Chapter 4: Legal

Legal Structure

Existing Models
Student-led microfinance initiatives nationwide have evolved with different organizational models. Some groups are based on campus and only offer training programs whereas other groups have formed independent nonprofit 501(c)3 corporations that manage microloan funds. We have split the varying models into the following categories described below. See different student led models Lend for America is tracking here.

501 (c) 3 Nonprofit Organization:

Based off-campus and run independent of the university. Nonprofit structure (board, staff and volunteers) determines product and service delivery, fundraising, operations, and management.

Advantages: This model allows students the greatest flexibility to lead the direction of your initiative and make decisions with partners and advisers. The nonprofit structure is based on a board of directors that manage the direction and activities of nonprofit staff. In addition to having autonomy, as a young nonprofit leader and social entrepreneur, you can access a wealth of resources within your university and globally. There is a lot of support available online for free to guide you. Moreover, the more you build relationships with mentors and seek their advice, the better decisions you will make.

Disadvantages: It is a lot of responsibility and a ton of work. Starting a new organization is a lot of responsibility. To maintain nonprofit status with the IRS, an annual filing is required. Fundraising, legal requirements, accounting, board development, decision-making falls entirely on your team’s shoulders. Starting a nonprofit organization, for anyone, is not easy – no matter how many people help, how much money you have, or how passionate you are. Students face additional challenges since their schedule doesn’t allow full-time commitment. Additionally, students generally lack professional experience and have struggled to build credibility. There is also paperwork to file, processes to implement, and it generally takes 6 months to get nonprofit status from the IRS.

Examples: Intersect Fund, Elmseed Enterprise Fund, Capital Good Fund, Community Empowerment Fund, Hilltop Microfinance Initiative, Forza Financial, Social Entrepreneurs of Grinnell

University club + Fiscal Sponsor:

Based on campus and work in partnership with university and often another partner off-campus such as a local bank, credit union, or nonprofit organization.

Advantages: This model allows your group to take advantage of the university’s support in addition to the infrastructure of a local partner. With this support, you avoid responsibility for complying with legal requirements and time spent setting up infrastructure to host products and services you want to offer. If these partnerships can be arranged on favorable terms, you can focus your efforts on recruiting clients and student staff as well as developing products and services.

Disadvantages: The downside of this model is having to comply with other organizations’ terms. If you fundraise on your own, the money goes through other organizations’ hands and will likely have various requirements such as processing fees attached. Furthermore, the decision-making power is ultimately shared among the parties involved in the arrangement. Each arrangement is unique and some groups have found this model favorable to their objectives. Upon setting up this relationship, it is important to clarify expectations and terms before deciding to use this model.

Several organizations have started as University clubs and eventually formed 501(c)(3) nonprofits, due to the limitation of this model.


Based on campus and led primarily by faculty at university

Advantages: With this model the support of the university can be leveraged to benefit your organization’s visibility, fundraising potential, and growth on campus. Additionally, you may have opportunities to take advantage of professors’ expertise, physical resources on campus to host trainings, and recruiting student volunteers.

Disadvantages: The major disadvantage is when your group is embedded into the university, the decision-making process is also embedded into the university. Therefore, your group’s ideas may face delays and rejection by university bureaucracy. In particular, LFA has seen student groups that are interested in lending face challenges with their university legal and risk management departments. When students want to begin accessing cash to manage transactions with clients, universities become concerned.

Examples: Bentley Microfinance Initiative, University of Notre Dame, St. Cloud State University

You should rely on information your team collects before getting started to determine what kind of organization is the best fit for offering your products and services.

Applying for 501(c)(3) Corporation

Organizations must incorporate and apply to receive tax-exempt status with the Internal Revenue Service (IRS). Below is a short version of the legal stuff you need to know. Check out full instructions from the experts at (,,id=96109,00.html) and see this IRS publication for more info.

Full disclosure: we are not legal advisors or experts and do not provide legal advice. LFA has examples of each of the documents listed below available for LFA members. Contact us ( if you'd like to learn more about membership.

Steps to attaining and keeping 501 c 3 status:

1. Incorporate at the state level
First, file articles of incorporation with your state, generally with the Secretary of State office. These are like your organization’s constitution and include your organization’s purpose and other general info about your nonprofit. To complete this step you also need to create bylaws, which are the rules of how the nonprofit is governed. Additionally, you typically need to pay a filing fee, and appoint a board of directors with at least 3 members. It will help if you have a pro bono lawyer to do this for you (it will be very simple for them to do, they've done this hundreds of times), but it is not impossible to do it on your own. Usually the instructions are online on the department of state's web site. Be sure to think long-term about who you put on your board to make sure they do not become road blocks as your business model evolves.

2. Apply for 501(c)(3) tax-exempt status at the federal level
To apply, you need to file the Form 1023 with the IRS and you should complete this step soon after incorporating with your state. Form 1023 is a fairly lengthy form that requires narratives and financial projections to justify the tax-exempt status. After you submit this form, the IRS may come back to you with additional questions before granting you status. On average this process takes between 6-9 months, but some Lend for America members have seen shorter turnaround times. Here are a few of the important steps of the process:
  • Apply online for an Employer Identification Number (EIN). This is a nine-digit number the IRS assigns to identify employers, sole proprietors, corporations, partnerships, nonprofits, government agencies, and other business entities. Fill out the Form SS-4 online here (,,id=102767,00.html) to receive an EIN number immediately.
  • Finalize your mission statement
  • Board members: The form 1023 asks you to identify the organization’s officers and directors.
  • Organize and prepare financials: the Form 1023 asks for your revenues and expenses for the current tax year and if you’ve been in existence, the 3 prior tax years. Additionally, you’ll need a current balance sheet. If you don’t have any financial history, the IRS will ask you to project your income and expenses for the next 3 years.
  • Pay the $400 fee. It costs $400 to register as a new organization if you anticipate your gross revenue being under $10K per year. Fee form clarifies the applicable fees

3. File the Form 990
As a 501(c)3 nonprofit corporation, you are required to file the Form 990 on an annual basis. The form reports on your actual revenue and expenses for the year, major donors and grantees, staff salaries, and program activities. You can update your current officers and directors in your annual 990 filing.

The deadline to file depends on your fiscal year dates. The IRS requires nonprofits to make their 990 available for public inspection. Posting it to your website is even better from a transparency standpoint, rather than just saying it is available upon request. Make sure to leave out the Schedule B, which you are not required to make available to the public. More information on the Form 990 is available on Guidestar here:

Most campus MFIs will qualify to submit the Form 990EZ if annual gross receipts are less than $200,000 for the fiscal year and total assets are less than $500,000. The 990EZ form is shorter and easier to complete. You can see the form online here:

Lending Laws by State

Regulation on interest rate limits and whether a lender needs a lending license differs state by state. You can look up the lending laws in your state at this website: