To profit or not to profit, that’s the quest?

By: Elmer Diaz

Most real estate investors associations call themselves either for Profit Organizations or Non-For-Profit Organizations. I’ve got news for you, whether you call your organization one way or the other, chances are that you are in business and not making any profit.

Most of the associations are in operation with the purpose of educating and to share information on real estate investing. To provide these benefits to the people involved or interested, there are a particular set of expenses that tag along with the physical delivery of those benefits to the association members. These expenses are very high; expenses such as meeting room rental, newsletter production and delivery, advertising, bookkeeping and more. All those expenses add up quickly. That’s one of the reasons a for profit organization doesn’t make any profit, most of it are expenses.

Let me give you a better definition than for Profit or Non-for-Profit. The so called For Profit Organizations are those created in a way that is recognized by the state or public in general as a Partnership, Corporation, or simply, Associations. This type of entity may or may not need to be registered with the state in which it operates. (There are a lot of requirements that each organization has to follow. To find out whether your association needs to be registered with the state where it resides or not you will have to consult with a competent lawyer and with the Secretary of the State in which the organization will operate.)

More likely, when we make reference of Non-For-Profit Organizations, we refer to those recognized by the State Comptroller and the Internal Revenue Service (I.R.S.) as organizations with particular needs. These particular needs are recognized by the State and the IRS for the purpose of obtaining some extra privileges. (Always remember that when the IRS offers certain privileges there are tons of paperwork and rules that have to be followed.) I am going to narrow down the Non-Profit status to two. Those recognized by IRS section 501 C-3 and those recognized by IRS section 501 C-6. For our purpose we will call it C-3’s or C-6’s. The member will not have any other particular benefits, only those probably of a business expense.

What is the difference between the two of them? The C-6’s are the groups or associations that not only are recognized by the state where it resides as a non-for-profit corporation but the purpose is to gather, network and be an organization for individuals that service in a particular trade. The IRS calls them business leagues or trade associations. One particular benefit to the member is the deductions of the dues under business deduction of dues and subscriptions. Most of our local REIA’s belong to this category. These are organizations of businesses and people who have some common business interest as opposed to engaging in some type of commercial business. Their activities must be directed to the improvement of business conditions generally as opposed to the performance of particular services for individual members.

The C-3’s are also recognized as non-for-profit corporations but must have the following five characteristics:

1.)They must have a public service mission.

2.)They must be organized as a not-for-profit or charitable corporation.

3.)Their governance structures must preclude self-interest and private financial gain.

4.)They must be exempt from paying federal tax.

5.)They must possess the special legal status that stipulates gifts made to them are tax deductible.

These groups function as Philanthropic Organizations, Advocacy Groups, Educational Institutions, Religious Organizations, and Service Organizations just to generalize. Their particularity is to attract the public in general and likely the members of these organizations may not be of any particular trade. It should be open to everyone that desires to be part of it. A benefit to the members is the deduction of the dues and gifts as a personal deduction.

Nonprofit organizations receive a multitude of government benefits designed to assist and motivate them in performing their public purposes. These benefits include favorable tax treatment to the organization and to its donor, reduced postal rates, grants from the government and other philanthropic organization, preferences on government contracts, etc.

Another general benefit of recognized Non-For-Profit organizations is the wide acceptance of the community as an organization created to help and prosper the community. This particularity will open the door for free advertising and free Public Relations that translate into more exposure to acquire benefits and members for free. There have been many times when I have been asked whether the organization that I represent is for profit or non-for-profit. Basically what it boils down to is whether they will be willing to give me free PR or not!

The bottom line is: Are you and your members willing to do more bookkeeping and file more paperwork with the IRS? Is it worth the hassle or not? Do you want more bureaucrats looking up your business? To profit or not to profit…That’s the quest?

Filing for 501 (c) 6 of the IRS*

Application

  1. 1024 Application for 501-(c) 6
  2. 2848 – Power of Attorney to file on behalf of the organization
  3. User Fees –Letter of application for request for Tax Exempt status Form 8717 – Figure amount of fee and pay it with request-IRS will not process request until payment is satisfied.
  4. To find out users fee and length of time of request 1-877-829-5500 (Number for Exempt Organizations Help Desk)
  5. Must have EIN

Organization Documents

  1. Articles of Incorporation
  2. Certificate of Incorporation by State
  3. By-Laws, Constitution or Governing document
  4. Conformed Copy-Agrees with originals and all amendments
  5. Every attachment should have organization’s name, address and EIN
  6. Company books, profit & loss statement, balance sheet
  7. Budget for the following three years
  8. Corporation Events and Marketing for those events
  9. Tabulate all sources of income
  10. Do not submit originals, they become part of the IRS

Copy of other documentation

  1. Newsletter, magazines, and other publications
  2. Advertising and marketing material
  3. Written material for expressing views on proposed legislation
  4. Copies of leases, contracts and any other agreements that the organization has entered.

* Although the National REIA does its best to keep accurate files and information, we recommend visiting the IRS website directly for the most up-to-date forms and guidelines.