A step-by-step guide to turning your dream nonprofit organization into reality
Starting a nonprofit that will operate as a tax-exempt organization and accept tax-deductable donations is a noble endeavor. It is also a complex one. It is not a matter of simply filing a document; there are multiple jurisdictions involved, and the route from conception to hosting fundraisers can take several months, longer if you’re not fully prepared.
Please don’t misunderstand—I’m not trying to scare you out of your plan. Starting a tax-exempt nonprofit organization is far from impossible. But it’s important to be aware of all of the moving parts right from the beginning; it’s easy to get so excited about your mission that you lose the forest for the trees and miss out on important filings and deadlines.
First, some preliminary information:
Forming a 501(c)(3) nonprofit is a matter of two main processes: registering as a nonprofit corporation* at the state level, and then applying for tax exemption with the IRS.
What does it mean to be a “tax-exempt” organization?
A tax-exempt nonprofit organization, broadly, is one that is formed for one of the purposes recognized under section 501(a) of the Internal Revenue Code. Rather confusingly, 501(c) organizations are covered under section 501(a). This lens is about forming a 501(c)(3), perhaps the most commonly known type of 501(c) organization.
To qualify for a 501(c)(3), your organization must be formed exclusively for one of the following purposes:
- Public safety
- Cruelty prevention (animals and children)
*An individual cannot qualify for tax-exemption under a 501(c)(3), but a corporation can (as well as certain other entity types: a foundation, for instance). This article focuses on a nonprofit corporation structure.
So how do you set up your organization as a tax-exempt nonprofit 501(c)(3) corporation? Let’s take a look at the main steps in getting your organization off the ground.
Steps to File for 501(c)(3) Tax-Exemption
Step 1: Select a Name for Your Nonprofit
Many nonprofit organization founders have had the perfect name for their organization picked out since the day they decided to form a nonprofit. But hold off on printing a thousand glossy promotional brochures and plastering your name all over the Internet—it’s worth checking to see if the name is even available first!
Unfortunately, there isn’t one giant government database that you can check your nonprofit name against and be assured that you won’t run into any legal snags along the way. There are a few different places you’ll need to search. Let’s take a look at some of those places.
Secretary of State’s Database
As mentioned earlier, your first official registration will be as a nonprofit corporation at the state level. Therefore, you’ll need to comply with your state’s name availability procedures.
Go to your Secretary of State’s website and locate the corporate entity search option. Type in your chosen name (or the first few words, if your name is longer than that) and see what happens!
(Note that in some states, an exact match is not required for a name to be considered “confusingly similar”—Texas, for example, has a “two-word” rule; with some exceptions, a corporation will not be allowed to register a name that has the same first two words as a corporation already on file (although permission to register can sometimes be obtained from the existing corporation).
It’s always important to look to the future of your organization before making any decisions. As yourself, “Is it possible that my nonprofit organization might expand into another state down the line?” If it is a possibility—even a remote one—take a look at the databases of the likely states.
While there’s nothing stopping someone from registering a corporation with the same name as you in that state between now and then, it at least lets you know if there’s a name conflict right now.
You wouldn’t want to form a new nonprofit with the intention of setting up shop in the next state over, only to find that there’s already an organization with the same name that formed fifteen years ago!
US Patent and Trademark Office Database
In addition to the name screening done by the Secretary of State’s office to ensure that they have only one entity per name on file (and to avoid confusing the public!), it’s important to check to see if the name you want to use isn’t already a registered trademark.
Trademarks (a word or words used to identify a product or service) can be registered with the federal government, specifically the US Patent and Trademark Office. The state name check searches only that state’s corporate records; when it comes to trademarks, you’re on your own.
State and Unregistered Trademarks
Here’s where it gets a little tricky. The USPTO isn’t the only place a trademark might be registered; trademarks can be registered at the state level as well. The USPTO helpfully provides a list to each state’s Trademark Office to make your search easier!
State trademarks are not listed in the Secretary of State’s corporate database—the Secretary of State is looking after its own interests (potential duplicate corporation names on file), not yours (legally clearing the name for use for you).
As far as unregistered trademarks, things get even harrier. How can you search for something that isn’t registered??
