Nonprofit organizations are responsible for doing so many amazing things, from combatting hunger and homelessness, to helping sick children and animals. But no one said saving the world was easy. While there are multiple steps to registering a business, you have to jump through even more hoops if you want to register a nonprofit business. Still, officially registering as a nonprofit is important because it legitimizes your organization and provides it with some distinct advantages. In particular, nonprofits registered as 501(c)(3) organizations have a tax-exempt status, which means they do not have to pay federal or state income tax.
Whether you want to start a nonprofit or have already begun your nonprofit, it’s important to make sure your organization is properly registered, compliant, and set up for success. Read on for an actionable, step-by-step guide to help you make your nonprofit official.
Why Register As A Nonprofit?
It is possible to informally operate as a nonprofit organization without officially registering as a nonprofit. However, until you make it official, you are basically turning away free money, as well as other benefits.
Here are the main reasons to register your nonprofit:
- Legal Protections: Nonprofit corporations have limited liability protection, which protects directors and members from being held personally responsible for the organization’s debts or liabilities. The nonprofit is considered a separate entity that can enter into contracts, sue or be sued, take out business loans, etc., without anyone who works for the nonprofit being held personally liable.
- Tax Benefits: Once you have your federal and state tax-exempt status, your organization will be exempt from paying income tax. There are also tax benefits for donors, who can deduct donations made to 501(c)(3) organizations on their taxes.
- Access To Grants: Many business grants are only available to organizations registered as nonprofits.
- Access To Discounts: With proof of your nonprofit status, your organization is eligible for various discounts, such as USPS nonprofit discounts and credit card processing discounts for nonprofits.
- Crowdfunding Eligibility: 501(c)(3) status lets you raise money through certain nonprofit crowdfunding platforms, such as CrowdRise. Some crowdfunding platforms will also eliminate platform fees for registered nonprofit entities.
- Credibility: An official nonprofit status lets people know your organization is legit and not just a bunch of yahoos or even scammers. Obtaining your nonprofit status is likely to attract more donors and larger donations.
The 8 Steps You Need To Take To Get Started
The process to execute some of these steps varies somewhat from state to state. For example, in some states, you will need to apply for both federal and state tax-exempt status. But wherever you live, you will need to follow all of the below 8 steps.
1. Select A Name
Though you may have a working name for your organization, to make your nonprofit official, you will have to make sure that name is available and hasn’t already been trademarked. After you choose your name, check with your Secretary of State office as well as the U.S. Department of Commerce website to ensure that it is available. You can normally pay a nominal fee to reserve your name until you file your articles of incorporation.
2. Form Your Board Of Directors
Generally, you should form your board of directors before incorporating. Some, but not all states require that you list your board members’ names in the incorporation documents. You’ll also need to list at least three directors when you file for your 501(c)(3) tax-exempt status. These members should ideally be unrelated (by blood or marriage).Â Â
3. File Articles Of Incorporation
This is the documentation that forms an official corporation for your nonprofit and will be filed with your secretary of state. It includes information such as your organization’s name, location, board of directors, and purpose (what your nonprofit is being created to do/provide). Although incorporating your nonprofit does not make it tax-exempt, you will need to include certain language in the articles of incorporation for when you apply for tax-exempt status later—your state’s nonprofit formation packet should include the required information.
Some states also require you to publish a notice of incorporation with your local newspaper.
4. Write Bylaws
After your articles of incorporation have been approved, you can write your bylaws. These are your nonprofit’s internal rules and guidelines for procedures such as holding issues, voting, and electing officers. You will need to include a copy of your bylaws in your 501(c)(3) application.
5. Hold First Board Meeting
At your first board meeting, you will make your articles of incorporation part of the official record, adopt your bylaws, and elect officers. Someone will need to take minutes, which you will keep on file. It’s recommended that you hold this initial board meeting before you file for federal tax-exempt status. In a later meeting, you can record the receipt of federal and state tax exemptions.
6. File For EIN
The final thing you need to do before filing for your 501(c)(3) status is to apply for an Employer Identification Number (EIN). You need to do this even if you don’t have employees yet, as it is required by the IRS to obtain your tax-exempt status. The IRS uses your EIN to track your organization’s financial activities. You’ll also need an EIN later on when you open a business bank account and hire employees.
To obtain an EIN, file Form SS-4 with the IRS.
