5-01 Categories of Organizational Forms and Tip-Offs to Corruption

SECTIONS ON THIS PAGE

  • Different Kinds of Organizations
  • Tip-Offs to Potential Problems of Corruption
  • Tax-Exempt Organization (EO) – 501(c)3 Non-Profit
  • Non-Profit Governance Policies and Practices
  • Limited Liability Company (LLC)
  • For-Profit Businesses: Sole Proprietorships, Partnerships, Corporations
  • Hybrid For-Benefit Businesses: B Corporations and Low-Profit Limited Liability Companies (L3Cs)
  • Some Types of Trusts
  • State Research Sources for Official Documents and Details

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Different Kinds of Organizations

Doing research on systemic abuse typically means investigating both the individuals and the institutions involved, because they work together to hold on to whatever benefits them — to the detriment of others. Here is a list of major kinds of organizational entities in the US. I know it is incomplete. I plan to expand the list with addition categories, and expand the sections with additional types, when I learn about them.

  • Charities (not all charities become tax-exempt non-profit corporations)
  • Nonprofit Corporations and Foundations
  • Political Organizations
  • For-Profit Businesses: Sole Proprietorships, Partnerships, and Corporations
  • For-Benefit Business (hybrid of non-profit values with a business that donates some or all proceeds to charitable causes)
  • Financial Trusts

Some of these may not seem relevant, but it turns out that pretty much any kind of organizational form or financial tool can be used as a way to create and cover systemic abuse. See the page on Filing Complaints Against Organizations for where to go for state-by-state links for departments that oversee particular kinds of entities.

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Tip-Offs to Potential Problems of Corruption

Each of the above many kinds of organizational forms has particular kinds of transactions (financial, contractual, etc.) and specific applicable criminal code laws or regulatory statutes. This is why the old adage of “Follow the money,” made famous during the Watergate era, is still relevant to cracking open the connections between individuals and institutions that keep a corrupted system going.

Here are other suspicious situations and tip-offs to potential problems of corruption:

  • When you see non-profit corporation officials (board members, executives, and/or staff) act like it is a sole-proprietorship, i.e., they “own” the organization and run it as if it’s their own private business instead of for public benefit.
  • When corporation shareholders (decision-makers) act like stakeholders (recipients of benefits).
  • When you see an elitist mentality in those running the organization, or a defacto elite rule in reality. This can be rule by an elite class (oligarchy) or rule by a wealthy elite class (plutarchy). When a group goes in and raids the resources of an organization, that is call
  • When you see undue preferential treatment, power, prestige, and goods given to certain kinds of individuals, based on their personal relationship with those in charge of the institution. They can be family members (nepotism) or personal friends and professional associates (cronyism).
  • When you see inurement — excessive financial benefits given to non-profit corporation board members, staff, and/or family members thereof.
  • When a non-profit raises funds by donations to a restricted purpose — meaning, those funds are required to be spent for the solicited purpose, or returned to donors* — but fails to use them for the designated purpose. (*An exception may be when the funds are solicited for a specific purpose BUT notice is included from the outset that the board of directors may apply funds raised for other purposes.)
  • When you see an agent (usually a lawyer) or agent organization act as the legal registrant for multiple entities, which means the agent’s/agency’s contact information is used on the registrations. This can hide other information about the actual owners or corporation officers, which can obscure who is truly in control and benefits from the existence of that entity. This is one way that governance is veiled, making the organization lack transparency.
  • When non-profit corporations refuse to provide copies of certain documents that are meant to be public information — as required by whichever state office regulates business and corporations. This is another of many types of failures to be transparent about the ways that business is conducted.
  • When a non-profit has multiple kinds of incorporated non-profit and for-profit divisions, drawing from a small set of people for the various required board of director members/officers, and any of the individuals or sub-organizations have engaged in any kind of ethically shady and/or potentially illegal activities.
  • When an entity, such as a limited liability corporation or some type of trust, holds physical or intellectual properties (such as copyrights, trademarks, word marks, and logos) on behalf of and individual or institution, that can mask the real owners.

