501(c)(3) Nonprofit Organizations (NPO’s) are organizations built to further a charitable, social, or beneficial cause – specifically in religious, scientific, literary, or educational settings. NPO’s use the money they make to further their cause instead of distributing it to it’s shareholders, leaders, or members.
Per the name, tax exemption is granted under Section 501(c)(3) of Title 26 of the United States Code – meaning they don’t pay income tax on the money they receive.
Forming a 501(c)(3) NPO takes some work, though. This post will give you a high level overview of how to form a Nonprofit Organization.
Choose a Purpose
First and foremost, choose a purpose for your NPO. For 501(c)(3) status, your purpose should be religious, scientific, literary, or educational. Be clear about what you are doing, and who you are doing it for.
Note that 501(c)(3) NPO’s are limited in what political and lobbying work they can do. The IRS website has a good breakdown on exempt purposes.
Choose a Name
This may seem obvious, but choosing a name for your NPO can be difficult. Your NPO cannot have the same name as another where you’re registering. Your state’s Secretary of State website has an entity search tool, as does the IRS with a Tax Exempt Organization Search tool.
You should also search the United States Patent and Trademark Office database for registered trademarks using the name, and do a general web domain search. Further, you can’t put terms that are reserved for official use (like “Federal” or “Bank”) in your nonprofits name. Finally, your nonprofits name must have a designation – like “corporation”, or “limited”, to cap it off.
File your Articles of Incorporation with the Secretary of State
Once you find a name that works, you should file your Articles of Incorporation with your Secretary of State. Work with an accountant and attorney to determine what state would be best for your registration. This document includes the name, address, and other basic information. However, there are some specific caveats with nonprofit organization. Specifically, your articles should include:
- a specific clause identifying that your corporation is being formed for a recognized 501(c)(3) tax-exempt purpose (charitable, religious, scientific, literary, or educational), and
- a specific clause identifying that that any assets of the nonprofit that remain after it dissolves will be distributed to another 501(c)(3) tax-exempt nonprofit — or to a federal, state, or local government for a public purpose.
Apply for 501(c)(3) Tax Exemption with the IRS
IRS Package 1023 (or 1023 EZ for smaller NPO’s) is the “Application for Recognition of Exemption” – and it must be submitted for you to achieve 501(c)(3) status as a nonprofit organization. This application will ask information about your organization, what happens to the money, financial data, organizational structure, and what happens after your NPO dissolves.
The IRS will apply an “operational test” to determine whether your NPO can receive 501(c)(3) status. Per the IRS website: “An organization will be regarded as operated exclusively for one or more exempt purposes only if it engages primarily in activities that accomplish exempt purposes specified in section 501(c)(3). An organization will not be so regarded if more than an insubstantial part of its activities does not further an exempt purpose.”
Nolo has a great article on how to apply for 501(c)(3) status – and you should work with an accountant and attorney to help you through it.
Apply for Tax Exempt Status with your State
This is not applicable to all states, as most accept your 501(c)(3) status as tax exempt. Some states, however, require that you complete a separate tax exempt status application with them.
Follow Corporate Governance
NPO’s must follow corporate governance measures just like a regular for-profit corporation. But there are a few caveats in practice. Your NPO should do the following:
- Draft and follow Bylaws outlining how the NPO will be governed
- Elect a Board
- Draft and implement a strict Conflict of Interest Policy
- Draft and implement a strict Whistleblower Policy
- Draft and implement Internal Control and Financial Accountability Policy
- Draft and implement Code of Ethics Policy
Work with your accountant and attorney to draft and implement these policies.
501(c)(3) NPO’s have annual ‘maintenance’ requirements to keep their status. This includes filing a Form 990, or Form 990EZ – which are essentially your NPO’s tax returns. The State of your registration may also have registration requirements – be sure to check with your Secretary of State.
Let us Help.
This is a high level overview of forming a nonprofit organization, and is by no means comprehensive of everything to consider. If you’re planning to start a nonprofit organization, have a conversation with your accountant and an experienced attorney.
This post is not legal advice, and does not establish any attorney client privilege between Law Office of K.S. Kader, PLLC and you, the reader.