What do I need to do to start a 501(c)(3)?
While the 501(c)(3) designation is often denoted as an organization, it is actually a tax exemption status, rather than an organization itself. You will be required to form a business entity structure that qualifies for the 501(c)(3) IRS tax emeption status prior to filing for the exemption. We have provided information and resources below for you to review regarding how to form a nonprofit organization and how to achieve a 501(c)(3) tax emption status.
“To be tax-exempt under section 501(c)(3) of the Internal Revenue Code, an organization must be organized and operated exclusively for exempt purposes set forth in section 501(c)(3), and none of its earnings may inure to any private shareholder or individual. In addition, it may not be an action organization, i.e., it may not attempt to influence legislation as a substantial part of its activities and it may not participate in any campaign activity for or against political candidates.
Organizations described in section 501(c)(3) are commonly referred to as charitable organizations. Organizations described in section 501(c)(3), other than testing for public safety organizations, are eligible to receive tax-deductible contributions in accordance with Code section 170.
The organization must not be organized or operated for the benefit of private interests, and no part of a section 501(c)(3) organization’s net earnings may inure to the benefit of any private shareholder or individual. If the organization engages in an excess benefit transaction with a person having substantial influence over the organization, an excise tax may be imposed on the person and any organization managers agreeing to the transaction.
Section 501(c)(3) organizations are restricted in how much political and legislative (lobbying) activities they may conduct….”
Discussions on nonprofit basics and pros and cons you may find helpful:
- http://nonprofit.about.com/od/nonprofitbasics/bb/corppros.htm
- http://www.nolo.com/legal-encyclopedia/what-an-unincorporated-nonprofit-association.html
Establishing a 501c3
There are various considerations—legal, tax, general operational, etc.—that must be addressed when starting, properly forming, and structuring a nonprofit organization. In terms of formation costs, how much of the process you can do yourself with the assistance of pro bono (free) or low cost legal resources will determine your overall costs.
Forming a nonprofit business first involves the determination that your planned activities will qualify for an IRS nonprofit exemption. You then 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:
1. 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.
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:
- http://www.irs.gov/pub/irs-pdf/f1023.pdf
- http://www.irs.gov/pub/irs-pdf/i1023.pdf
- http://www.irs.gov/Charities-&-Non-Profits/Frequently-Asked-Questions-about-Form-1023
2. 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. Also, you can review state filing information by visiting the official secretary of state’s website for your specific state.
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. We have a SmallBizClub product called ManageMyMinutes which simplifies the task of keeping your business Minute Book. You can locate ManageMyMinutes information through the following website link:
3. 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.
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