“Nearly every great cause was started by a visionary, risk-taking, no-barriers, basically very courageous human being.”1
You’ve felt the nonprofit call: maybe you’ve seen a need that no one is meeting, or envisioned a new way to address an age-old problem. Maybe you’ve sketched out plans and talked to people who share your passion.
But how do you translate that passion and vision into a viable nonprofit organization? Better yet, how can you lay the foundation for an organization poised to grow and thrive? In this blog post, we answer some of the most common questions founders ask about nonprofit formation.
No, tax exemption is not a requirement for starting a nonprofit, but it offers numerous advantages. In addition to exemption from federal income tax, benefits include:
Achieving tax exempt status affirms that your organization is set up to serve a legitimate charitable purpose as defined by the federal government.
This question points to a second reason why it’s important to look at tax exemption early in the nonprofit planning process. The IRS defines 29 types of tax exempt organizations, including everything from alumnae clubs to chambers of commerce, under Section 501(c) of the Internal Revenue Code. Whether you plan to apply right away for tax exemption, it’s important to examine the IRS categories and see what kind of nonprofit you want to form. By far, the most common and widely known type of nonprofit is the 501(c)(3) charitable organization.
To qualify as a 501(c)(3) charitable organization, your organization must meet all of the following conditions:
Note that nonprofits can — and should — make a profit. The difference between a for-profit and nonprofit organization is not whether you make a profit, but how your profits are spent. In a nonprofit, all profits are used to further the charitable mission.
Each state has different nonprofit governance requirements that specify whether you need to appoint a board of directors and how many board members you must have. The requirements also address matters like how often you need to meet and how decisions will be made.
In addition, if you plan to apply for 501(c) status at any point in your future, your board of directors will need to satisfy IRS governance guidelines, which are far more stringent than the basic state requirements. The IRS guidelines address complex issues such as independence of your board and inclusion of family members and business associates, executive compensation, conflicts of interest, document retention, fundraising, and much more.
Beyond conforming to requirements, your founding board of directors is very important to the future success of your venture. Don’t just look to friends and associates who want to support you when building your nonprofit board. Look for people who share your passion and commitment to the cause, and who bring appropriate skills to the positions you need to fill.
Have further questions about setting up a compliant board? This prior blog post answers seven FAQs.
Once you’ve established the type of charity you want to create and met your state’s governance requirements, you’re ready to incorporate your nonprofit. Incorporation creates the legal entity of a nonprofit corporation, and carries several benefits to the organization. The process of incorporating involves preparing and filing articles of incorporation with your state’s corporations division. This document states the organization’s name, purpose, and other key details. Each state has minimum requirements for information on the articles and many states provide templates, however these templates are almost always insufficient for IRS requirements. If you plan to apply for 501(c) status, plan ahead to make sure your articles of incorporation satisfy both state and IRS requirements to avoid rejections down the road.
Each state has its own timing and fees, but turnaround can be as little as same-day where online filing is available to six weeks. You can find turnaround times for your state in our online reference, How to Start a Nonprofit Organization. In addition to timing, the reference provides a breakdown of incorporation fees, lists of required forms, and links to detailed guides for every state.
To apply for federal tax exemption, you will need to file Form 1023 or Form 1023-EZ with the Internal Revenue Service, ideally within 27 months of forming your nonprofit. To file the short form, your nonprofit must meet detailed criteria set forth by the IRS.
Obtaining tax exemption is the most challenging part of the nonprofit formation paperwork. It is not unusual for a Form 1023 application and attachments to exceed 100 pages. The IRS estimates that it will take more than 100 hours to prepare and file Form 1023.
The IRS filing fee for Form 1023 is $600, while the fee for the 1023-EZ is $275. These are one time application fees. Once the tax exemption is granted, there are no additional fees required to the IRS, and the organization enjoys its federal tax exemption in perpetuity, provided it takes the necessary steps to maintain its eligibility.
Generally, the IRS takes anywhere from two weeks to six months to review the paperwork once you’ve submitted it. If there are errors or missing documents in your application, it may need to be resubmitted, which can add significantly to the time.
Our compliance specialists can help expedite your tax exemption paperwork. You can read a case study showing how we helped a nonprofit startup become tax exempt in 14 days.
If your application is approved, you will receive an IRS Determination Letter declaring your nonprofit officially tax exempt. This is an exciting day for a nonprofit!
If you want to make sure your nonprofit is built on a strong, compliant foundation without wading through all of the government paperwork, we can help. Our nonprofit formation packages make forming your nonprofit quick and easy. Just choose a plan and provide basic information about your nonprofit. Once we receive your information, our teams go to work preparing your applications, filing all the paperwork, and following through with government agencies. And they set you up with our free compliance software, so you can track the status of your nonprofit and access corporate records anytime.
To learn more, call 1-888-995-5895, or get in touch today. We’re excited to help you make your nonprofit vision a reality in 2019!
1. Deborah Linnell, “Founders and Other Gods,” Nonprofit Quarterly. March 2004.