Forming a Nonprofit
How do I start a nonprofit organization?
Below are essential ingredients in starting a successful nonprofit:
- a vital mission
- high-quality, responsive, and unduplicated programs and services
- reliable and diverse revenue streams
- clear lines of accountability
- adequate facilities
The following generally describes the major steps in starting a nonprofit.
- File articles of incorporation with the Secretary of State or other appropriate state agency.
- Apply for exempt status with the Internal Revenue Service (IRS). Please note that it can take 3-12 months for the IRS to return its decision.
- Register with the state(s) where you plan to do fundraising activities
Please note that laws and procedures can vary in each state. For more assistance, consult Nonprofit Dreams.
Alternatives to starting your own nonprofit:
- Volunteer or work for an existing nonprofit that shares your mission.
- Find a nonprofit with a similar mission that will act as your fiscal sponsor. This arrangement may help you become eligible for more funding opportunities without obtaining your own exempt status. Q:
What are the advantages/disadvantages of becoming a nonprofit organization?
Tax exemption/deduction: Organizations that qualify as public charities under Internal Revenue Code 501(c)(3) are eligible for federal exemption from payment of corporate income tax. Once exempt from this tax, the nonprofit will usually be exempt from similar state and local taxes. If an organization has obtained 501(c)(3) tax exempt status, an individual’s or company’s charitable contributions to this entity are tax-deductible.
Formal structure: A nonprofit organization exists as a legal entity in its own right and separately from its founder(s). Incorporation puts the nonprofit’s mission and structure above the personal interests of individuals associated with it.
Eligibility for public and private grants: Nonprofit organizations are allowed to solicit charitable donations from the public. Many foundations and government agencies limit their grants to public charities.
Limited liability: Under the law, creditors and courts are limited to the assets of the nonprofit organization. The founders, directors, members, and employees are not personally liable for the nonprofit’s debts. There are exceptions. A person cannot use the corporation to shield illegal or irresponsible acts on his/her part. Also, directors have a fiduciary responsibility; if they do not perform their jobs in the nonprofit’s best interests, and the nonprofit is harmed, they can be held liable.
Cost: Creating a nonprofit organization takes time, effort, and money. Because a nonprofit organization is a legal entity under federal, state, and local laws, the use of an attorney, accountant, or other professional may well prove necessary. Aside from legal or other consultant fees, applying for Federal tax exemption can cost $200-$850 or more, in addition to state fees for incorporation.
Paperwork: As an exempt corporation, a nonprofit must keep detailed records and submit annual filings to the state and IRS by stated deadlines in order to keep its active and exempt status.
Shared control: Although the people who create nonprofits like to shape and control their creations, personal control is limited. A nonprofit organization is subject to laws and regulations, including its own articles of incorporation and bylaws. In some states, anonprofit is required to have several directors, who in turn are the only people allowed to elect or appoint the officers who determine policy.
Scrutiny by the public: A nonprofit is dedicated to the public interest; therefore, its finances are open to public inspection. The public may obtain copies of a nonprofit organization’s state and Federal filings to learn about salaries and other expenditures.
How does an organization become tax-exempt?
To be recognized as exempt from federal income taxation, most organizations are required to apply for recognition of exemption. For section 501(c)(3) organizations, the law provides only limited exceptions to this requirement. Applying for recognition of exemption results in formal IRS recognition of an organization’s status, and may be preferable for that reason.
The IRS will recognize an organization as tax-exempt if it meets the requirements of the Internal Revenue Code. See Types of Tax-Exempt Organizations and Publication 557, Tax-Exempt Status for Your Organization, for more information.
Organizations applying for tax-exempt status must submit two applications: First, if they have not previously received an Employer Identification Number (EIN), they must apply for one, and second, an application for recognition of exemption.
The IRS sometimes recognizes a group of organizations as tax-exempt if they are affiliated with a central organization. This avoids the need for each of the organizations to apply individually. See Publication 4573, Group Exemptions, for more information.
How do I form a “501(c)(3)” corporation?
The designation “501(c)(3)” refers to a specific federal tax provision only. If you need information regarding a federal tax provision or a tax provision impacts your certificate of formation, you should contact your own tax counsel, nonprofit consultant, or the IRS. The secretary of state’s meets minimum state law requirements but does not include any additional statements that the IRS might require for tax-exempt status.
I’m filing a certificate of formation for a nonprofit corporation, and I have to decide whether the corporation will have members. What is a member?
