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Is Incorporation Required?

11 years 8 months ago #140553 by drdeb
Our PTO president spent almost $4000 in attorneys fees without consulting the membership. The attorney was apparently hired to add the legally required language for a non-profit organization to our bylaws and to file the necessary documentation with the IRS. The attorney is said to have told the president that Pennsylvania law required us to become incorporated in order to be a non-profit organization, and he went ahead and incorporated our organization as well.

This has turned into a major issue within our PTO, because the members were never given any notice that the lawyer would be hired, nor were we given the opportunity to vote on the expenditure or whether to to incorporate the organization. The president's actions are now being defended as legally required.

From reading this board and from experience with other non-profit organizations, I understood incorporation to be an issue separate from filing for non-profit status -- that it mostly concerned protecting the officers from personal liability.

Does anyone know whether Pennsylvania law requires incorporation? I'm interested in everyone's input, but if you have citations to the relevant law, that would be most helpful!
11 years 8 months ago #140627 by luckyrbb
Replied by luckyrbb on topic Is Incorporation Required?
I can only tell you that in California incorporation is required before you can become a nonprofit, because the feds (IRS) and the state (Franchise Tax Board) will only grant nonprofit status to corporations, therefore, one necessitates the other. It is probably true in PA as well, but I do not know PA law.

However, your PTA President is most likely not allowed to spend any monies without prior Board approval and Association ratification. Do you have Bylaws? If you're not a corporation, you probably don't have any. Are there any written rules about how your organization is governed? Now that you are a corporation, you will have Bylaws that will probably state the appropriate procedure for spending. You can report the issue to your District, or whoever oversees your PTA.

If your President did not bid out the work & took the first attorney he came across, or if he has a personal relationship with the attorney, the President could be held personally liable for the expense. It is complicated, there are lot of factors to consider.

I hope you can work it out. If not, the year is half over, and you can elect a new President for next year, hopefully.
11 years 8 months ago #140633 by JHB
Replied by JHB on topic Is Incorporation Required?
No - incorporation is not required. It's a recommended, but optional, step. The first PTO I helped form as a 501(c)(3) was not incorporated, and I can tell your for a fact it is not required by the IRS.

This can be very confusing because of the various terms used inter-changeably, plus levels of law that apply (federal versus state).

Your president should never have taken such a step to expend that amount of funds without approval. I'll see if I can find you specific info on PA.

Lucky - I'm pretty sure incorporation isn't a prerequisite in California - although definitely it's a good idea. Perhaps your organizers stressed that part and implied it was required. I only looked briefly at the laws in your state, but the application process specifically refers to "corporations and unincorporated associations".

Note - if you do plan to incorporate, the order is important. You do this first, before applying for the 501(c)(3). Once you incorporate, you create a new legal entity. If you were already a 501(c)(3), it doesn't transfer. You'd have to file and pay the $750 fee all over again if you incorporate later.
11 years 8 months ago #140636 by JHB
Replied by JHB on topic Is Incorporation Required?
drdeb - in the application for sales tax exemption in your state, it pretty clearly lays out the [filing] document checklist for:
  • Incorporated Institutions
  • Unincorporated Institutions
I see no instructions that would require incorporation, and it's hardly likely they'd include a checklist for unincorporated organizations if they weren't accepting applications from them.

In your case, I think an answer directly from the PA Department of Revenue will carry the most weight because they are the authority in this matter. Ideally get the answer in writing (email) or else carefully note the name/title of the person with whom you speak as well as the date/time. Here is their contact information.

However, as more supporting evidence, the commonly asked questions section from you PA Department of Revenue includes an answer to the question of how to gain Sales Tax Exemption for a non-profit organization. ( Link ) Among other things, it says that unincorporated entities submit bylaws. It seems clear to me that there is no requirement for incorporation.
11 years 8 months ago #140755 by drdeb
Replied by drdeb on topic Is Incorporation Required?
Thank you all for your help. I thought that this was the case, but the lawyer (probably to justify his fee) insisted that incorporation was necessary. I will e-mail the PA Dept. of Revenue to check, as you suggest. Thanks for the links and your research!
11 years 8 months ago #140763 by JHB
Replied by JHB on topic Is Incorporation Required?
One thing to consider - in the scheme of things incorporation is usually a very simple process for a non-profit. You need bylaws whether you incorporate or not. In most states, incorporation merely requires that the organization present their Articles of Incorporation (AOI) - or other required document - and pay a small fee, like $25 or $50.
For non-profits, the state usually has a downloadable sample of the AOI and you simply fill in the blanks. It often just one page or so.

You lawyer may be preforming the following tasks:
  • crafting bylaws
  • incorporating the organization with your state
  • filing for 501(c)(3) status with IRS - $750 fee
  • filing for [sales] tax exemption with your state
My point is that incorporating in of the simplest tasks (for a non-profit) and really doesn't require a lawyer. PTOs handle it themselves all the time. So I'd have a hard time swallowing a justification of a big fee for THAT service.
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