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How to Form a Nonprofit

Kids at Camp

The main purpose of a nonprofit is to work toward a public good. Nonprofits should have a clear mission and fill a need in the community.

If you have the passion and commitment, you might consider starting a nonprofit. The following step-by-step guide will help you create a solid foundation for your new nonprofit endeavor.

Name Your Nonprofit Startup

If you plan to create a nonprofit corporation, you should choose your name first. If you are incorporating you will probably be required to register a name.

When naming your new nonprofit, you should try to think of one that will be memorable to your members and donors. You should also check social media and domain name availability.

There are a few legal considerations to keep in mind too:

  • If you incorporate, your nonprofit's name cannot be the same as any other corporation in your state. Your state's corporation's office can help you find out whether your name is already taken. Some states' websites have searchable name databases that help speed up this process.
  • Your nonprofit's name cannot be trademarked by another business. Check the United States Patent and Trademark Office's (USPTO's) searchable database.

Get an Employer Identification Number (EIN)

An Employer Identification Number (EIN) is a unique number that helps the federal government identify businesses. It issues EINs for both nonprofit and for-profit organizations.

Your nonprofit needs an EIN to open a bank account, hire employees, and pay any taxes it owes. You can secure an EIN by mail or phone. The IRS also offers an online application for faster processing.

Write a Business Plan

All businesses, whether nonprofit or for-profit, can benefit from a strong business plan. As a not-for-profit business, your plan should focus on your mission statement. It should include strategies for how you plan to fund and achieve your mission. You should also check to see if existing organizations already do the same type of work.

If you plan to do marketing or fundraising, you should include that in your business plan. A realistic assessment of your fundraising needs can be very helpful. It will help you create a financial plan and budget for long-term outreach in your community.

Decide Whether To Incorporate Your Nonprofit Organization

If you do not take steps to incorporate your nonprofit, it will be unincorporated by default. It will be legally known as an unincorporated association. Although incorporating requires some extra paperwork, it is probably worthwhile.

Benefits of Incorporating

When you incorporate, your nonprofit has its own legal existence. In other words, incorporating makes the nonprofit its own legal entity separate from the people who run it. This also means the nonprofit corporation can buy and sell property.

Incorporating also comes with tax benefits and helps to shield your personal property from liability for the nonprofit's actions. For these reasons, most nonprofits incorporate.

Unincorporated Association

If you decide not to incorporate, your nonprofit will be an unincorporated association. This means that your nonprofit does not have a legal status separate from its members.

Unless your state has laws that specify otherwise, your nonprofit will not be able to buy or sell property. It also will not be able to sue or be sued.

How To Incorporate

If you choose to incorporate your nonprofit, there are a few steps you will need to follow.

  • Find the local government department where you must file your paperwork. This is usually a department of the secretary of state or department of state.
  • Submit your articles of incorporation. This is a legal document that provides some general information about your organization. Many states offer fill-in-the-blank templates that make this easier. You will need to provide information such as the organization's purpose, name, address, and list of directors.
  • Pay your state's filing fee and submit.

Write Bylaws

Bylaws are a set of internal rules that your nonprofit's members agree to. The rules will include:

  • Identifying information for your nonprofit, including its name, address, and place of business
  • Procedure for electing the board of directors
  • Term limits for board members
  • Frequency of board meetings
  • Procedure for changing the bylaws

The IRS does not have specific requirements for nonprofit bylaws. State rules may vary.

Apply for Tax Exemptions

Tax exemptions for nonprofits are not automatic. You will need to file a some paperwork to secure your nonprofit's tax-exempt status.

The most common type of federal tax-exempt status in the nonprofit sector is covered by 501(c)(3) of the Internal Revenue Code (IRC).

If it is tax-exempt an organization does not have to pay taxes on the revenue it earns through activities related to its tax-exempt mission. But if it generates substantial revenue through unrelated business activities, it might be taxed on that income.

Who Qualifies For a 501(c)(3) Tax Exemption?

Most nonprofits are charitable organizations. They qualify for tax exemption under 501(c)(3). Private foundations may also get this type of tax exemption.

The nonprofit must have one of the following purposes to qualify for this type of exemption:

  • Charitable work
  • Religious outreach
  • Prevention of cruelty to children or animals
  • Scientific inquiry
  • Educational or literary missions

Your nonprofit also must not have a political purpose to qualify for this exemption. The Internal Revenue Service (IRS) has a rigorous process for examining these applications.

They will check whether your nonprofit has any conflicts of interest. They will also investigate whether it might inappropriately benefit its members.

What Are the Benefits of a 501(c)(3) Tax Exemption?

Donors get tax deductions on their donations. So, having this income tax exemption can help you attract more donations. There are also federal tax exemptions and possible state tax exemptions.

How Do I File for a 501(c)(3) Tax Exemption?

You should fill out the appropriate paperwork. These will be either an IRS Form 1023 or Form 1023-EZ. Form 1023-EZ is for smaller nonprofits. You could qualify for the EZ form if your gross receipts and assets fall below certain thresholds.

The IRS provides a worksheet to help you determine your eligibility for 501(c)(3) status. You should also read the IRS's compliance guide online to help you keep your tax-exempt status.

How Do I Get a State Tax Exemption?

In some states, you will automatically be a tax-exempt organization if the IRS granted you a 501(c)(3) tax exemption. Other states will require you to apply for state level tax-exemption separately.

Check with your state's department of revenue or attorney general's office to learn more.

Do I Need a Charitable Solicitations Registration?

Most states require this before you can ask for donations. Talk to your state's attorney general's office for more information.

Other Types of Tax-Exemptions

Most nonprofits fall under 501(c)(3). But there are also many other types of nonprofits. If your nonprofit does not qualify for a 501(c)(3) exemption, it may qualify under a different subsection. Some examples include:

  • Social clubs
  • Civic leagues
  • Social advocacy groups
  • Trade associations

IRS.gov offers more tax information about other nonprofits.

How an Attorney Can Help

If you are starting a new nonprofit, you might want legal advice. You may have questions about tax exemptions, bylaws, incorporation, and other issues. Call a local attorney today to ask your nonprofit formation questions.

You Don’t Have To Solve This on Your Own – Get a Lawyer’s Help

Meeting with a lawyer can help you understand your options and how to best protect your rights. Visit our attorney directory to find a lawyer near you who can help.

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Next Steps

Contact a qualified business organizations attorney to help you choose the best formation for your business.

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