Many nonprofits use the term “member” synonymously with “supporter” or “donor.” Separate from this fundraising use, however, the Business Organizations Code provides for a nonprofit corporation with a formal membership structure. A “member” of a nonprofit corporation is “a person who has membership rights in the nonprofit corporation under its governing documents.” Members of a nonprofit corporation are similar to shareholders of a for-profit corporation in that both members and shareholders may have significant rights with respect to internal corporate governance. Unlike shareholders, however, members of a nonprofit corporation are typically not owners and are not issued stock. When forming a nonprofit corporation, you must determine whether the corporation will have members, and if so, who will govern the corporation—the members, a board of directors, or both.
A nonprofit corporation is presumed to have members. If you are forming a nonprofit corporation without members, the certificate of formation must include a statement to that effect.
Do I need a tax-exempt number for my organization?
No. Unlike some states that issue numbers to organizations to indicate that these organizations are exempt from state sales taxes, the IRS does not issue numbers specifically for exempt organizations. While the Internal Revenue Service does issue Employer Identification Numbers (EINs), these are merely a unique identifier, similar to a Social Security number for an individual. Applying for and receiving an EIN says nothing about the organization’s tax status; however, your organization needs an EIN to apply for tax exemption.
How do I get an Employer Identification Number (EIN) for my organization?
You can apply for an EIN on-line, over the telephone, via fax or through the mail. See the instructions for Form SS-4, Application for Employer I.D. Number, for further details.
To apply on-line, use the on-line EIN application available on this website.
To get an EIN over the IRS’s toll-free telephone number, call (800) 829-4933. Hours of operation are 7:00 a.m. to 10:00 p.m. local time, Monday through Friday. See EIN Toll-Free Telephone Service for more information.
To request an EIN via fax, 24 hours a day / 7 days a week, dial the fax number at the location accepting applications from your state. The instructions on the Form SS-4 indicate which location will accept your faxed request.
To receive an EIN through the mail, complete Form SS-4. The instructions for the form provide the correct address.
Third parties can receive an EIN on a client’s behalf by completing the new “Third Party Designee” section and obtaining the client’s signature on Form SS-4. This avoids having to file a Form 2848 (Power of Attorney) or Form 8821 (Tax Information Authorization) to get an EIN for their client.
How do I obtain an application for tax-exempt status?
Most organizations applying for exemption must use specific application forms. Two forms currently prescribed by the Service are Form 1023, Application for Recognition of Exemption (and instructions) (for charitable organizations); and Package 1024, Application for Recognition of Exemption (for other tax-exempt organizations). The application your organization is required to submit is specified in Publication 557. See Tax-Exempt Organizations Tax Kit for a list of forms and publications of interest to tax-exempt organizations. You may also request these forms by calling 1-800-TAX-FORM (1-800-829-3676).
Does a foreign nonprofit corporation have to register to transact business in another state if its only contact with the state is solicitation of funds or donations?
A nonprofit corporation that actively solicits funds in another state may be “transacting business” and should file an Application for Registration; however, if the corporation’s contacts are only through interstate commerce (for example, by mail or by telephone) or independent contractors, then the corporation is probably not “transacting business” in another state.
However, regardless of the manner of solicitation, an out-of-state nonprofit corporation may be required to register with the secretary of state in order to participate in a state employee charitable campaign under the government code.
How long does it take to process an application for exemption?
Applications are processed as soon as possible. The process can be delayed, however, for reasons ranging from simple errors on the application to issues concerning the qualification of the organization for exemption. See the Top Ten Reasons for Delay in Processing Applications. To obtain information about where a particular application may be in the process, see Where Is My Exemption Application?
Answering all questions completely and submitting all required items will help agents reviewing your application do so as quickly as possible. Completing the procedural checklist on the last page(s) of Form 1023 or Form 1024 will help you submit a complete and error-free application.
Is there anything I can do to help ensure that my application is processed as quickly as possible?
Answering all questions completely and submitting all required items will help ensure that agents reviewing your application are able to process as quickly as possible. Completing the procedural checklist on the last two pages of Form 1023 (last page of Form 1024) will help you submit a complete application.
What if purposes or programs change after an application is submitted?
If the organization’s organizing documents, purposes or programs change while the IRS is considering an application, you should report the change in writing to the office processing your application. If you do not know the office that is processing your exemption application, contact Exempt Organizations Customer Account Services.
Because material changes in a charity’s structure or activities may affect its tax-exempt or public charity status, organizations should report such changes to the IRS Exempt Organizations Division. See procedures for reporting changes for a complete discussion.