How Do You Incorporate Your Nonprofit?
The First Step to Becoming a 501c3
Although there are pros and cons to incorporating at the state level for nonprofits, most charitable organizations do incorporate because of the advantages it confers. Those range from tax advantages to legal protections, to making it easier to secure federal tax-exempt status.
Nonprofit incorporation is very similar to creating a for-profit corporation except that a nonprofit must take the extra steps of applying for tax-exempt status with the state in which it incorporates and with the IRS.
What Incorporation Involves
Nonprofit incorporation usually involves these steps:
- Choose a business name that is legally available in your state and file for an EIN (Employment Identification Number)
- Prepare and file your articles of incorporation with your state's corporate filing office, and pay a filing fee.
- Create bylaws that will dictate how the corporation will be operated.
- Appoint an initial board of directors.
- Hold the first meeting of the board of directors.
- Apply for any licenses or permits that your corporation will need to operate in your state and local municipality.
Your state's corporate filing division is usually part of the secretary of state's office. You can request a packet of nonprofit materials from that office which will include sample articles of incorporation, the state's laws on nonprofit corporations, and instructions on how to find an available business name.
Here are a couple of easy ways to find the office in your state and the procedures required.
How to File for Federal Tax-Exemption
After you have filed all the paperwork for nonprofit incorporation in your state and received a copy of your articles of incorporation, you can move on to submitting your application to the IRS for your federal nonprofit status as a 501(c)(3) organization.
It is best to file within 27 months after the date of your incorporation.
There are now two IRS forms to choose from when you register as a tax-exempt 501(c)(3) nonprofit.
- If your organization has less than $50,000 in gross receipts, and assets less than $250,000, you can file 1023-EZ. This is a new form (2014) and is considerably shorter than the 1023, which predated this one and is still the form for larger organizations. The 1023-EZ must be filed online, and the fee is $275. A good explanation of the new form is Harbor Compliance's New 1023-EZ Form: the Good, the Bad, and the Ugly.
- If you are a larger organization, over the limits listed above, you must complete IRS Package 1023, Application for Recognition of Exemption.
IRS Publication 557, Tax-Exempt Status for Your Organization, provides instructions on filling out the proper forms. Many can be downloaded from the IRS website, www.irs.gov. The IRS also maintains a list of ways to contact the IRS by mail, phone, email, and fax.
The IRS will review your application and send you a "determination letter" indicating that it has approved your nonprofit status. Or, the IRS might ask you for more information. It can also deny your application.
If that happens, seek legal help from a lawyer who specializes in nonprofit issues.
Larger organizations that file the longer Form 1023 often find that hiring an attorney to prepare their filing saves time and money. One of the reasons the IRS gives for taking a long time to grant tax exemption or to deny it is that there is often incomplete information on the form.
You may need to apply to your state for tax-exempt status as well. Some states require a separate application to get a state tax exemption, while some states are satisfied with your federal tax-exempt status To find out what your state requires, contact your state tax agency.
Don't Fundraise Until Your Charity Is Legally a 501c3
Check to see if your city requires you to have a solicitation license before you can fundraise.
Also, most experts recommend that you do not fundraise until you've received your letter of determination from the IRS stating that you are now tax-exempt.
Tax-exemption includes being able to assure your donors that they can take a tax deduction for their contributions. Starting to fundraise before that tax-exemption is legal puts your nonprofit on shaky ground.
What many nonprofits don't know is that they must register in every state where they fundraise. Even if you are a local organization, if you accept online donations, it's possible that you receive donations from other states. Not paying attention to out-of-state registration laws can result in penalties. Become aware of what you should do before you start any fundraising.
State Nonprofit Incorporation Forms and Information (IRS) lists Secretary of State Offices and links to more IRS nonprofit resources.