7. File For Tax-Exempt Status
After you have your directors, incorporated status, bylaws, and EIN, it’s finally time to file for your federal tax-exempt status with the IRS. For nonprofits in most states, you only need to do this at the federal level, but some states require you to file for tax-exempt status at the state level too. For example, nonprofits in California must also apply for tax exemption with the California Franchise Tax Board after obtaining tax-exempt status from the IRS.
To apply for your federal tax-exempt status under section 501(c)(3)Â of the Internal RevenueÂ Code, you will need to file Form 1023Â with the IRS. If your organization has gross receipts of less than $50K and less than $250K in assets, you can file the 3-page 1023-EZ application (vs. the 26-page standard 1023).
Some information you’ll need to include in your 1023 application:
- Your budget, including any balance sheets or other financial information
- The names of your directors
- Copy of your articles of incorporation
- Copy of your bylaws
- Dissolution clause (usually included in articles of incorporation or bylaws)
- Conflict of interest clause (usually included in articles of incorporation or bylaws)
- Statement of exempt purpose (usually included in articles of incorporation or bylaws)
In order to ensure that your application meets all state and federal requirements, it’s a good idea to consult with a lawyer or someone familiar with tax-exempt law. Including attachments, a 501(c)(3) application package can easily exceed 50 pages.
Note that even after your organization receives its letter of determination from the IRS with its tax-exempt status, each year you will have to submit Form 990 in order to maintain your 501(c)(3) status. This document provides financial information about your organization to both the IRS and to the public.
8. Obtain Business Licenses & Permits
Once you have your tax-exempt status, you’re almost ready to start raising funds. But first, you’ll need to make sure you’re in compliance with all business licenses and permits applicable to your state and your organization’s activities. For example, you may need a sales permit or a zoning permit. Check with your local department of consumer affairs to find out what kind of licenses and permits you need to operate as a charitable organization in your particular state. Some cities may require a city business permit as well.
Registering As A Nonprofit: FAQs
How long does it take to register a nonprofit?
The IRS estimates it will take 100 hours to fill out Form 1023. The application process typically takes between 3-6 months, though it could take as long as a year, depending on whether the IRS has follow-up questions and how quickly you provide the answers.
How much does registering a nonprofit cost?
To file for 501(c)(3) status, you will pay either $600 to file Form 1023, or $275 to file Form 1023-EZ.
The costs of incorporating and obtaining the necessary permits to operate as a nonprofit vary from state to state; however, they usually do not exceed $100-$200.
Is the registration process different in each state?
Yes, somewhat. Check with your state to see if you need to complete any extra steps, such as publishing your nonprofit’s articles of incorporation or filing for state-level tax exemption.
Can any organization register as a nonprofit?
No. Your organization must meet the IRS’s definition of a public charity (the most common type of 501(c)(3) organization), private foundation, or private operating foundation. Be sure to read up on the IRS’ exemption requirements for 501(c)(3) organizations before you apply.
Can I register my business as a nonprofit to dodge taxes or get rich?
No. The IRS has strict regulations in place to make sure that businesses cannot use misuse their 501(c)(3) status for personal gain or to avoid paying taxes. All of your organization’s financial information, including salaries and use of income, will be closely and regularly scrutinized to look out for possible fraud and conflicts of interest. For example, if your nonprofit brings in $500K a year, you will not be able to get away with paying yourself a $200K salary.
Should I hire a lawyer to help with the registration process?
Yes, it is a good idea for first-timers to consult with a legal professional at some point to ensure compliance with all state and federal requirements, particularly when filling out the incorporation paperwork and when preparing the 501(c)(3) forms.
Whether they benefit schools, the environment, public safety, or another cause, nonprofit organizations do a lot of good in this world. But if a nonprofit is not officially registered, then it can only make a limited impact. When a charitable organization is incorporated as a nonprofit corporation and obtains a 501(c)(3) status from the IRS, the organization does not have to pay income taxes on the money it brings in, and the organization becomes eligible for other funding opportunities, including government grants and charitable crowdfunding platforms. Additionally, donors are more motivated to donate to IRS-registered nonprofits because any contributions they make to these organizations are tax-deductible.
There is some work involved in registering a nonprofit and maintaining nonprofit status, but your charity and your cause will ultimately benefit from your diligence. If you’re not sure your nonprofit qualifies for 501(c)(3) status, the IRS has information you can review on the various types of tax-exempt/nonprofit organizations, including 501(c)(3) and others. If you think maybe a nonprofit structure is not right for your organization after all, I recommend reading our article on the different types of business structures.