Why Isn't USGenWeb (or XXGenWeb) a 501(c)(3)
Tax Exempt Nonprofit Corporation?

The question has been asked over and over again since The USGenWeb Project was started in 1996, both by new members, and occasionally by existing members. The national organization considered, but decided against incorporation.

In Jun 2007, The USGenWeb Advisory Board passed Motion 07-12 authorizing the creation of a Fact Finding Committee and charged the Committee to:

"1] Review and document current financial laws relative to nonprofit organizations such as the USGenWeb. For example, incorporation, registration, unincorporated nonprofit registration, 501(c)3 status, status quo and so on and what each would mean to this organization as possible effects/non-effects of possible needed future funding.
"2] Develop a list of possible financial paths the USGenWeb could pursue, or not, with potential advantages and disadvantages."

The Committee Report was submitted in May of 2008 and was discussed, but was eventually accepted without any further action being taken. In June of 2012, the Advisory Board again took up the report for consideration. After extensive discussion of the original report, changes to the law since the report was submitted, and receiving member input, the board passed Motion 2011/12-15 which effectively rejected incorporation and 501(c)(3) status for national. The motion was approved by 13 of 14 board members, with one board member not voting:

"Resolved: that The USGenWeb Project should and will remain an affiliated group of independent State and local web sites, and per our Bylaws, an unincorporated, and unregistered, nonprofit association which does not solicit financial contributions."

This does not mean state, local, or special projects affiliated with USGenWeb can not incorporate.  Some have already done so.  However, any affiliated project considering the adoption of a more formal structure must understand there may be disadvantages as well as possible benefits. Advocates of incorporation stress the benefits, but can overlook or may not be aware of potential problems. The USGenWeb Advisory Board considered many things before choosing not to incorporate and/or pursue 501(c)(3) status. This white paper is my overview of those discussions and considerations, and is offered to bring some balance to any present or future discussions of the issue. But I am not a lawyer and this is not legal advice.

Pat Asher
February, 2015

This paper updated January 2018 to reflect the number of currently required State registrations and December 2017 changes to U.S. tax law.

Corporation Vs. Unincorporated Association

Many people believe the IRS requires an organization to incorporate in order to be recognized as a tax-exempt charitable organization. This is not true. IRS Pub. 4220 states: "A 501(c)(3) organization must be organized as a corporation, trust, or unincorporated association."

Whether incorporated or not, to request tax exempt status from the IRS, the organization must first register in the principal state in which it does business.  Requirements (and costs) vary widely from state to state.  For information particular to your state, see How to Start a Nonprofit Organization. As an overall perspective, Nonprofit Assistance offers the following comparison:

Steps to Form an Unincorporated Nonprofit Develop vision and mission statements File articles of association if required by your state Obtain an employer identification number (EIN) Open a bank account and establish check signing procedures Establish an accounting system Develop an overall fundraising plan

Steps to Form an Incorporated Nonprofit Develop vision and mission statements Establish bylaws and board policies Select individuals to serve on the board of directors Hold first director's meeting and elect required officers File the certificate of incorporation Obtain an employer identification number (EIN) Open a bank account and establish check signing procedures File for federal tax exemption Follow state and local nonprofit regulations Procure necessary insurance coverage Establish an accounting system Develop an overall fundraising plan

[Ed. notes]: An unincorporated association is legally formed when its organizing document is adopted by the signature of at least two individuals. An EIN is necessary for tax reporting purposes, even if the organization has no employees.

It also must be understood that the organization's obligations do not end with registration. While the initial effort and cost to register may be manageable, operating a nonprofit requires a lot of paperwork, and there are ongoing costs as well (See: Soliciting Funding for your USGenWeb Website)

Corporations must maintain a Corporate Records Book which must be available to the public with no more than a nominal charge for copying. It must contain:

• the articles of incorporation and any amendments
• the nonprofit corporation's bylaws and any older versions used in the three most recent years
• minutes from board of directors meetings for the three most recent years
• records of all actions taken by directors without a meeting for the three most recent years
• a list of the full names and last known addresses of all past and present directors
• a list of the full names and last known addresses of all past and present officers
• financial records, including federal, state, and local tax returns and reports, for the three most recent years
• annual or biennial reports or statements of information filed with the state for the three most recent years
• any other documents filed with the state

Nonprofit corporations must keep proper corporate records to preserve directors' limited personal liability and protect the organization's tax-exempt status.

"Section 501(c)(3) organizations are required to keep books and records detailing all activities, both financial and nonfinancial. Financial information, particularly information on its sources of support (contributions, grants, sponsorships, and other sources of revenue) is crucial x x x." [IRS Pub. 4220]

Incorporation is a long term committment that can be difficult to sustain for a small group of volunteers. Directors and officers can't just quit and walk away if they become bored or disgruntled. They remain legally responsible unless or until they are relieved of their duties through appropriate corporate action and filings with the state.

To be recognized as a nonprofit by the IRS, the organization's bylaws must include specific language. If your project already has bylaws, they may need extensive revisions before applying to the IRS as a nonprofit.

Incorporation as XXGenWeb does not exempt the corporation from compliance with USGenWeb bylaws:

"XII. C. It shall be the responsibility of each state organization to ensure that the state project is in compliance with the stated bylaws of The USGenWeb Project.
"XII. E. State projects are empowered to develop/adopt any additional rules/bylaws and guidelines, as appropriate, for their state so long as they do not conflict with these bylaws."

