Starting a tax-exempt nonprofit 501(c)(3) organization, a How To Guide
Starting a nonprofit organization made simple.
Read this page carefully top to bottom because this is where you start forming a 501(c)(3) nonprofit organization. Before starting a nonprofit organization or filing the IRS form 1023, you need to ask yourself two simple questions:
Are there any other organizations doing the same thing that you want to do?
There are over a million charitable organizations in the United States alone promoting and fighting one cause or another so chances are that your cause is already covered by 100 other likewise organizations. You need to be honest with yourself. Are you really going to do a better job? Do you have the funding? Do you have the drive? Do you have the patience? Do you have the knowledge? Or you just want to do something. Nine out of ten cases, you should just support an existing organizations because in reality, the more diverted the efforts get the result also suffer respectively.
The next question is how you are going to do it.
Running a nonprofit organization and going on a blind-date is not all that different – It’s scary and if you do it “right”, you will be poor financially and if you cheat it, you’ll live comfortably but you give up the cause. The nonprofit business is just a business like any other; the only difference is that you make profit for others rather than yourself. Knowing all that, a nonprofit organization is thousand times harder to run than a for-profit entity, because your hands will be tied on what you can or can’t do by the IRS. Sometimes it’s better to pay taxes, and be free in your programs than holding a nonprofit status and not being able to do what you wanted in the first place. A profitable nonprofit organization is a rare sight, but not impossible.
Another thing that you need to know is that internal Revenue Code has many sections. Section 501 is only one section, and the 501(c)(3) refers to a single article under this section. Just because you are a nonprofit entity, that doesn’t mean that you do qualify under this section, and at the same time you might qualify for tax exemption under another section but not 501(c)(3). There are 27 other chapters that will grant you tax-exemption but are not charitable. Before going any further, here’s the complete Revenue Code from the IRS. Read it and find out where you stand. If you settle down on section 501 (c)(3), the next step is to take the public charity test and see if you actually possess the qualifications to even apply under this section. If you do pass, the rest of your work is cut out for you.
Assuming that you’re still interested, your hard work start from here:
Preparing the Nonprofit Articles of Incorporation for the State
This is different than the complete Articles of Incorporation document required by the IRS. What you are doing here is incorporating your entity to be effectively recognized as a person under laws of your State. For-profit and nonprofit entities receive some benefits from incorporation such as protection of personal assets of directors and members in case of bankruptcy, but incorporating a nonprofit organization is not for receiving benefits, it is mandatory by the Department of Revenue. You can NOT apply for tax exemption if you are not a legal entity, hence the need for incorporation.
Start by going to the office or website of your Secretary of State. They should provide all the information you need regarding registering and incorporating your business. The process goes like choosing a name, registering that name and filling the forms. Once you do all that, the Secretary of State will either approve or deny your business. If you do get approved, you will receive a letter like the one below. You can also see the sample of the State articles of incorporation here. By incorporating your entity, you are giving the minimal information needed to the State to form the entity, but the IRS doesn’t care about your State. You need to draft a complete Articles of Incorporation with specific legal languages, and that’s what the IRS accepts. Go here to start drafting your complete Articles of Incorporation.
Assembling your nonprofit board of directors
Selecting the initial directors is a non-democratic process, but there is no way around it. Each State has a minimum requirement for the board size, but as a rule of thumb, a nonprofit board should not be less than four and not greater than twelve. The IRS is not one bit shy about asking you to increase your board size, because smaller boards are more prone to corruption. At the same time, a very large board is a nightmare to manage and your meetings become next to impossible to call.
Refrain from electing relatives on your board, keep your family members out of the board business, this is not Mafia. A nonprofit organization should not be a dynasty-run business; elect qualified non-related individuals who care about your mission. Place an ad in the local newspaper or your web site, and you’ll attract local talents who share the same passion, and will contribute to the success of your organization.
Preparing the Nonprofit Corporate Bylaws
Bylaws are the rules and methods that your organization follows to ensure legality and productivity. Bylaws by themselves are more of an internal document than required in United States, but a well planned and clear structure will take out the guess work and corruption out of your organization, especially in time of disagreement between board members. This is the document that specifies the election process of directors, your meeting manners, the role of the employees, and many more roles. Take your time when it comes to drafting your bylaws, it’s the make or break it document. Hop on here to get your nonprofit bylaws started.
Preparing the Nonprofit Conflict of Interest Policy
In my opinion, the Conflict of Interest policy is the most important organizational document that a nonprofit can possess and is crucial in maintaining organizational integrity and reputation. Many people have only a vague idea of what Conflict of Interest is, or how to deal with it. Draft this document carefully and make sure that it serves the needs of the organization not its board. Go here to draft your Conflict of Interest policy and see a sample of this document.
Applying for the Employee Identification Number (EIN)
Whether you are going to have employees or not, you need to apply for the Employee Identification Number from the IRS. The EIN is like the Social Security Number for your entity, the IRS will identify your organization with this number from now on. The good news is that it’s a super simple process, and has one of the quickest turnaround times. Go here to read more and apply for your Employee Identification Number or EIN.