MAR 18, 2020
For Board Directors, Knowing Your Organization's Required Forms & Filings Is a Must For Good Governance
(Originally appeared in the March 18th, 2020 'Across the Board' publication, a Board Director, Board Advisor, C-Level, and Business Newsletter reaching 26,000+ exceptional business leaders in over 70 countries with articles focused on leadership, strategy, and governance topics - sign up here)
[Let me first start off by stating that I hope everyone is well and healthy during these trying times. My best to you and your families. May we triumph over COVID-19 quickly. I have made the decision to publish my monthly article in an effort to bring a 'business as usual' feeling to me and hopefully to you, as well. In these unprecedented times, the simple feeling of 'normal' is greatly welcomed.]
Within the numerous macro and micro knowledge areas of Board Directorship, there are some that are not particularly exciting, nor do they bring about feelings of enthusiasm, but are nonetheless important in ensuring proper governance for the organization. When it comes to understanding common required forms and filings for organizations to abide by, Board Directors should be well versed in these areas in order to provide a layer of'coverage' in required compliance, content accuracy, and submission timeliness.
Many aspiring Board Directors are not knowledgeable or proficient in the areas of required filings and disclosures prior to joining their first Board. Even then, they are limited in their knowledge depending on the entity type of the organization they are serving (nonprofit, private, or public). Experienced Board Directors have commonly ‘learned on the job’ during their early Board service to build up a more robust knowledge. Either way, it can be very beneficial to know the ropes in the early stages of your Board Director career, and experienced Board Directors may find this a great refresher or reference for questions they always had, but never asked. Let's cover nonprofits, privately owned companies, as well as publicly traded firms...
Due to myriad of local rules and tax/disclosure filing requirements across the globe varying by country, this article is specifically focused on United States regulations as they relate to organization tax and compliance filings - it would take an entire book to list the similarities, differences, and nuances regarding public, private, and nonprofit filing requirements globally. Know that in theory, by looking at U.S. requirements, this can create a robust foundation of knowledge for global Board Directors to further understand regional structures and also be prepared to ask the right questions to ensure proper governance.
Nonprofit Organization Forms & Filings
There are many types of nonprofit organizations. These nonprofits are usually tax-exempt because they work toward the public interest with all assets and income reinvested back into the organization or donated. Depending on the nonprofit’s membership, mission, and structure, different classifications will apply. Remember not to make the assumption that all nonprofit organizations are tax-exempt, as this is not the case.
In the United States, it is generally accepted that there are roughly 1.7 to 1.8 million nonprofit organizations serving the public interest and are mostly categorized as tax-exempt by the U.S. Internal Revenue Service (IRS). Know that there are different types of nonprofit organization designations with each having its own set of rules for a) eligibility, b) governmental lobbying, c) electioneering, and d) tax-deductible contributions.
Summary of Common Nonprofit Organization Forms & Filings:
- Remember, a nonprofit organization is not required to file corporate tax return (Form 1120) with the IRS.
- Form 990: Required by the IRS, this form provides the public with financial information about a nonprofit organization and is often the only source of such information. It is also used by government agencies to prevent organizations from abusing their tax-exempt status. Certain nonprofits have more comprehensive reporting requirements, such as hospitals and other health care organizations (Schedule H).
- Annual Reports: Even though nonprofit organizations aren’t required by law to publish separate and stand-alone Annual Reports, most nonprofit leaders recognize the value Annual Reports can provide. Many nonprofits consider the filing of their Form 990 as satisfying any need for an Annual Report, however, there is value for nonprofits to create a friendlier, more readable document geared towards stakeholders, donors, and other interested parties. Annual Reports can be used to highlight a nonprofit’s mission and impact, thank volunteers and supporters, and make a case for donating to the organization.
- Form 990-T: Exempt organizations use IRS Form 990-T to a) report unrelated business income, b) report unrelated business income tax liability, c) report proxy tax liability, claim a refund of income tax paid by a regulated investment company (RIC) or a real estate investment trust (REIT) on undistributed long-term capital gain, d) request a credit for certain federal excise taxes paid or for small employer health insurance premiums paid, and e) report unrelated business income tax on reinsurance entities.