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Tax-Exempt Organization (EO) – 501(c)3 Non-Profit

In the United States, the overall category of “Registered Nonprofits” is subdivided into three different types of organizations: Public Charities, Private Foundations, and Other Nonprofits (other types of exempt corporations). According to the Nonprofit Almanac 2012, “An estimated 2.3 million non-profit organizations operate within the U.S. and 1.6 of them are registered with the IRS as of 2012.” (Source: NCCS homepage.)

According to the International Revenue Service (IRS), an EO (Exempt Organization) must function “in the public interest” and not run it for the benefit of any private individuals or other organizations. The Compliance Guide for 501(c)(3) Public Charities is the best overview resource I’ve found to address the basics of constituting a non-profit, ongoing requirements, record-keeping, governance procedures and practices, and required disclosures and documentation. It’s concise and clearly written, and if you’re involved with an EO, you should read it to make sure you don’t put its tax-exempt status in jeopardy.

What we typically think of in America as a “church” is constituted as a non-profit religious organization that is exempt from federal income tax. Yes, in reality a church is its people – the organic, local congregation – but to stay tax-exempt you have to abide by the rules and regs for the organizational, virtual corporation! And although there are many requirements in terms of forms to file and records to keep, the IRS print materials and websites consistently emphasize three main restrictions for maintaining tax-exempt status. To quote the Compliance Guide:

1. Private Benefit and Inurement. A public charity is prohibited from allowing more than an insubstantial accrual of private benefit to individuals or organizations. This restriction is to ensure that a tax-exempt organization serves a public interest, not a private one. …

No part of an organization’s net earnings may inure to the benefit of an insider. An insider is a person who has a personal or private interest in the activities of the organization such as an officer, director, or a key employee. …

If a public charity provides an economic benefit to any person who is in a position to exercise substantial influence over its affairs (that exceeds the value of any goods or services provided in consideration), the organization has engaged in an excess benefit transaction. [Page 4, emphasis added.]

2. Political Campaign Intervention. Public charities are absolutely prohibited from directly or indirectly participating in, or intervening in, any political campaign on behalf of (or in opposition to) a candidate for public office. [Page 5.]

3. Legislative Activities. A public charity is not permitted to engage in substantial legislative activity (commonly referred to as lobbying). [Page 8.]

Some common abbreviations and terms related to non-profits:

EO – Exempt Organization. A tax-exempt non-profit corporation, as determined by the Internal Revenue Service.

EIN – Employer Identification Number. EIN is a unique number issued by the IRS. It is like an SSN (Social Security Number), only for a non-profit corporation instead of for an individual.

UBI – Unified Business Identifier. Used in Washington state (and perhaps elsewhere) as “a 9-digit number that registers you with several state agencies and allows you to do business in Washington State. A UBI number is sometimes called a tax registration number, a business registration number, or a business license number. Use the Business License Application to apply for a UBI number.” Source: the State of Washington Business Licensing Service, a Unified Business Identifier, or UBI.

NTEENational Taxonomy of Exempt Entities Code. This code categorizes various kinds of non-profits according to their primary purposes or audiences. There are 10 Major Categories of US Nonprofits, and within those are 26 Subcategories, according the NTEE Code. “Religion-Related” is the relevant Major Category and Subcategory of major purpose or activity counted on this line. Religion-Related is further broken down by the NTEE Code into 22 more codes, with a series of key words and notes to help differentiate organizations within each code.

IRS Ruling Date – The date used by the IRS for determining when donations to a non-profit applicant are considered tax-deductible to donors. You may also see terms like provisional ruling for when the application as a non-profit has been processed, and final determination for when the application has been approved.

Form 990 – Submitting this IRS form annually is required for non-profits that have donations over the specified minimum (currently $25,000). There are several kinds of Form 990s, but all Form 990s are public access information, as noted in the upper right-hand corner of the form. These forms are important because they give detailed information about governing board members and key employees, sources/amount of remuneration for their work, percent of budget raised from donations from the public, etc. This provides valuable source information for researching into whether board and key staff are related, and thus whether there may be nepotism or inurement, etc.

Some key sources for researching non-profit corporations and foundations:

National Center for Charitable Statistics (NCCS). NCCS is “The national clearinghouse of data on the nonprofit sector in the United States.” It has a direct link to the official IRS database of non-profit corporations, and provides summary information on corporation name, contact information, NTEE code, IRS ruling date, and access to Form 990s. It also has search functions so you can search for titles of non-profits, state it is located in, EIN, etc. Its NCCS Urban Institute provides registered members with an online Table Wizard that allows breaking down the total nonprofits in the US into various subcategories, incomes levels, location state or county, total assets or revenue, etc. It draws from Internal Revenue Service Business Master Files from August 1995 onward. (See Guide to Using NCCS Data.)  NOTE: At this time (early 2018), it appears that NCCS is undergoing a complete overhaul and so links to it do not work at this time. I am leaving this description here so you know what kinds of information were available from it, and because other key resource organizations on non-profits link to it. Watch for NCCS to be restarted or replaced.

CitizenAudit.Org is one of the best sources for researching key aspects of non-profits. Members of the public can access a total of 40 page views per year for free. Additional views after that are by paid subscription, which various fee plans available (such as one month, one year, etc.).

The Foundation Center is a major source of research information online, plus regional libraries hosting Foundation Center research collections. Its statics FAQ webpage links to NCCS’s Table Wizard. You can follow The Foundation Center on Twitter.

Pro Publica. is another major source for researching key aspects of non-profits.

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Non-Profit Governance Policies and Practices

Key Points and Significance

In the Compliance Guide for 501(c)(3) Public Charities, the IRS stresses that they do not get overly specific in requirements for specific forms of governance, or particular policies and procedures. However, they are equally clear that they expect tax-exempt organizations to function with “sound operating and compliance with tax law,” and that the IRS has legal authorization (Section 6033 – Returns by exempt organizations) to ask for information including on governance relevant to those concerns.

Detailed Description and Examples

As indicated above, the IRS does not get hugely specific about governance. Still, to hone in one what details they may be most concerned about, should they ever conduct an investigation, there are important details that can be gleaned from the following materials. All are linked in with the IRS page on Governance of Charitable Organizations and Related Topics. Even simply considering the section headings, and the emphasis found in the repetition of topics, starts building a picture of what the IRS considers important in terms of transparent, accountable, and responsible governance.

Governance Practices. This eight-page document gives expanded versions on governance-related topics found in the Compliance Guide. Sections are still relatively short – a few paragraphs each – but they continue to build toward the greater depth of detail needed to ensure governance that is above board.

  • Mission.
  • Organizational Documents.
  • Governing Body.
  • Governance and Management Policies, including executive compensation, conflicts of interest, investments, fundraising, governing body minutes and records, document retention and destruction, ethics and whistleblower policy.
  • Financial Statements and Form 990 Reporting. (Although churches are not required to submit Form 990, it equates to a very large checklist of considerations for conflict of interest, the topic of the next section in this post.)
  • Transparency and Accountability.

Governance Checksheet. This two-page checklist is used in cases of an IRS investigation of an Exempt Organization, and so contains essential information. It includes sections on the following. So, although the IRS does not dictate all the particulars in these areas, they may check carefully to ensure you have policies on them, that you comply with them, and that they comply with sound operating procedures and tax laws.

  • Governing Body and Management.
  • Compensation.
  • Organizational Control.
  • Conflict of Interest.
  • Financial Oversight.
  • Document Retention.

Governance Guide Sheet. Four pages of additional information for IRS agents who are filling out the Checksheet. This did not seem as essential to read, but I’ve included it for those who want to be thorough.

Life Cycle of a Public Charity. This webpage links to other detailed topics for federal and state regulatory matters on nonprofits, so it’s a helpful index to trouble-shooting. It has major sections on starting up a non-profit, applying to the IRS, required filings, ongoing compliance, and significant events (like reporting changes or shuttering the organization). I’d strongly recommend at least skimming through the homepages for the sections on Ongoing Compliance and Significant Events. These give a one-paragraph summary of key points for most subsections.

