Entrepreneurship is not limited to for-profit entities. Forming a nonprofit corporation is much like creating a regular corporation, however, non-profits have to take the extra steps of applying for 501(c)(3) tax-exempt status with the IRS and their state tax division. Below are four basic steps to getting your 501(c)(3) up and running.
Step One: File with your state
The first step to form a non-profit is to register. This is normally done through your states’ department of corporations or the secretary of state’s office. Most states have sample articles of incorporation you can use as a template to file with the state.
Make sure your articles comply with the requirements for federal tax exempt status in your state. Although you can’t actually file your federal exemption application until you are registered with the state, you should review the federal requirements prior to filing your state papers. Otherwise, you could be stuck paying taxes while you work through any errors you might have made — or worse still learn that your group isn’t eligible for an exemption.
Step Two: Apply for Your Federal 501(c)(3) Tax Exemption
After your state’s filing office returns a copy of your filed registration materials, you can submit your federal 501(c)(3) tax exemption application to the IRS. The IRS requires you to submit a copy of your filed articles with your application. This is a critical step in the formation of your nonprofit organization since most of the real benefits of being a nonprofit flow from 501(c)(3) tax-exempt status.
To apply for your exemption, you must complete IRS Form 8718, User Fee for Exempt Organization Determination Letter Request, and IRS Package 1023, Application for Recognition of Exemption. For instructions on filling out these forms, read IRS Publication 557, Tax-Exempt Status for Your Organization. (You can obtain all of these items for free by calling 800-TAX-FORM, or you can download them from the IRS website at www.irs.gov.)
After the IRS reviews your application, it will send you a letter indicating that it has approved your nonprofit status, or it might ask you for more information about your organization. The IRS can also deny your application outright. If this happens, see a lawyer who specializes in nonprofits.
Step Three: Apply for a State Tax Exemption (If Necessary)
In a few states (California, Montana, North Carolina, and Pennsylvania), you must complete a separate application to get a state tax exemption. In other states, as long as you file nonprofit articles of incorporation and obtain your federal 501(c)(3) tax-exempt status, your state tax exemption will be automatically granted. In still others, to get your state exemption you must send in a copy of the IRS determination letter that granted your federal exemption. Contact your state tax agency to find out what steps you must take.
Step Four: Corporate Formalities
A non-profit is much like a corporation in terms of the corporate formalities that must be followed by members. It is every impotant to follow these formalities, given the nature of the organization.
The first formality is to develop corporate bylaws. These are the internal rules that will govern your nonprofit corporation. Bylaws contain rules and procedures for holding meetings, voting on issues, and electing directors and officers. To create bylaws, you can either follow the instructions in a self-help resource or hire a lawyer in your state to draft them for you. Typically, the bylaws are adopted by the corporation’s directors at their first board meeting.
Second, you should select your board of directors. Directors have the responsibility to manage and run the nonprofit corporation. Many states allow nonprofits to have just one director, but other states require at least three. Make sure you know the rules.
Finally, you are ready for your first meeting. The purpose of the first meeting of the board of directors is to conduct the initial business of the corporation and take care of other formalities, such as recording the receipt of federal and state tax exemptions. In this meeting, the directors should first adopt the bylaws and elect officers — state law usually requires a president, secretary, and treasurer, and sometimes a vice president as well. Then, the directors should authorize the newly elected officers to take actions necessary to start the business of the nonprofit — for example, setting up bank accounts and admitting members.
After the meeting is completed, minutes of the meeting should be created and filed in your corporate records book. Records keeping is very important to maintain your non-profit status and to obtain funding from government or independent sources. Non-profits generally want to make the world a better place, but to do good, it is important that you do right.
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