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A U.S. nonprofit corporation is designed to address the needs of a certain demographic.
Because a not-for-profit corporation often has a magnanimous mission statement designed to benefit others, this type of corporation is able to apply for tax-exempt status under section 501(c)(3) of the Internal Revenue Code.
Creating a nonprofit corporation is much like creating a regular corporation except for the extra steps necessary to apply for a tax-exempt status with the Internal Revenue Service (IRS) and state tax department.
Outlined below, are steps to begin a U.S. nonprofit corporation:
- Organize a Board of Directors: This is a group of like-minded individuals with the same mission statement who are dedicated to the population that the organization will serve. You need a minimum of three board members. The board of directors will appoint the corporate officers, which often include a president, vice-president, treasurer and secretary.
- Create a Mission Statement: A mission statement defines the organization’s goals, target population and the geographic areas in which it plans to pursue its outreach. Mission statements should be accomplished early in the process because you will include it in your application to the IRS. Keep in mind that the IRS does not want to read a long, meandering explanation of the nonprofit’s mission. It should be well-written, concise, and flexible. If possible, consult someone who is experienced at drafting mission statements to assure that your application is efficiently approved and perhaps even reduce the number of conversations that you or your attorney will conduct with IRS agents.
- Form a Business Plan: You need a comprehensive, working business plan which includes your mission statement, describes the organization, and contains a chart showing its hierarchy. It will also show the scope of services, proposed projects and programs, objectives, goals, marketing, fundraising, budgets, expenditures, and projected costs.
- Prepare Articles of Incorporation: Once you have your board of directors, mission statement, and business plan, you can prepare the articles of incorporation and file them with the Secretary of State.
- Consents from State Agencies: Depending on your mission statement, some states (especially New York) may require you to obtain consents from various agencies.
- File the Name of Your Nonprofit Corporation: A 501(c)(3) cannot be a Limited Liability Company (LLC). It has to be a specific type of corporation, which requires an application to incorporate at the state level.
- Apply for and Obtain Federal Tax ID: This is the elongated process of applying for recognition of exemption from taxes. You will have to review the proposed budgets and financials. (You may want to consult a licensed CPA.) You will have to prepare an IRS Form 1023, including the narrative and all applicable attachments. You will then submit the application to the IRS.
There are many compliance issues in maintaining a 501(c)(3) and its tax-exempt status. Officers and directors can receive compensation via a salary, but you cannot issue dividends. There are a number of financial compliance requirements as well, so regular check-ins with both a CPA and a corporate attorney are absolutely necessary.
The general design of a nonprofit organization is to provide a better quality of life for a community. But, because they do not pay taxes, the IRS does not look upon them with great favor. Therefore, it is very important to specifically and systematically take care of all of the compliance issues you will be confronted with when attempting to create and maintain a nonprofit organization.
If you have questions or comments, contact me anytime.