This is a guest post from Harbor Compliance. Harbor Compliance does not provide tax, financial, or legal advice. Use of our services does not create an attorney-client relationship. Harbor Compliance is not acting as your attorney and does not review information you provide to us for legal accuracy or sufficiency.
How to start your 501(c)(3) nonprofit organization, from start to finish! From incorporating to filing for tax status, this post from Harbor Compliance lays out all the necessary steps.
If you’re passionate about helping others and have an idea of how to serve a community in need, starting a nonprofit is a great way to turn your vision into a reality. Before you can start helping, there are important organizational steps you need to take to form your nonprofit.
A nonprofit organization is a corporation formed for not-for-profit purposes. The not-for-profit purpose is declared when that nonprofit corporation is formed. What distinguishes a nonprofit from a for-profit is what the organization does with its profits. While for-profit businesses may distribute profits to shareholders, nonprofit organizations reinvest profits in the cause of the organization.
There are many different types of nonprofits – health, education, human services, international aid, environment, animal welfare, arts and more. What all nonprofits share is a focus on helping others. If there is no existing organization serving the community in need you’ve identified, you may be interested in forming your own nonprofit. Here’s a primer on the steps it takes to do it.
Incorporate Your Nonprofit
Once you’ve had the idea to form a nonprofit, there is a legal process that must be followed. Start by establishing a legal structure—the nonprofit corporation—at the state level. Select a business name that is legally available in your desired state of incorporation. Filing for an Employment Identification Number, or an EIN, comes next. An EIN is a unique nine-digit identification code issued by the Internal Revenue Service (IRS) to a business. It is used for filing tax returns, opening a bank account, and hiring employees.
Selecting your board of directors is an important step in setting your nonprofit up for success. Collectively, the board of directors strategizes, sets policy, and makes decisions for the nonprofit. Individually, each director should have certain qualities and attributes that add value to your organization. The IRS requires that there be a minimum of three unrelated board members on the board, to guard against insider transactions and misuse of funds.
Preparing and ratifying your articles of incorporation come next. Incorporation creates the legal entity of a nonprofit corporation and carries several benefits to the organization. Each state has different requirements for articles of incorporation, and many provide templates for emerging nonprofits to follow. However, the IRS requires specific language in your corporate formation documents that may not be included in state templates. his language must be included your articles of incorporation if you plan to file for 501(c)(3) federal tax-exempt status. Articles of incorporation must follow both state and IRS requirements to avoid rejections down the road.
Create nonprofit bylaws which will become the main governing document of your nonprofit. Your bylaws will act as supplemental rules to those already required by the state and IRS. The document will act as a guide and decision-making tool for the board of directors. Bylaws are required if you pursue federal tax exemption, and will help prevent or resolve conflicts amongst the board. Along the same lines, create a written conflict of interest policy. Make sure to check if your state of incorporation has specific requirements for what must be included in your conflict of interest policy. Undisclosed conflicts of interest can compromise public trust in your nonprofit. A strong conflict of interest policy will help ensure your organization and leadership are protected.
Hold the first meeting of the board of directors, where the above documents are reviewed and approved. Elect officers and establish roles. This first meeting will set the tone for your nonprofit and give your group of dedicated members a chance to create a positive vision of your organization’s future.
File for Federal Tax-Exempt Status
Once you have formed your nonprofit, you may want to seek tax-exempt status from the IRS. There are numerous benefits to seeking tax-exempt status including the ability to solicit tax-deductible donations and certain grants, as well as exemption from federal corporate income taxes, and a discount on bulk-rate postage. With a tax-exempt status, you’ll have enhanced credibility and trust as an organization and be able to apply for grants.
There are 29 different types of organizations that are tax-exempt under Section 501(c) of the Internal Revenue Code. The most popular and widely known of the 501(c) exemptions is the 501(c)(3). Commonly referred to as charitable organizations, 501(c)(3) are frequently eligible to receive tax-deductible contributions, a valuable benefit to offer donors to your nonprofit organization.
The IRS does impose some restrictions on 501(c)(3) nonprofit organizations. Those restrictions include:
- 501(c)(3) organizations may not be organized for the benefit of private interests, such as the founder, the founder’s family, or others directly or indirectly controlled by such private interests.
- 501(c)(3) organizations must be organized and operated for the specific exempt purposes identified in Section 501(c)(3) of the Internal Revenue Code.
- 501(c)(3) organizations may not participate in electioneering, campaign activity for or against political candidates.
Tax exemption is applied for by submitting an application to the IRS using Form 1023 or 1023 EZ. It is not unusual for the Form 1023 application and attachments to exceed 50 pages. Be careful to ensure that you’ve included everything that is required, and be sure to follow IRS formatting instructions. IRS processing times may take anywhere from 2 weeks to 6 months, so be patient. While waiting for your determination letter from the IRS it’s best not to fundraise. Once you are confirmed as tax-exempt, you’ll be able to kick your fundraising into gear.
File for State Tax-Exemptions
There are some states that will grant you tax-exempt status once you receive your IRS determination letter. Other states require the submission of a state application. Tax exemptions may vary depending on the state. States may offer exemption from corporate income, sales, use, and other taxes they levy on nonprofits. Consider exemption in each state where your nonprofit operates. Typically exemption requires submitting an application to the department of revenue and must be renewed every 1 to 5 years.
Register to Fundraise
After you’ve received your 501(c)(3) determination letter from the IRS, you’ll need to register to fundraise in your state of incorporation and perhaps others too. Generally, you must register or seek exemption from registration before soliciting donations in each of the 41 states that require registration. Properly registering is an important part of nonprofit compliance that will allow you to fundraise across state borders.
Additional prerequisites for registration in some states including registered agent service. In the technological age, charitable solicitation can happen anywhere. Solicitation is defined as asking for funds for charitable purposes, regardless of the method. This includes donations by mail, grant requests, text to give, and a donate now button on your website. Solicitation occurs where the request for a donation is received. If you don’t know where your solicitations are being received, you may need to register in multiple states.
[Note from Mightycause: On our platform, donations are filtered through the Mightycause Charitable Foundation, which is registered in all 50 states!]
After becoming registered or exempted where required, you need to file an annual secretary of state annual report in each of these states. Typical documents submitted with this annual report include IRS Form 990 tax return and compiled or audited financial statements.
Time to Do Some Good
There you have it, folks! These are the most important steps you need to take to establish your nonprofit organization. Once you’ve crossed off these important tasks you’ll be able to start functioning as a 501(c)(3) nonprofit organization. Now that you know what to do, you can begin to do your part to make your community a better place.
Want more tips on setting your nonprofit up for success? Check out Nonprofit Startup Bootcamp.
About the Author
Sharon Cody, JD is the partnership manager at Harbor Compliance. Since 2012, Harbor Compliance has helped more than 25,000 organizations apply for, secure, and maintain licensing. Sharon’s passion for educating nonprofits on the value of compliance stems from three decades spent as an attorney, foundation executive, charitable fundraiser, and nonprofit board member.
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