Before getting into how to start a 501c3 nonprofit in detail, what does 501c3 mean? 501c3 is a section of the IRS tax code.
What does “registered nonprofit” mean? This can get confusing. If you create a nonprofit corporation in your state then you are a ‘registered’ nonprofit.
But that doesn’t have anything to do with being a 501c3 nonprofit because that requires a whole separate process that involves an application to the IRS. I hope that makes sense. Now let’s get into it.
- Pros Of 501c3 Nonprofit Status
- Cons Of 501c3 Nonprofit Status
- The Complete Guide to Registering a 501c3 Nonprofit
- 8 Steps To Start a 501c3 Nonprofit Organization
Pros Of 501c3 Nonprofit Status
- One of the most important benefits of a 501c3 nonprofit is getting tax-exempt status. This means your nonprofit is exempt from federal taxes, sales taxes, and property taxes. You might even be exempt from payroll taxes if you have employees. The benefits are obvious. Instead of paying approx 30% of revenue in taxes you will keep that money and reinvest it into your nonprofit.
- Your 501c3 nonprofit status makes your organization seem more credible. You can clearly state this on all materials and on any application you fill out.
- You will have the ability to give donors tax deductions when they donate to your organization. There are a lot of donors that will only donate money if they get the tax deduction that goes with it.
- You will be eligible for grants on federal, state, and local levels. In fact, most funding organizations make it a condition to be a 501c3 nonprofit in order to be allowed to apply for a grant – meaning that they won’t even consider an organization that is not registered as a 501c3 nonprofit. This is obviously critical if your funding strategy is heavily reliant on grants,
- There are a lot of media outlets that give free or discounted rates for announcements, press releases, and even advertising from nonprofit organizations. A lot of them make it a condition to have 501c3 nonprofit status.
- The United States Postal Service will give you nonprofit’s that have 501c3 nonprofit status the ability to take advantage of special bulk mailing rates that save you a lot of money.
Cons Of 501c3 Nonprofit Status
Creating a nonprofit organization takes time, effort, and money. You will need to spend money for incorporation and to apply for the 501c3 nonprofit status.
In order to make sure that everything is done properly you might also need to use an attorney, accountant, or other consultants.
If you have 501c3 nonprofit status you will need to keep detailed records of all of your nonprofit activity and submit annual filings to the state and IRS by strict deadlines in order to keep your nonprofit active and maintain the exempt status. Again, this will cost you time, money, or both.
Now, this is a massive issue so please read this carefully. If you want to create a nonprofit and have a vision for what you want to do and how you want to do it then you need to very clear about the fact that 501c3 nonprofit status will not allow you to control your nonprofit’s activities.
Your nonprofit will need to have a minimum of 3 board members and its own articles of incorporation and bylaws. This means that the board members can outvote you and, in a worst-case scenario, they vote you off the board and out of your nonprofit.
This is the reason that I decided not to register my nonprofit as a 501c3 nonprofit when I was based in the US.
The activity of my nonprofit was extremely important to me and I needed to make sure that I had complete control over everything and the idea of being voted out of my own nonprofit was completely unacceptable. Keep in mind that you won’t be able to solve this problem by simply adding board members that you know because partnership disputes are extremely common and there is no guarantee that they will support you if the nonprofit ends up in a difficult situation.
Scrutiny by the public:
Keep in mind that a nonprofit is dedicated to the public interest. This means that your nonprofit activity and your nonprofit’s finances are open to public inspection and scrutiny.
Members of the public have the right to obtain copies of your state and federal filings to learn about the salaries you pay to yourself and how you spent the money you raised.
The Complete Guide to Registering a 501c3 Nonprofit
This video is about registering your nonprofit with the IRS and getting 501c3 nonprofit status.
The first point to make is that this only applies to US-based nonprofits. If your nonprofit is not US-based then you need to find the equivalent of this in your country.
If you are a US-based nonprofit make sure you have watched my video about the advantages and disadvantages of 501c3 nonprofit status. As I mentioned in that video, I deliberately chose not to register my nonprofit as a 501c3 nonprofit.