First, an “unregistered trademark” is simply something used as a trademark to identify a corporation or product/service that hasn’t been registered as such. However, registration is not necessary in order to receive common law trademark protection in its geographic area (take a look at Wikipedia’s article on unregistered trademarks for more information).
There are a few ways to look for unregistered trademarks:
Do an Internet search. It’s the Age of the Internet; any active competing trademark, if the organization’s management knows anything about marketing, probably has some sort of an online presence. Also, try typing your organization’s name into your browser’s address bar (http://www.[name].com), as well as likely abbreviations and with various punctuation—not only will this help you in your unregistered trademark search, but it will tell you if the domain name is available for your future organization’s website! (Or, search ICANN’s list of Accredited Registrars to do a more formal search for domain names.)
Search ThomasNet. ThomasNet is a comprehensive database of thousands of companies, products, and services; chances are, if there’s an active unregistered trademark out there being used for a business or product, you have a solid chance of finding it there.
If your organization really takes off, a conflicting international trademark may become a concern to you. Among other companies, Thomson Reuters provides a fee-based international trademark search.
Step 2: Write a Mission Statement
Your mission statement is extremely important—to your organization, to potential donors and investors, and to the federal government.
Your nonprofit Articles of Incorporation must include a purpose statement. While states many times allow for-profit corporations to register their businesses for “any and all legal purposes,” nonprofit corporations are typically required to specify exactly what nonprofit activities your nonprofit organization will engage in. Your Mission Statement can typically double as this purpose statement.
Your donors and investors will look at your Mission Statement first. Before digging into your business plan, potential donors will want to look at a specific but succinct summary of your purpose and activities. If your Mission Statement doesn’t deliver, keep working on it!
The IRS requires certain information in your purpose statement before they will grant you tax exemption. A nonprofit organization claiming tax exemption must do so under the laws of one of the paragraphs in section 501 of the IRC—in this case, section 501(c)(3). The specific terms of that section must be addressed in your nonprofit Articles of Incorporation.
Of course, your mission statement isn’t set in stone. If the version in your Articles turns out to fall short of the IRS’s standards, no worries—Articles can be amended. If a prospective donor walks away without feeling like he or she has a solid grasp of your purpose, it’s OK—you can fix the problem for the next donor. And if your specific purpose shifts slightly, you shouldn’t feel constrained by your mission statement. It can and should grow and expand along with your organization.
Step 3: Select your Board of Directors
Your nonprofit corporation must have directors. Many states require a minimum of three; some will allow you to have one. The board of directors is responsible for steering your nonprofit organization in the direction it’s supposed to go—they will adopt resolutions, make decisions on behalf of the organization, and remove or replace corporate officers.
How to Choose a Board of Directors:
In a nonprofit organization, the question of who will fill the board of directors is a crucial one. The temptation at this beginning stage of your organization is to ask your friends and family to participate, but it’s important that you look to the future, to a time when your organization is more established.
In addition to standard management skills and strong ethics, a nonprofit corporation will run the most smoothly and encounter the least road bumps if you keep the following tips in mind.
Seek out directors that share your vision.
While this seems like a logical point, it’s important to discuss the purpose of your organization in detail with your friends and family members that you intend to ask to join you. When your organization really gets off the ground and big decisions need to be made, will you be able to accomplish your mission objectives, or will you be tied up in meetings squabbling over how to move forward?
Seek out a variety of perspectives.
While a common goal is a necessity for action, consider including members of the community and other areas of experience in addition to solely individuals familiar with your field.
Know what strengths, talents, and experiences you’re looking for.
Make sure that your board covers a good array of talents. Pay attention to the strengths and skill set of each individual under consideration, and fill in any gaps. A diverse board is a strong board.
Step 4: Register Your Organization with the State
Now that you have all the basic information about your nonprofit corporation, it’s time to formally organize as a corporation!
Any corporation, whether nonprofit or for-profit, is formed by filing Articles of Incorporation. We touched on the purpose/mission statement requirement in Step 2. In addition to that purpose statement containing 501(c)(3) information and specific activities, your Nonprofit Articles must include other basic information about your corporation.
