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How do I go about forming a Non-Profit business?

How do I go about forming a Non-Profit business?

Answer: There are various considerations (legal, tax, general operational, etc.) that must be addressed when starting a nonprofit. Forming a nonprofit business first involves the determination that your planned activities will qualify for an IRS nonprofit exemption. Then, you form a business entity (typically a corporation) in your state and file for nonprofit exemption with the IRS. Once you receive your nonprofit exemption from the IRS, you may also need to apply for a nonprofit exemption with the state. The following are additional comments and helpful information that you can use in forming and structuring your nonprofit:

Nonprofit purpose, exemption and operations: Nonprofit corporations exist not to make money, but to fulfill one of the purposes recognized by federal law: religious, charitable, educational, scientific or literary. The primary advantages of a nonprofit organization are that it does not pay income taxes and can, under certain circumstances, more readily access or qualify for federal loans and public and private grants. The main disadvantages are that it cannot be used to generate profits for the owners; the business purpose must conform to IRS regulations and the administrative burden of maintaining nonprofit exemption status. While you can take a salary as an employee of the nonprofit, you cannot take profits from a nonprofit organization in the way that you can from a for-profit business. You can review additional discussions of nonprofit organizations at the following websites:

Whether your planned activities will qualify for IRS nonprofit exemption status will depend on all of the facts and circumstances. To better understand the nonprofit qualifications and filing requirements, you can review the following IRS websites:

Form 1023 is used to request tax-exempt status from the IRS. Form 1023 and instructions and related information can be found at the following websites:

Additional information on forming a nonprofit and on nonprofit operations can be obtained from the following websites:

Publication:

How to Form a Non-Profit Corporation: nolo.com

Nonprofit formation: Nonprofits can be organized under various entity structures; however, the C corporation structure is often used because it meets the personal asset protection criteria and offers an efficient governance and management structure. The specific forms and filings vary by business entity; but, the basic steps to forming a corporation are reserving a business name and filing Articles of Incorporation and other appropriate forms with the State. Also, you have founder meeting minutes, director meeting minutes, bylaws, Federal Tax Identification (ID) number, and other business entity governance issues. Generally, the least expensive method of forming a corporation or other business entity is preparing and filing the paperwork yourself. However, we normally recommend that first time filers form a business entity through a lawyer or with incorporation services.

For drafting and review with your lawyer, you can find information on developing nonprofit bylaws and samples at the following websites:

In addition to Articles of Incorporation and Bylaws, corporations should have, at a minimum, minutes to document founder organizational meetings, Board of Director elections, officer elections, bank account authorization, and other decisions regarding major contracts and important business issues.

Nonprofit businesses are generally required to obtain a Federal Tax ID number, also known as a Federal Employer Identification Number or EIN, from the IRS. You can find EIN information and obtain an EIN for your nonprofit through the following IRS websites:

Nonprofit fundraising issues: Unless you have some type of affiliation or sponsorship with an existing nonprofit organization, you should form your nonprofit foundation before conducting fundraising activities due to the potential income tax and personal liability issues discussed below. Also, if your intention is to conduct tax deductible fundraising activities, then you would want to have your 501(c)(3) exemption approval before starting the fundraising activities. Some nonprofits do not seek 501(c)(3) exemptions, but fundraising is generally more effect if the charitable donations are tax deductible for the donors under a 501(c)(3) exemption. You can review additional fundraising issues and considerations at the following IRS and nonprofit industry websites, which explain:

Professional assistance: Forming a nonprofit can be a difficult process. If you need to analyze the personal and business legal and tax implications of a nonprofit, we recommend that you consult with a local lawyer and tax advisor.

Published: June 28, 2013
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Matt Tarkenton

Matt Tarkenton is Executive Vice President at Tarkenton Companies. He was part of a group that started Renova Partners, a boutique investment bank, and was recognized as a “40 Under 40: Up and Comer” by the Atlanta Business Chronicle in 2009. Matt performs business planning and marketing training for hundreds of professionals across the country, and co-hosts a weekly coaching program on entrepreneurial education. Matt graduated from Princeton University, where he was a member of the 1989 Ivy League Championship Football Team, and received an MBA from Harvard Business School.