If you are going to spend the time and money to get your 501c3 nonprofit status I’m assuming you are aware of the pros and cons and have decided to go ahead. So, let’s get it into it.
8 Steps To Start a 501c3 Nonprofit Organization
Step 1: Clarify your purpose
When you start this process you will need to make a very long list of decisions and spend precious time and money.
You can only make these decisions if you have your end goal in mind because every decision needs context and your end goal is your context.
Any lack of clarity about your objectives will increase the likelihood of making decisions that you will regret some time down the road.
In the meantime, a clear purpose for the organization will attract better employees and volunteers, and more donors.
Step 3: Name your nonprofit
When you name your nonprofit, you need to think about two things:
As for rules, every state in the United States has different rules and regulations so check the website of the Secretary Of State in your state to see what you need to do in your state.
Many states require nonprofits to use a corporate designator like Incorporated, Corporation, Company, Limited, or whatever.
As for the brand, this is a more detailed subject and you check out my video about branding.
For now, just keep in mind that this decision will set the tone for your nonprofit’s brand for many years so take a little time to think about it.
Make sure it’s descriptive, easy to say, and remember and remember to check to see if the domain is available. Again, check out my video about ‘how to create a brand’.
Step 4: Form a Board
Deciding on your board members before incorporating is usually a good idea. Some states require you to list the names of your board members in your incorporation documents but keep in mind that they can be changed anytime.
But, even if your state doesn’t require the names of your board members on day one, the right board members might be able to help with all of the important early decisions like giving you advance about the nonprofit name, the rules to set up in the articles and bylaws, which consultants to hire and a long list of other issues.
Of course, all of this will only be possible if you recruit the “right” board members – people that have experience and skills that you don’t have.
Step 5: Create bylaws
The bylaws contain the operating rules of your nonprofit and provide a framework for your management procedures. They are also the framework that you will use for internal accountability.
Bylaws contain the rules and procedures for things like holding meetings, electing directors, appointing officers, and taking care of other formalities.
The power to adopt, amend or repeal bylaws rests with the board of directors.
It’s important to note that an organization that has 501c3 nonprofit status, is required to report changes to its bylaws and any other governing documents annually to the IRS on the organization’s IRS Form 990 so this, not something you want to change frequently.
I have provided bylaws templates in the notes for this video. But keep in mind that bylaws are a legal document and I cannot and am not giving you any legal advice because I know nothing about your circumstances and I’m not a lawyer.
If you need to help with this you will need to contact a lawyer that’s registered in the state where you incorporated the nonprofit.
Step 6: Prepare and file your incorporation documents
OK, now you have a name for your nonprofit, selected and appointed a board of directors, you just need to complete and file your incorporation documents
You will also need to file “articles of incorporation” with your state’s corporate filing office – which is usually the SOS of your state. Check out their website to see if you can do it electronically or if you need to physically mail something.
As a general rule, you should incorporate in the state where you expect to conduct most of your nonprofit’s programs or services.
If you won’t be focusing on a specific state or you plan to offer national programs then you should incorporate in the state where you or your nonprofit’s HQ will be located.
Filings and fees will vary based on your state. Keep in mind that incorporating your nonprofit in your state does not make it 501c3 exempt.
That will require an application to the IRS but the IRS will require you to include certain statements in your articles of incorporation if you’re planning to apply for 501c3 status.
You will also need to get a federal employer identification number (EIN) before applying for your 501c3 tax exemption. You need this even if you don’t have employees.
The good news is that you can do this quickly and easily on the IRS website www.irs.gov.
The IRS will use your EIN to track your organization’s financial activity and you will need it to open a business bank account and to hire and pay employees.
In fact, almost every major transaction your nonprofit makes will require an EIN.
When the state approves your articles of incorporation go ahead and set up your first official board meeting.
The chair of the meeting should report to the board that the state has approved the articles then the board needs to make the Articles of Incorporation a part of the official record.
Then it is time for the board to officially approve your bylaws and elect your board officers.
Step 7: File for 501c3 tax-exempt status
You apply for your 501c3 status with the Internal Revenue Service (IRS) and you do it by filing IRS Form 1023. In order to avoid potential problems, make sure you file Form 1023 within 27 months of the date you file your nonprofit articles of incorporation.