Personal Liability

The other reason most often given for incorporation is to protect individual members and officers from personal liability. However, the so-called "corporate veil" is not absolute. An Individual's assets are not protected if s/he personally and directly injures someone, or does something intentionally fraudulent or illegal. In 2009, the Ninth Circuit held that an individual “is liable under the Lanham Act for ‘torts which he authorizes or directs or in which he participates, notwithstanding that he acted as an agent of the corporation and not on his own behalf.'” [Corporate Officers May Be Personally Liable]

The stated purpose of the USGenWeb is publishing genealogy content on line, "accomplished by presenting websites which shall be central repositories of historical and genealogical research data, x x x." [USGW Bylaw II. B.] Unlike brick and mortar operations, the most likely risk for a nonprofit whose sole activity is publishing on line content, is being sued for defamation, invasion of privacy, copyright or trademark infringement.

"In The USGenWeb Project, copyright [ownership] of websites resides solely with the creator of the web page(s)." [USGW Bylaw X. A.] Taken together with the Ninth Circuit decision, it is unlikely that an acknowledged "sole owner" could avoid personal liability, even as a member of XXGenWeb, Inc., for disputed content s/he published.

Because XXGenWebs have relatively small memberships which may change frequently, there are two other risks to which I believe members of an incorporated XXGenweb are particularly vulnerable.

First, failure to comply with formal rules for forming and maintaining a corporation. Too often, a group enthusiastically endorses incorporation and completes all the initial steps; but through membership attrition, carelessness, or just because it has become a bother; fails to follow through with required maintenance; i.e. filing annual tax returns and/or reports, renewals of registrations and business licenses, regularly holding formal meetings, maintaining any necessary escrow accounts, and all of the required record keeping. Compliance with the formalities is essential to maintaining the corporate shield. Will your members be willing to take on these responsibilities in addition to maintaining and adding information to their web sites?

Second, failure to maintain separation of personal funds and assets from those of the corporation.  Aside from the always present risk of someone "borrowing" from a nonprofit's bank account to pay personal debt, when a nonprofit is small, there is often personal involvement and a sense of responsibility by the members. If for example, the annual web hosting agreement is due for renewal and funds are not available, throughout the history of the USGenWeb there has always been someone willing to personally underwrite the cost. However, suggesting to a creditor that a corporation debt will be guaranteed or paid by an individual will "pierce the corporate veil" and expose the guarantor to personal liability. Such commingling of corporate and personal funds may even cause the courts to rule that the corporation doesn't really exist with the result that none of the directors, officers, or members are shielded.

If registered in one of the 13 states that have adopted the Uniform Unincorporated Nonprofit Association Act (UUNAA), an unincorporated association holds many of the same rights and protections granted to corporations, e.g. the association is a legal entity that can buy, hold, or sell property, and the liability of members, directors, and officers is limited.

501(c)(3) Status

In the past, individuals as well as corporate donors were motivated to support 501(c)(3) organizations by U.S. tax law. The Tax Cuts and Jobs Act signed by President Trump on 22 Dec 2017 and effective for the 2018 tax year, sharply reduces the number of small to moderate-income people who will be eligible to itemize deductions, thereby eliminating the tax benefits to individuals of making small charitable donations. So while some USGW volunteers have envisioned 501(c)(3) status as the route to an endless flow of funds to pay for domain registrations, hosting fees, and maybe even purchases of rare or difficult to obtain records for transcription, that appears even less likely than before the changes to the law.

The IRS classifies 501(c)(3) organizations as either a public charity or a private foundation. Generally, a public charity has a broad base of support while a private foundation has very limited sources of support. This classification is important because different tax rules apply to the operations of each. Deductibility of contributions to a private foundation is more limited than deductibility of contributions to a public charity. Note: The IRS has not yet published new rules based on the December 2017 tax act.

The IRS requires that nonprofits classified as public charities receive at least 1/3 of their income from the general public. This will usually require active solicitation of the public. But USGW Bylaw IX. B. limits how a USGW project may solicit donations: "Solicitation of funds for personal gain is inappropriate. This is defined as the direct appeal on the home page of any of the websites comprising The USGenWeb Project for funding to do research, to pay for server space, to do look-ups, etc."  Without the required level of public support, a 501(c)(3) organization that has applied as a public charity may be reclassified by the IRS as a private foundation.

Because The USGenWeb and its affiliated State and Special Projects are web-based, solicitation of the public would be accomplished using an interactive web site. As of December, 2017, 47 States and the Disctrict of Columbia, as well as some municipalities, require nonprofits to register if the organization is soliciting charitable donations from residents, including via the internet. State rules vary widely, as do the registration fees, which can range from $0 to about $200 per year. But if the average is only $50, depending on the number of states where your organization must register, annual fees could add up to $2000 or more. Failure to register where required can result in charges of fraudulent charitable solicitation and significant penalties.

While the IRS does not require charities to acknowledge cash donations of less than $250, in the last few years my personal experience has been that every charity to which I have donated has sent me a letter or e-mail acknowledging the donation. There is a good reason for this. In the digital world, many donors do not have cancelled checks so they must have a "receipt or letter" in order to claim a deduction. Will your organization be prepared to process the necessary acknowledgements? [IRS Pub. 1771]

If your XXGenWeb project did have funds to pay for some of those pet projects your members have dreamed about, who would decide which member's project has the most value to your project as a whole? Every member is going to think his/her project is important. How will you avoid hurt feelings and resentment when you allocate any available funds?

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