This section of the handbook covers the following information:
- Obtaining Minnesota Nonprofit Corporation Status; Articles of Incorporation
- Obtaining Federal Employer Identification Number (EIN)
- Obtaining Federal Tax Exempt Status
- Minnesota Sales Tax Exemption
1. OBTAINING MINNESOTA NONPROFIT CORPORATION STATUS; ARTICLES OF INCORPORATION
The Minnesota charter school law states that “the school must be organized and operated as a cooperative under chapter 308A or nonprofit corporation under chapter 317A.” (Minn. Stats. 124D.10, Subd. 4(a)) Although the law provides two options, no charter school to date has organized as a cooperative, and the discussion here focuses on the nonprofit corporation option.
Charter schools should incorporate early, as incorporation limits the liability of individuals involved with the school. The law, in fact, requires charter schools to incorporate before entering into a contract or other agreement for professional or other services, goods or facilities. (Minn. Stats. 124D.10, Subd 4(c)) In addition, evidence of incorporation will be required when applying for federal tax-exempt status, or when seeking funds from potential donors, including the Federal Charter School Planning Grant Program, the primary source of start-up funds for Minnesota charter schools.
Incorporating as a Minnesota nonprofit corporation is easily done. Charter school boards must simply draft articles of incorporation for the school and submit them, with a $70 filing fee, to the Minnesota Secretary of State. (See resource section below for contact information.) In general, there are only four required elements for articles of incorporation for a Minnesota nonprofit corporation. These are:
- Official name of the corporation,
- Registered office and agent,
- Number of shares (can be zero for a nonprofit), and
- Names and addresses of incorporators.
The Secretary of State can send you a template for your articles of incorporation. You can also access the template online at: sos.state.mn.us/business/pdf/bus3.pdf.
IMPORTANT NOTE: If you plan to apply for federal tax-exempt status, as most charters will, you may NOT use the template. The IRS requires additional language in the organization’s articles of incorporation, relating to the entity’s tax-exempt status. For guidance on this additional language, see IRS Publication 557, available online at irs.gov/pub/irs-pdf/p557.pdf.
Annual Filing with the Secretary of State
Nonprofits, including charter schools, must register annually with the Minnesota Secretary of State. There is no fee charged for this registration, unless the organization misses the December 31 deadline. Registration can be done online.
Once incorporated, the charter school board should draft a set of Bylaws. The Bylaws must be submitted to MDE as an attachment to the school’s contract with its sponsor, and, therefore, must be completed within 90 days of the date of charter approval. Bylaws govern the operation of the school as an organization, and include information about membership, the Board of Directors (number, election, terms, responsibilities, meetings), committees, officers, fiscal management, etc. The content of bylaws for Minnesota nonprofit corporations is governed by Minnesota Statutes 317A.181. For sample charter school bylaws, see the resource section below.
3. OBTAINING FEDERAL EMPLOYER IDENTIFICATION NUMBER (EIN)
Once incorporated, the school should apply for a Federal Employer Identification Number (“EIN”). This number will be used for federal tax filing and reporting purposes. To apply for an EIN, use IRS Form SS-4. You can apply online, by phone or by mail. If not done before, the application can be made at the same time your school applies for Federal tax-exempt status. Form SS-4 is available online at irs.gov/pub/irs-fill/fss4.pdf. Instructions for filing are available at irs.gov/pub/irs-pdf/iss4.pdf.
4. OBTAINING FEDERAL TAX EXEMPT STATUS
Although Minnesota charter schools are not required to obtain federal tax-exempt status, most do. This status is necessary in order for foundations, corporations, or individuals to make deductible, tax-exempt donations to the school. Federal tax-exempt status is often referred to as “501(c)(3) status,” a reference to the section of the Internal Revenue Code under which tax-exempt status would be granted. To obtain federal tax-exempt status, you must submit an application (IRS Form 1023), together with IRS Form 8718 and the accompanying fee, to the Internal Revenue Service at P.O. Box 192, Covington, KY 41012-0192.
To apply for Federal tax-exempt status you will need the following:
- Package 1023, Application for Recognition of Exemption Under Section 501(c)(3) of the Internal Revenue Code
- Form SS-4, Application for Employer Identification Number (if you don’t already have an EIN);
- Form 8718, User Fee for Exempt Organization Determination Letter Request (to which you attach the $500 filing fee); and
- IRS Publication 557, Tax Exempt Status for Your Organization, provides the latest information on rules and procedures for organizations seeking tax exempt status.
Once you’ve drafted a successful charter proposal, you’ll have already done much of the work required for the application for Federal tax-exempt status. The application requires you to provide a host of information regarding your planned activities, organizational structure, funding sources, school budget, and other items describing your operations. As a school, you must also complete Schedule B, which relates specifically to schools, colleges and universities.
As a general rule, allow four to six months for the entire application process. However, if the IRS has many questions requiring clarification (or is busier than usual), the process could take longer than six months. If you can prove that a specific foundation wishes to give your organization a grant, and all that is delaying this is your lack of tax-exempt status, you can apply to the IRS to expedite the review process. There is a filing fee that must accompany your application for tax exempt status. As of January 2004, it was $500.
The application for tax-exempt status is quite long and fairly technical. As such, you may want to consider having your application reviewed by an attorney with experience in nonprofit law. In addition, telephone assistance from the IRS is available at (877) 829-5500.
Annual Filing with the IRS
Even if your school obtains Federal tax-exempt status, the school must still file an annual tax return with the IRS. Tax-exempt organizations are required to file IRS Form 990, Return of Organization Exempt from Income Tax. This form can be found online at irs.ustreas.gov/.
5. MINNESOTA SALES TAX EXEMPTION
As public schools, charter schools qualify for exemption from sales tax on the purchase of goods used in their programs. While some organizations must apply to the state to qualify for sales tax exemption, charter schools are not required to do so. To receive the sales tax exemption, the school should simply deliver a completed Minnesota Department of Revenue Form ST-3 to the vendor. Form ST-3 can be obtained from the Minnesota Department of Revenue Sales and Use Tax Division, at 600 North Robert St., St. Paul, MN 55146, (651) 296-6181 or online attaxes.state.mn.us/taxes/sales/forms/st3.pdf.
Sample charter school articles of incorporation and bylaws.
Minnesota Council on Nonprofits (excellent source of information about starting a Minnesota nonprofit)
2314 University Avenue
St. Paul, MN 55114
(651) 642-1904 (phone)
(800) 289-1904 (Greater Minnesota)
(651) 642-1517 (fax)
mncn.org (see especially, mncn.org/infocentral.htm)
Minnesota Secretary of State (incorporation as a nonprofit)
Business Services Division
180 State Office Building
100 Rev. Dr. Martin Luther King, Jr. Blvd.
St. Paul, MN 55155-1299
Minnesota Department of Revenue (sales tax exemption)
Sales and Use Tax Division
600 North Robert Street
St. Paul, MN 55146
The Internal Revenue Service (to obtain forms)
Forms can also be obtained at a major post office
Package 1023, Application for Recognition of Exemption Under Section 501(c)(3) of the Internal Revenue Code. Form and instructions available online at irs.gov/pub/irs-pdf/k1023.pdf.
Form 8718, User Fee for Exempt Organization Determination Letter Request. Form and instructions available online at irs.gov/pub/irs-fill/f8717.pdf.
Publication 557, Tax-Exempt Status for Your Organization. Available online at irs.gov/pub/irs-pdf/p557.pdf.
The Internal Revenue Service (for technical assistance relating to application for tax-exempt status)