If you think your corporation might qualify as a public charity, private foundation or a private operating foundation, then you’ll want to apply for tax-exempt status so you can get the 501(c)(3) classification available via the IRS.
Below are the steps to take to create your tax-exempt non-profit corporation. It’s a two-part process, beginning with business registration that is similar to starting any business, and ending with state and federal-level tax exemption. Let’s take a closer look.
Part 1: Founding Your Non-Profit
1. Determine and Apply for Your Business Name
This is just like registering a business name for a regular, for-profit business. As such, you need to be sure that your business name isn’t being used by another non-profit or corporation in your state.You’ll need to register it with your state. Call your state’s corporation division or visit its official filing website to see if the name is already taken. If your name is available, you can normally pay a small fee to reserve it until you’ve filed your articles of incorporation.
2. Determine Your Business’ Legal Entity Type
Because of IRS regulations, non-profit organizations cannot be sole proprietorships or partnerships. Acceptable legal business entity types include corporations, community chests, funds, articles of association or foundations.
3. Draft Your Mission Statement
You want to make sure that your mission statement is concise and directly addresses who your organization serves. Look to other charitable organizations for guidance if you’re not sure where to start. Also, keep in mind that your mission statement will have to align with information you include in your articles of incorporation.
4. Hire an Attorney Specializing in Non-Profit Organizations
This is an incredibly important step. Perhaps even more than for-profit businesses, you need all of your forms to be filed correctly. Take the time to find the right attorney specializing in non-profit structuring, which will save you time, money and headaches.
5. File Your Application
File your non-profit organization’s incorporation papers as dictated by your state’s laws. The filing process and requirements are very similar to a for-profit corporation, and typically involve filing:
- Articles of Incorporation
- Organizational Meeting Minutes
- Corporate Records Organization
6. Hire a Certified Public Accountant Specializing in Non-Profit Organizations
Just like hiring a lawyer, you will want the knowledge and guidance of a CPA who specializes in non-profit organizations. Look for recommendations or conduct interviews with select accountants and firms to ensure that you feel comfortable with the person. Also, try to select a firm or individual who has experience working with organizations of your size.
7. Develop a Budget and Determine How You Will Keep and Store Your Records
Developing a budget and retaining records will be key for your non-profit organization. The public or government officials may ask to inspect these records at different times as a way to verify that your organization is holding true to its mission statement—and not abusing its tax-exempt status. Work with your CPA on ways to effectively manage your books and your budget.
Part II: Apply for Tax-Exempt Status
Now that you’ve filed the necessary incorporation papers, your new non-profit organization will not be tax-exempt until you apply for tax-exempt status. You’ll need to submit application materials to qualify for tax exemption at both the state and federal levels. We’ll start with the federal level, then move on to the state level.
1. Federal Requirements:
Here is a list of the required forms:
- Once your organization is legally formed, apply for an Employer Identification Number (EIN) via Form SS-4. Your organization will need an EIN regardless of whether you have employees. NOTE: Do not apply for an EIN until your organization is legally formed; doing so triggers additional filing requirements for the IRS.
- Here’s the big one: complete Form 1023 – Application for Recognition of Exemption Under Section 501(c)(3) of the Internal Revenue Code and send it with the required filing fee. Smaller charitable organizations can file Form 1023-EZ. This form also requires a filing fee, but can be filed online. Click here for instructions on filling out Form 1023 and here for instructions on filling out Form 1023-EZ. NOTE: You will need to submit financial statements for the current year and budgets for the next two years as part of this application.
- If someone other than your principal officer or director will be in charge of answering any questions relating to your tax-exempt status or filing of the necessary federal forms, fill out Form 2848 – Power of Attorney and Declaration of Representative and Form 8821 – Tax Information Authorization. This will give the IRS permission to disclose information regarding your tax-exempt status to the representative you indicate.
- Apply for a non-profit mailing permit. If you anticipate sending second or third-class postal mail with any frequency, it’s worth submitting this application to the United States Postal Service. For more details on eligibility, contact the USPS and ask for Form 417.
When to file: Technically, you must file these forms within 27 months of when your organization was legally formed. Legal formation is defined as one of the following:
- The day an organization’s articles of incorporation are filed with the state.
- When at least two individuals adopt an unincorporated association’s organizational documents.
- A trust is formed when any non-charitable interests expire or it is fully funded.
2. State Requirements
In 40 states and Washington, D.C., you’re required to file a charitable solicitations registration. This gives your organization permission to solicit donations from the public. To file, you’ll need documentation very similar to what you need to apply for federal 501(c)(3) status.
While only required in a handful of states, you may also need to file for state corporate tax exemption. For most states, the federal 501(c)(3) status is sufficient to qualify for state tax-exempt status.
Many states allow charitable organizations to purchase items for their organization without having to pay state sales tax. In order to qualify, you will need to have already obtained your federal 501(c)(3) status.
Creating a non-profit organization is a noble endeavor, but one that is still full of legal requirements and consequences. Make sure to cover all of your bases and work with both an attorney and a certified public accountant to ensure that your organization is in full compliance.
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