- Form 990-EZ: A variant of Form 990, Form 990-EZ is the ‘Short Form Return of Organization Exempt From Income Tax’ and can be used instead of Form 990 for nonprofit organizations with gross receipts of less than $200,000 and total assets less than $500,000 (with some exceptions).
- Form 990-N: Small organizations with annual gross receipts ‘normally’ $50,000 or less may file the electronic IRS Form 990-N. Officially known as an ‘Electronic Notice’ or ‘e-Postcard,’ this is for tax-exempt organizations not required to File Form 990 or Form 990EZ. A paper form of 990-N does not exist, but it is possible to file Form 990 or Form 990-EZ instead.
- Form 990-PF: Filed by private foundations in the U.S., IRS Form 990-PF includes fiscal information and a complete list of grants, among other information. This form is due to the IRS 4.5 months after the end of the foundation's fiscal year.
- There are 13 States in the U.S. that also have specific nonprofit filing requirements (i.e. CHAR500 in New York, CRI 300 in New Jersey, etc.).
Nonprofit organizations must file their 990, 990-T, 990-EZ, 990-N, or 990-PF by the 15th day of the 5th month after your accounting period ends. So, if your fiscal year ends on December 31st, the 990 is due on May 15th of the following year. Two ninety-day extensions are allowed, except for 990-N (postcard) filers.
Private Company Forms & Filings
A privately held company differs from a public company in that a small group of investors, or the company’s founders, own the company. Since a private company does not solicit financing from the general public, it is not required to publicly disclose its financial position nor does it typically fall under regulations by the U.S. Securities and Exchange Commission (SEC), a government commission that protects investors. Although the SEC requires publicly traded companies to comply with ‘Generally Accepted Accounting Principles’ (GAAP) standards, privately held companies are not required to utilize GAAP financial disclosure guidelines. Private companies that prepare financial statements, primarily to report revenue for tax purposes, do not need the more complex financial statements required under GAAP rules.
Summary of Common Private Company Forms & Filings:
- Form 1120: Private corporations classified as C-Corporations are required to submit IRS Form 1120 to file their annual tax returns. "This year has introduced some interesting filing deadline challenges due to the coronavirus pandemic," states Eric Feuerstein, Partner at Feuerstein LLP and an expert tax advisor specializing in small businesses and high-net-worth individuals. "For 2020 (2019 calendar year tax return filings), while formal guidance has not yet been issued, it appears that the normal April 15th deadline for calendar year C-Corporations will be pushed back to at least June 15th, with tax payments of up to $10,000,000 deferred without penalty or interest until that time."
- Form 1120-W: All private companies are required to file with the IRS quarterly tax estimates - a periodic advance pre-payment of taxes based on the amount of income that is earned and the amount of estimated tax liability that will have been incurred as a result.
- Form 1120-S: Private corporations classified as S-Corps (recognized and registered ‘small corporations’) are required to submit IRS Form 1120-S when filing their annual tax returns.
- Form 1065: Partnerships use IRS Form 1065 to file their annual tax returns.
- Various States in the U.S. also have specific filing requirements.
Public Company Forms & Filings
A publicly traded corporation is required by law to disclose information about the company’s financial performance to its shareholders, the IRS, and the SEC. Public companies trade daily in the stock market, typically selling shares to raise capital, with stocks representing the sale of part of a company to shareholders. In return, the shareholders partake in the company’s ownership and are entitled to a commensurate percentage of profits. Since the goal of a public company is to increase profits for its shareholders, a publicly traded company is required to make complete financial statements available to its shareholders. Public companies follow GAAP principles and standards when recording tax and accounting information they use in preparing financial statements.
Summary of Common Public Company Forms & Filings:
- Form 1120: Public corporations classified as C-Corps are required to submit IRS Form 1120 to file their annual tax returns. (See note on 2020 filing date change in previous private company C-Corporation Form 1120 section)
- Form 1120-W: All public companies are required to file quarterly tax estimates, a periodic advance pre-payment of taxes based on the amount of income that is earned and the amount of estimated tax liability that will have been incurred as a result, with the IRS.
