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Should we incorporate a 501(c)(3) to start sailing program?

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Should we incorporate a 501(c)(3) to start sailing program?

Do we need to incorporate a 501(c)(3) organization to start a youth sailing program if we do not intend to solicit or accept donations? We have the boats, the expertise, and the need in our community. We just want to offer sailing to those who can't afford it.

Your question raises two separate questions.  Should you incorporate and should you seek 501(c)(3) charitable status?
If your group intends to operate this program on a long-term basis, you definitely want to engage in the activity through a legal entity that gives you protection against personal liability if one of the kids falls off the boat and drowns.  Corporations traditionally protect individuals from personal liability unless they are personally involved in wrongdoing, and I would definitely recommend incorporating.  You may achieve some of the same protection if you form an unincorporated association and your state has adopted the Uniform Unincorporated Nonprofit Association Act (See Ready Reference Page:  “Revised Uniform Unincorporated Nonprofit Association Act Provides Clarification for Rules of Conduct”) or if you form a limited liability company, but I like the corporate form because the rules are usually a lot clearer.
I would also recommend that you apply for 501(c)(3) status, even if you don’t now anticipate seeking contributions.  First, the federal Volunteer Protection Act will generally limit your personal liability unless you are grossly negligent or engaged in willful misconduct, and it easier to show that you qualify if your organization is recognized as a 501(c)(3).  (See Ready Reference Page:  “Federal Law Protects Nonprofit Volunteers)  Your state could have an even more protective state statute on immunity for charity volunteers.  Second, even with volunteer protection, you will probably want insurance to protect yourselves, the organization and the victim if an injury should occur.  You may as well deduct the contributions that you have to make to the organization to buy the insurance.  You may also want to acquire some additional equipment to expand the program at some time in the future and seek third party contributions to make that possible.  It is easier to get deductible contributions than nondeductible ones (unless, of course, you are running for political office).
And if you don’t expect to raise more than $50,000 in each of the next three years, the new Form 1023-EZ application is almost irresponsibly simple and you are likely to get your recognition letter in a couple of weeks.   (See Ready Reference Page: “IRS Issues Streamlined Form 1023-EZ For Exemption of Small 501(c)(3) Groups”)
So, in short, you don’t have to incorporate or seek (c)(3) status, but you are exposing yourselves to greater potential risk and giving up significant opportunities if you don’t.

Tuesday, November 4, 2014

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Comments

Get insurance before starting this business!  The advice as to corporate limited liability is sound; but only if the entity is adequately capitalized. If someone drowns as a result of the negligence of an employee of the corporation – and the only assets they have are some boats and life preservers – I would not expect the corporate veil to provide all that much protection.  They should have an adequate amount of insurance to protect against claims and not rely on the corporate veil alone.

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