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Limited Liability Company (LLC)

Here is how the U.S. Small Business Administration (SBA) describes a Limited Liability Company (LLC):

A limited liability company is a hybrid type of legal structure that provides the limited liability features of a corporation and the tax efficiencies and operational flexibility of a partnership.

The “owners” of an LLC are referred to as “members.” Depending on the state, the members can consist of a single individual (one owner), two or more individuals, corporations or other LLCs.

Unlike shareholders in a corporation, LLCs are not taxed as a separate business entity. Instead, all profits and losses are “passed through” the business to each member of the LLC. LLC members report profits and losses on their personal federal tax returns, just like the owners of a partnership would. (Emphasis added.)

As best I can interpret and summarize this, it seems like an LLC is a business entity that serves as a conduit for earnings from its specified activities to go back to the owners. The owners are then responsible for including those proceeds in their personal or corporate income tax filings.

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For-Profit Businesses:

Sole Proprietorships, Partnerships, and Corporations

Information to be added: Sole Proprietorships, Partnerships, and Corporations.

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Hybrid For-Benefit Businesses: B Corporations

and Low-Profit Limited Liability Companies (L3Cs)

Information in this section is based on research I did in 2014. I may update it with more recent statistics later.

B Lab, B Corporations, “B the Change”

B Corp is an international designation for businesses dedicated to positive impact on employees, society, and the environment. This puts in sync with many of the principles of a quadruple bottom line, which seeks to benefit community, ecology, economy, and spirituality simultaneously. (For more details, see my futuristguy tutorials on the Quadruple Bottom Line and the Fourth Bottom Line.)

B Corp began as the B Lab non-profit in 2006, with its Declaration of Interdependence launched July 5, 2006. According to the B Lab history page, the first US B Corp was certified June 8, 2007 and the first Canadian member certified February 19, 2009. Membership had risen to 125 by the end of 2008. By the time they published their 2009 Annual Report, there were 212 certified B Corps members. By the release of the 2011 Annual Report, their total for 2010 was 370 certified members from 60 different industries. The history page declares 2012 as a year of firsts – with first B Corps in Africa, Brazil, and India. The 2012 Annual Report notes 2011 membership at 503 B Corps and nearly 2,000 businesses using the free B Impact Assessment tools to “benchmark their performance.”

A website visit on March 2, 2014, shows over 950 certified B Corporations, in over 30 countries, spread across 60 industries, working together toward 1 unifying goal: “People Using Business as a Force for Good.” Or, to put a digital spin on Gandhi’s phrase, “B the change.” In their own words to describe what B Corps are:

B Corp is to sustainable what Fair Trade certification is to coffee or USDA Organic certification is to milk.

B Corps are certified by the nonprofit B Lab to meet rigorous standards of social and environmental performance, accountability, and transparency.

Certification as a B Corporation requires three steps:

  1. Meet performance requirement in measuring what matters most – the impact of your business on society and the environment.
  2. Meet legal requirement in terms of corporate structure and state of incorporation.
  3. Make it official by signing the B Corp Declaration of Interdependence and Term Sheet.

According to the B Corp page on impact assessment, over 15,000 businesses “measure what matters.” The process B Corp uses involves best practices, assessments, case studies for:

  1. Getting a baseline reading on company performance on best practices related to impact on employees, community and the environment.
  2. Comparing your initial score with how it stands against other businesses.
  3. Creating a plan to improve your practices.

A March 2, 2014, search showed B Corp’s online registry included 915 companies. Of these, 682 are based in the US and 6 in the UK. B Corp’s Facebook page shows 20,038 “likes” and 23.6k followers on Twitter.

Low-profit Limited Liability Company (L3C )

The emergence in the US of for-benefit businesses is found in the form of the L3C – Low-profit Limited Liability Company. These are known as “Benefit Corporations.” What are Benefit Corporations/L3Cs, and what makes their form and function unique?

First, a key distinction: legal Benefit Corporations are not the same as certified “B Corps” which have passed assessment criteria of B Lab for the membership network known as B Corp. However, B Corp has shown support for the creation of legal L3Cs/Benefit Corporations.

