describe what happened and the decision made. It gives a written record and helps people stay informed and on track.

Minutes should be signed by the secretary of the meeting and accepted by the board at the next meeting.