How to Start a 501(c)(3)

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501(c)(3) is federal income tax exemption for qualified charitable nonprofits. Application for 501(c)(3) exemption is made by filing Form 1023 with the IRS.

Obtaining 501(c)(3) tax exemption is the most difficult part of your nonprofit paperwork. The IRS estimates Form 1203 takes 100+ hours to prepare and file. They charge $275-$850 to review your application. Nevertheless, many nonprofits see these barriers as “necessary evils” because there is no other way to obtain tax exemption and the credibility that 501(c)(3) exemption provides.

Do You Qualify?

Before bothering with the time and expense of applying, quickly check the following three main points for qualifying. Your organization must:

1.) Be organized
The nonprofit may be organized as a corporation, trust, or unincorporated association.
2.) Have an exempt purpose
The most common types of 501(c)(3) organizations are charitable, educational, and religious. The organizing documents of the nonprofit must limit the activities of the organization to those approved under 501(c)(3).
3.) Be operated to further its exempt purpose
The organizing or governing documents (e.g. bylaws) must limit the organization from refrained activities. It may not participate in political campaigns, must restrict lobbying, must ensure earnings do not benefit any private individual or interest, and must not operate beyond its exempt purpose.

When Do You Apply?

Your nonprofit should apply for exemption within 27 months of formation, but may be granted an extension. You must wait until after your nonprofit is formed (e.g. articles of incorporation are approved by the state). You must also obtain an EIN prior to applying.

While not an explicit requirement by the IRS, because the Form 1023 exemption application requires financial information about your nonprofit, it is wise to time your application when current financial statements are readily available.

How do you Apply to Start a 501(c)(3)?

Application for 501(c)(3) exemption is made by filing Form 1023 with the IRS. The IRS charges an application fee of $275 $850, depending on which application form you use to apply and whether your annual gross receipts exceed $10,000. Though Form 1023 is long and complex, remember that the IRS will approve your organization if it demonstrates that it meets the exemption requirements of IRC 501(c)(3).

By the time you assemble Form 1023 and supplements, your submission package will contain:

  • Application (Form 1023 and Schedules A through H, as required)
  • Articles of organization as well as any amendments in chronological order
  • Bylaws or other rules of operation and amendments
  • Documentation of nondiscriminatory policy for schools, as required by Schedule B
  • Form 5768, Election/Revocation of Election by an Eligible Section 501(c)(3) Organization To Make Expenditures To Influence Legislation (optional)
  • Form 2848, Power of Attorney and Declaration of Representative (optional)
  • Form 8821, Tax Information Authorization (optional)
  • Expedite request (optional)
  • User fee
  • EIN
  • All other attachments, including explanations, financial data, and printed materials or publications. Label each page with name and EIN.
“Absence of the proper purpose and dissolution clauses is the number one reason for delays in the issuance of determination letters.” IRS Form 1023 Instructions

What Else Should I Know Before I Apply to Start a 501(c)(3)?

The IRS further classifies all 501(c)(3) exempt organizations as either public charities or private foundations. This classification will have repercussions on how your organization operates, obtains grants, and so forth. By default you will be classified as a private foundation unless you demonstrate that you are a public charity.

Key Takeaways:

  1. Start a 501(c)(3) by filing Form 1023 and gaining IRS approval.
  2. Prepare your company and financial documents as input to your application.
  3. Plan for the expense of a $275, $400, or $850 IRS application fee.
  4. Complete your application to be classified as either a public charity or private foundation.

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