The Benefit Corp Information Center is a website dedicated to legislation status of the emerging Benefit Corporation form. It has a state-by-state status page, and confirms the current number as 20 US states and District of Columbia having passed legislation. Their Find a Benefit Corp search page notes: “Many states do not currently track the names or number of benefit corporations in their state.” So, tallies of Benefit Corporations are not known.

B Corp/B Lab also reports on Benefit Corporations and legislation. They give some historical snapshots of progress. Their 2011 Annual Report shared an overview of “Benefit Corporation” legislation, saying it “creates a legal framework that allows companies to keep their founding values, not just shareholder value, at the forefront.” It noted that these laws mean “corporations can now be protected from shareholder litigation in the name of profit maximization.” Also, according to a recent notice for a March 2014 workshop on Benefit Corporations: Exploring a New Business Model, “Benefit corporations are required to submit an annual benefit report outlining the impact of their activities.”

As with many innovations in the US, change starts from the grassroots up rather than the government down. So, rather than starting with legal recognition at the federal level, L3Cs began at the state level.

  • Maryland and Vermont were the first to pass Benefit Corporation legislation, in 2010.
  • B Corp’s 2012 Annual Report notes that, by the end of 2011, a total of seven states had Benefit Corporation laws: California, Hawaii, Maryland, New Jersey, New York, Vermont, and Virginia.
  • A Wikipedia article on Benefit Corporation (last update, 23 February 2014) lists in chronological order the 16 states plus Washington, D.C., where Benefit Corporation laws had been passed.
  • And the workshop notice for Benefit Corporations: Exploring a New Business Model, noted that L3Cs are currently legally recognised in 19 US states plus Washington, D.C.

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Some Types of Trusts

Charitable Remainder UniTrust (CRUT)

Wikipedia has a helpful short explanation of a Charitable Remainder Unitrust:

A charitable remainder unitrust is an irrevocable trust created under the authority of Internal Revenue Code § 664[1] (“Code”). This special, irrevocable trust (known as a “CRUT”) has two primary characteristics: (1) Once established, the CRUT distributes a fixed percentage of the value of its assets (on an annual or more frequent basis) to a non-charitable beneficiary (which is considered the settlor of the trust); and (2) At the expiration of a specified time (usually the death of the settlor), the remaining balance of the CRUTs assets are distributed to charity. The trustee determines the fair market value of the CRUT’s assets at the time of contribution, and thereafter on the applicable valuation date. The fixed annuity percentage must be at least 5% and no more than 50% of the fair market value of the assets in the corpus. The remainder (the amount expected to go to charity) must be at least 10% of the fair market value of the assets contributed to the CRUT. Code Section 664(d)(1) sets the federal income tax requirements for a charitable remainder unitrust. [Retrieved August 2014.]

Wikipedia links to the posting at the Cornell University Law School site of Section 664 from the Internal Revenue Code. Note the tabs for the US Code and for Notes. The Notes section allows tracking specific changes to the Code over time.

Revocable Living Trusts

Information to be added.

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State Research Sources for Official Documents and Details

PUBLIC DOCUMENTATION. In addition to IRS documents and national-level non-profit research sources like CitizienAudit.org and ProPublica, there are numerous state and national agencies that can provide certain kinds of details that are public access information. Such agencies as the following provide official documentation on the public record as for: type of entity, date of creation/registration, whether it is active or inactive, “governing persons” (individuals, LLCs, corporations, combination), reseller permits, business licenses, business locations, registered trade names, etc.

The titles of state government entities responsible for collecting this information varies. See the IRS page on State Links for Exempt Organizations for a starter list of state-based agencies to investigate organizations. These include:

  • State Charities Regulation
  • State Tax Filings
  • State Filing Requirements for Political Organizations
  • State Nonprofit Corporation Filings
  • SBSE Business Filing Information

COURT CASES AND OTHER FILINGS. Cities, counties, courts, and states typically have some level of online access to court records and other kinds of official filings. However, as I’ve found out from some specific cases I’ve researched, these entities also may restrict access or acquisition of copies. Sometimes copies are available for purchase and shipment by mail, other times copies may be available only when ordered in person at the relevant office. While the process may seem to be a hassle, the higher productivity from having such documentation can make it worth the effort.

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