Forming a non-profit is very similar to forming other types of businesses, with a few unique differences. A non-profit is really a term of the tax-exempt status granted a business by the Internal Revenue Service (IRS) and corresponding state taxation agencies. This designation relieves the business entity for paying income taxes on profits from an approved non-profit activity. If the business carries on operations other than the approved tax-exempt activity, it will have to pay taxes as any other corporate entity. The requirements to be a non-profit and the steps necessary to achieve non-profit status are what makes it unique from other types of businesses.
In this article, we discuss the various steps and consideration for bringing a non-profit into existence.
Form a Business Entity
All non-profit entities are organized as corporations. Business entities exist under state law. Most states designate a specific type of corporate entity for non-profits. The state non-profit entity is a type of corporation, as achieving non-profit status with the IRS generally requires a corporate structure (with some unique attributes).
Corporations are generally owned by shareholders, managed by directors, and the daily operations are carried out by officers. In a non-profit, there are no shareholders. There may be beneficiaries or members who vote for the election of directors, but there are no true owners of the nonprofit. In some cases, non-profits do not have members or beneficiaries. Rather, the board of directors exercises complete control over the business. They elect any replacement members if a board member leaves for any reason. In any event, having the structure where directors manage the business while officers carry out daily operations is important.
You must follow the state-prescribed procedure for forming the non-profit business entity. It generally requires filing of articles of incorporation with specific language designated for the non-profit. The articles are filed at the state secretary of state’s office. The articles will acknowledge that there are no shareholders. Further, they will specifically state that any assets remaining if the nonprofit ceases operations must be distributed to other nonprofits.
Setting Up the Non-Profit Organization
After formation of the business entity, the business will need to take steps to organize itself. Generally, an incorporator files the articles of organization. After the certificate of incorporation or charter is issued by the state, the incorporator will appoint an initial board of directors. The board will then vote to take actions on bringing the non-profit into existence. This will include appointing a secretary to keep meeting minutes and other corporate records, appointing an officer to manage the daily affairs of the business, adopting the company bylaws, approving a bank account, accepting any initial donations, etc. The board will authorize the officers to seek non-profit status with the IRS. Importantly, the nonprofit founders should make certain to draft appropriate bylaws to govern the business.
The nonprofit must hold regular director meetings to conduct the non-profit’s business. The board will make decisions concerning major non-profit actions. All actions are taken by vote. The terms of voting and the number of votes required for approval will be outlined in the bylaws.
Apply for Nonprofit Status with the IRS and State Tax Agency
After forming the non-profit business entity, it is time to seek non-profit tax status. Most states grant non-profit tax status to entities that receive exempt status from the IRS. As such, you should begin by seeking non-profit status with the IRS.
First, you will need to identify a statutory provision authorizing tax exemption. Most of these are located under section 501(c) of the internal revenue code. The non-profits are exempt under section 501(c)(3). This is the exemption provision for charitable, religious, and educational businesses.
The process for seeking exemption requires filing the IRS Form 1023 and supporting documents. It requires filling out the form, including a statement of non-profit purpose, attaching the articles of incorporation, the business past financials or future projections, and other supporting documents.
Once you receive the federal tax exempt status, you will be able to file the appropriate form with the state taxing authority to receive state income tax exemption.
Many nonprofits depend upon donations to operate. This requires the non-profit to actively solicit donations. Soliciting donations is covered by state and federal law. There are numerous requirements to report solicitations and donations received. This generally requires filing a list of the donors and the amount donated.
It is important when soliciting donors to indicate when the company has not yet received tax-exempt approval from the IRS. These donors depend upon the company achieving tax-exempt status to take advantage of applicable deductions for charitable donations.
Timeline Considerations for Filing Non-Profit
Creating a nonprofit does not happen very quickly. It generally takes the IRS several months to review a non-profit application. As such, the business should plan its activities accordingly. Any activities carried on prior to receive of tax-exempt status must be done as a for-profit business. This means reporting taxes appropriately. Generally, if the IRS ultimately approves the non-profit application, the business may amend prior tax returns covering non-profit approved activity.
LawTrades Knows NonProfits
Filing a non-profit is a very detailed process. It is important to work with competent legal professionals when undertaking this task. The legal professionals at LawTrades are experts in all matters affecting non-profits.