Tax Exemption

You need to know how to start a nonprofit with 501(c)(3) tax exempt status if you hope to secure donations or grants. (Credit: Unsplash) Do you know what a nonprofit corporation is? Famous nonprofit corporations are all around us — just look at social enterprises like DonorsChoose and Charity: Water. Many entrepreneurs assume that a nonprofit corporation is the same as a nonprofit. This is not true. A nonprofit corporation is defined as a corporation founded for a charitable purpose. Eligible businesses that incorporate as a nonprofit corporation may also apply for tax exempt status through the IRS. The nonprofit corporation must first be formed to benefit the public or a specific group of individuals. One of the most popular, and frequently used, exemptions is the 501(c)(3). This applies to nonprofit corporations founded for charitable, religious, educational, scientific, or literary purposes. By electing as 501(c)(3) status, corporations pursuing non-profit missions are exempt from paying federal and state taxes. The status also helps a social enterprise secures donors and government grants. I’ve outlined the basics of what a nonprofit corporation is and what its tax exemptions look like. Now, let’s take a look at how to start a nonprofit corporation and successfully run the organization. 1. Create a business plan that includes your nonprofit corporation’s mission statement. Much like forming a limited liability company (LLC) or corporation, nonprofit corporations must follow a business plan. A business plan for a nonprofit corporation, however, does differ a bit from a traditional business plan. Don’t forget to highlight these items in your draft. Mission statement. Clearly identify the mission statement for your nonprofit corporation. Who will you help? What do you hope to accomplish? Establishing a mission statement does more than outline the values of your organization. It’s a key factor for the IRS and state tax agencies. They will review this statement when deciding whether or not to grant your nonprofit corporation tax exempt status. Your mission statement should be clear and understandable with actionable goals that help guide you to success. Determine a fundraising plan. Government officials won’t be the only ones reviewing your mission statement and business plan. Donors will want to know how your nonprofit corporation plans to raise money. If you don’t know, they won’t be persuaded to donate to the cause. Take time to thoroughly think about your fundraising initiatives. Figure out who your target donors are, what your budget looks like, and how you’ll include sponsors. Remember to stay on the same page as your mission. Do not make it your objective to raise tons of money and lose sight of the cause. The IRS will take notice and may even revoke your 501(c)(3) status because of it. 2. Incorporate, choose a business name, and file articles of incorporation. Much like incorporating a regular business, like an LLC or corporation, nonprofit corporations follow a similar process for getting their start. Here’s a quick bullet rundown of what to cross off your list.h Formally incorporate the business. Choose a unique business name. Check its availability by conducting a name search and register the trademark. Prepare articles of incorporation. This is a requirement in most states that the business operates in. Articles of incorporation generally require information about the name and address of the nonprofit corporation, its registered agent information, and the corporation’s purpose for existing. Draft corporate bylaws. These act as the rules that guide how your nonprofit corporation is run. Hold an organizational meeting. During this meeting, you will be able to appoint corporate officers and a board of directors, set your nonprofit’s annual budget, and adopt bylaws. Remember to take minutes during this meeting, in the event that the IRS should wish to review them later. 3. Apply for tax exempt status. If you have completed everything listed above, your soon-to-be nonprofit corporation may file for tax exempt 501(c)(3) status from the IRS. This is done with the federal, state, and local governments. What forms should you file for tax exempt status? The IRS recommends that Section 501(c)(3) organizations file Form 1023, Application for Recognition of Exemption Under Section 501(c)(3) of the Internal Revenue Code and pay the accompanying fee. It is also encouraged to file Form SS-4, Application for Employer Identification Number. Commonly referred to as a federal tax ID, you may also file for an employer identification number (EIN) separately online. Once your paperwork has been filed, the agency will review the documents to determine if your nonprofit corporation will be granted tax exempt status. Relax and hang tight in the meantime. Form 1023 covers a lot of groundwork, including compensatory arrangements and answers to specific questions, that you can further detail and rest easy knowing the IRS knows as much about your nonprofit corporation as you. 4. Maintain ongoing compliance. You’ve been approved for 501(c)(3) tax exempt status! The tough part is over. All you have to do is run the corporation dedicated to the cause you’re passionate about — right? Not quite. You may pursue the nonprofit corporation’s mission, but you also need to maintain records that allow your tax exempt status to stay in compliance. Luckily, this isn’t very difficult to do. Update corporate and financial records, and file any necessary reports required of your nonprofit corporation each year. Whenever the IRS needs more information about what you are doing, or what you have done, you will be ready to provide it and maintain your tax exempt status. Deborah Sweeney is the CEO of MyCorporation.com which provides online legal filing services for entrepreneurs and businesses, startup bundles that include corporation and LLC formation, registered agent services, DBAs, and trademark and copyright filing services. You can find MyCorporation on Twitter at @MyCorporation.

Tax Exemption

Feeling the Love? How to Start a Nonprofit Corporation

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Tax Exemption

Feeling the Love? How to Start a Nonprofit Corporation

The Story Exchange

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