Keep in mind that there will be a fee of $275 or $600, depending on your application method and it can take 3-12 months for the IRS to make a decision -, depending on how many questions they about your application.
So, it goes without saying that you need to start this process as soon as possible.
Form 1023 is up to 28 pages long and can be more than 50 pages long after including all of the required attachments and other supporting documents.
Keep in mind that the application process is a detailed review of your nonprofit’s governing structure, your purpose, and any planned programs.
The IRS wants to make sure that the organization is formed for exclusively 501c3 nonprofit purposes and that its programs are designed to fulfill the stated purposes – not unrelated purposes.
The IRS will also be looking closely for any conflicts-of-interest or the potential for any benefit to insiders and both of these are possible grounds for denial.
You can use one of two application forms
- Form 1023: This is the traditional 26-page application used by most larger nonprofits
- Form 1023-EZ: The condensed 3-page application that can be used by organizations that have gross receipts of less than $50,000 and less than $250,000 in assets.
Check the IRS website to see the latest instructions an Eligibility Worksheet that you need to complete to figure out if your nonprofit meets the requirements for using the shorter form.
BEFORE filling out form 1023, make sure you have:
- Filed your articles of incorporation with SOS
- Created your bylaws
- Held your first board meeting
You will also need to include your nonprofit articles of incorporation and your bylaws with the application. Your articles of incorporation and/or your bylaws are going to have to include:
- a statement of your exempt purpose(s), (such as charitable, religious, educational, and/or scientific purposes)
- a dissolution clause
- a conflict of interest clause
Prepare to provide this information:
Basic information about the nonprofit
Like the name of your nonprofit corporation, contact information, and when you filed your articles of incorporation.
A copy of your articles of incorporation and your bylaws added to the application form.
The following clauses stating that:
- your corporation was formed for a recognized 501c3 nonprofit tax-exempt purpose (e.g., charitable, religious, scientific, literary, and/or educational), and
- any assets of the nonprofit that remain after the entity dissolves will be distributed to another 501c3 nonprofit tax-exempt nonprofit — or to a federal, state, or local government for a public purpose.
A detailed description of all of the organization’s activities.
Include a description of past, present, and future activities and prioritize them in their order of importance.
Information about intended compensation (or other benefits) for :
- Officers (e.g.president, chief executive officer, vice president, secretary, treasurer, chief financial officer, or any other officer in your organization)
- The five top-paid employees that will earn more than $50,000 per year, and
- The five top-paid independent contractors that will earn more than $50,000 per year.
A statement of revenues and expenses along with a balance sheet.
Step 8: Ongoing compliance
After getting approved, you need to prepare for annual reporting requirements. In most cases, an exempt organization will need to file some version of Form 990 with the IRS.
Form 990 outlines your finances, activities, governance processes, directors, and key employees, and, remember, it is open to public inspection.
States also have their own reporting and renewal requirements so will need to track and document your organization’s finances and activities throughout the year in order to avoid a scenario where you need to do a huge amount of work at one time or it’s too late to get records of financial transaction or nonprofit activity.
At the minimum, you should: keep a corporate record book where you keep all critical documents (including registration papers, licenses, and permits, meeting minutes, etc.) to make sure that you’re organized and fully compliant.
Finally, do not do any fundraising activity where you claim 501c3 nonprofit status until you’ve received your letter of determination from the IRS stating that you are now tax-exempt.
You can get yourself into a lot of trouble if you accept donations after giving donors the impression that you had (or are about to receive) 501c3 status so don’t do it.
In the meantime, if your application is denied and you want to appeal, consider hiring a lawyer in order to avoid wasting more time and money.
But, don’t just hire any lawyer, hire a lawyer that has experience with 501c3 nonprofit applications.
OK, now this process will obviously be a little challenging if you are one man or woman show.
If you are new to this and have no business nonprofit or experience then I suggest you hire an attorney, accountant, or someone familiar with the tax-exempt law and how nonprofit organizations operate in your state to ensure that your new nonprofit complies with state and federal laws and requirements.