While specific article requirements vary by state, typical Articles will include:
- Your organization’s name, including corporate indicator (“Inc,” “Corporation,” or other)
- Your registered address
- The name of your registered agent at that address
- Your Board of Directors’ names and address (many states require a minimum of three Directors)
- Certain clauses addressing dissolutions and asset distribution
As always, it’s important to check the requirements of your state as they relate to nonprofit corporations before drafting your Articles of Incorporation. Failure to adhere to state statutes may cause a delay in filing or noncompliance.
Lawyers, Third Parties, and DIY Filing
Registering a nonprofit corporation is a simple matter: submit your Articles of Incorporation to the Secretary of State’s Corporations Division—the same place you did your state-level name search.
To do this, you have three basic filing options:
1. Draft and submit your articles yourself.
In most states, a lawyer is not required in order to form a nonprofit corporation. An incorporator’s signature is required, in some cases up to three incorporator signatures, but you and your management team are perfectly able to be incorporators.
This is a viable option for a group with a strong legal background, and with consultation with a legal advisor. If your team is filing your nonprofit corporation themselves, it’s important that you look into ways to stay compliant with both the state and the IRS’s requirements, both now during startup and for the duration of your organization, and make good use of the Secretary of State and the IRS’s online resources and correspondence.
2. Use a third-party filing service.
You may have heard of LegalZoom or other businesses like this provide filing services at a low cost because they do not provide legal advice—they register your business according to your direction; they do not give you direction.
A third-party filing service is a good option for someone with a solid grasp of what they need, but who want to have a professional filing service handle the details. Another potential benefit of third party services is ease: commonly needed services are often bundles into packages, which can save you time and having to deal with a variety of different places.
3. Work with a lawyer.
Legal advice is crucial when forming a tax-exempt nonprofit corporation. In exchange for the tax and other benefits your cooperation is applying for, the IRS expects cooperation with and adherence to IRS code—and failure to comply, whether or not that failure is accidental, can be a costly mistake. In the economic climate of today, make sure you’re not wasting any of your cash flow on fines or late fees.
Whether or not you’re using a professional filing service, remember that any decision you make about your company should be decided with the advice of your lawyer or accountant.
Step 5: Write Nonprofit Bylaws
Your bylaws act as a road map for your organization—they will describe how certain actions, such as replacing a member or amending the bylaws, will take place.
Standard nonprofit bylaws will include the following information:
- The name of your nonprofit organization
- Its mission statement
- The responsibilities of your members
- How many members make up a quorum (the amount of members necessary to take action)
- How bylaws can be amended
- The duties and responsibilities of the board of directors
- Voting procedures
How to Write Nonprofit Bylaws:
It’s very important that you consult with a legal advisor or lawyer when drafting your nonprofit bylaws. Template bylaws are valuable, but customized bylaws tailored specifically to your organization and its purpose and specifics will be far more valuable to you.
Step 6: Submit your 501(c)(3) Application
When your corporation has been formally registered in your state—you have a filing date with the Secretary of State—you can apply for 501(c)(3) status with the IRS.
To apply, you will complete IRS Form 1023, the form used by 501(c)(3) corporations (fun fact: as well as certain 501(e) and 501(k) organizations) to apply for tax-exemption.
There are several sections of Form 1023:
- Applicant Information
- Organizational Structure
- Required Provisions (from your Articles of Incorporation)
- Description of Activities
- Financial/Compensation Information
- Individuals or Organization You Benefit
- Organization History
- Specific Activities
- Financial Data
- Public Charity Status (whether you’re a private foundation or public charity)
- Form 1023 Checklist and any required Schedules, statements, and other supporting documents
It is important to remember that the IRS can take up to 7 months to process your 501(c)(3) application—and that’s if you’re prepared enough to avoid one or more rounds of rejections. Read directions carefully and triple check your stack of required documents!
So that’s basically the process step by step to incorporate with a 501(c)(3) as a non-profit organization. As always, we here at Bankster.tv are NOT lawyers and NOT giving legal advice, so please talk to a licensed lawyer in your state. The above information and outline is for informational purposes only and it meant as a solid guide on what is necessary to get incorporated.