- Annual Reports: An Annual Report is a yearly publication that public corporations must provide annually describing their operations as well as financial conditions, and is used to disclose corporate information to their shareholders. It is commonly viewed as a 'state-of-the-company' report, including an opening letter from the CEO, financial data, results of operations, market segment information, new product plans, subsidiary activities, and research and development activities on future programs. Public companies are required to send Annual Reports to their shareholders when they hold annual meetings to elect Directors, and under proxy rulings, reporting companies are required to post their proxy materials, including their Annual Reports, on their company websites. The annual report on Form 10-K, which must be filed with the SEC, may contain more detailed information about the company’s financial condition than the Annual Report and will include the annual financial statements of the company.
- Form 10-K: Also known as a 10-K, 10K, or simply “The K,” this is an annual filing that publicly traded companies are legally required to file with the SEC. Form 10-K contains almost everything about the business that an investor would want to know, including audited financial reports, before buying or selling shares of stock in the corporation or investing in the firm's corporate bonds.
- Form 10-Q: Also known as a 10-Q, 10Q, or simply “The Q,” this is a quarterly report for publicly traded corporations mandated by the SEC to facilitate improved investor communication and company information dissemination. These reports generally compare the company’s last quarter to the current quarter as well as last year's quarter to this year's quarter. It contains similar information to the annual Form 10-K, however the information is generally less detailed, and the financial statements must be reviewed, but not audited, by an independent auditing firm. Information for the final quarter of a company’s fiscal year is included in the 10-K, requiring only three 10-Q filings to be submitted each year. In addition to including traditional financial statements, the 10-Q also contains 'management discussion and analysis' (MD&A) describing fluctuations in the income statement and statement of cash flows.
- Form 8-K: Used to notify investors in U.S. public companies of 'significant' or material events that may be important to shareholders or the SEC, this is one of the most common types of forms filed with the SEC. After a significant event (i.e. a bankruptcy or CEO's departure), a public company must file a 'Current Report' on Form 8-K within four business days to provide any updates to previously filed quarterly reports on Form 10-Q and/or Annual Reports on Form 10-K.
- Forms 3, 4 and 5: These SEC submission forms are used to report any stock transactions that an officer or Director engaged in within the public company they serve. These filings are required for the individuals that the SEC defines as 'Section 16 Officers,' which includes all Board Members, key company executives such as the CEO, CFO, and all other key member executives of the management team.Form 3 is used for the very first stock transactions that the Section 16 individual has in the company’s stock. Form 4 is used for any subsequent company stock transactions. Form 5 is used for any transactions that the Section 16 officer failed to report earlier on a form 3 or form 4.
- Schedule 13D: Schedule 13D, an SEC form, not only reveals who owns most of the company's shares, but also introduces the owner (or owners) to investors and provides contact information. It's filed within 10 days of any entity acquiring 5% or more of any class of a company's securities and provides information such as: a) background information on the owner, b) the type of relationship this owner has with the company, c) an explanation of why the transaction is taking place, d) the type and class of the security, and e) the origin of funds used for purchases.
- Form 144: Within SEC Form 144, investors gain insight into corporate insiders' pattern of selling securities. It is essentially a notice by corporate insiders or affiliates of the intent to sell restricted stock. The transaction, or at least part of it, is then made within 90 days of filing, and is required when the amount sold during any three-month period exceeds certain sales thresholds.
- The Proxy Statement: A public company's Proxy Statement, generally filed with the SEC in two forms (DEFA14A and DEF 14A), is a disclosure preparing the shareholders for a vote at the company’s annual meeting. The primary sections of the Proxy Statement contain information such as a) the structure and pay of the Board of Directors, b) the items that will be voted on at the upcoming annual meeting, and c) the compensation of executives.
- Form S-3: SEC Form S-3 is used as a 'shelf registration statement,' registering a certain amount of equity or debt securities that can be sold at a later date to the public.
- Form S-1: SEC Form S-1 is used in an initial public offering, and although similar to the S-3, it is only used the first time that the company wants to sell registered shares or debt as a publicly traded company registered with the SEC.
- Various States in the U.S. also have specific filing requirements.
Ok, so we got through it. Whew... Again, not the most exciting topic in the world, but still important information to know as a savvy Board Director. Ask your organization for the last 3 years of these filed documents to learn not only the necessary information included, but also to understand the recent history of the organization.
Does your Board have a process in place for reviewing important filings?
Reach out directly to Mark A. Pfister to become a better Board Director with his Board Consulting offerings & International Speaking Tour topics.