If your passions have led you to consider starting a nonprofit, then you’ll be happy to know that nonprofits come with a host of benefits. Perhaps the most well-known advantage is becoming eligible for tax exemption, but there are many others that are equally beneficial.
After becoming a nonprofit, your organization will enjoy limited liability under the law and be eligible to receive grants and donations. Additionally once you get over the hurdle of initial funding, nonprofits tend to attract very interesting employees. Oftentimes, people that work for these organizations have a strong work ethic and are very passionate about helping their communities. This often makes for a good working environment!
Once you’ve decided you want to start a nonprofit corporation, the process may seem daunting and confusing. This article will explain the steps required to become a legal nonprofit in the United States.
Step 1: Choose a Name
Choosing a name for your nonprofit is not a simple as brainstorming some potential names and picking your favorite.
Craig Van Korlaar recently published an article here on choosing a nonprofit name. In it, he describes 4 groupings of criteria to consider; Strategic, Functional, Linguistic, and Legal. For the sake of brevity, I will only be recapping the legal one as it is critical to the filing process.
Nolo advises that before you can apply, you should be certain that your business’ name adheres to the rules of your state’s filing office. Your state’s official website should have a full list of its rules, but here are three common regulations:
- Your business’ name must be unique and cannot match any other business’ name on file
- In around half of the states required that you to end your name with a designator, such as “Corp”, “Inc.”, or “Ltd.”
- Do not use words that are reserved for state purposes, such as “federal” or “national.”
- Once you have a few ideas, call your state’s filing office to determine which of your potential names is available for use.
Step 2: Prepare Your Articles of Incorporation
Things you need.
Preliminary Mission Statement: This doesn’t need to be your polished mission statement, but it does need to provide a description of what your organization will do.
Statement of Tax Exempt Purposes: A one-sentence statement (use IRS template) describing the reason an organization or program exists within the context of state and federal 501(c)3 tax exemption law.
The default text provided by the IRS states;
Article 3: The purposes for which this corporation is organized are:
This corporation is organized exclusively for charitable, religious, educational, literary, and scientific purposes, including, for such purposes, the making of distributions to organizations that qualify as exempt organizations under Section 501(c)3 of the Internal Revenue Code, or the corresponding section of any future federal tax code.
Tip: Delete any that don’t apply; (charitable, religious, educational, literary, and scientific)
The names of the initial directors (usually a minimum of 3, but check your SoS website)
Step 3: Hire an Attorney (recommended)
The National Council of Nonprofits states that choosing an expert in 501(c)(3) filing can save you time.
Try contacting your state’s bar association to access a list of attorneys that specialize in working with nonprofits. Your attorney will help you to file articles of incorporation and to apply for an employee identification number (EIN).
It is possible for you to file your articles without a lawyer by using an online legal service or completely DIY. You will just need to spend extra time researching this process to ensure that you do it properly.
Step 4: Hire a CPA (recommended)
Your next hire should be a certified public accountant (CPA). You will be relying on this person quite a bit, so make sure you find someone that you trust and enjoy being around. Your CPA will assist in creating a budget, developing a record-keeping structure and planning an overall accounting system, all of which are integral parts to ensuring your venture’s success. Skipping this step will almost always come back to bite you.
Step 5: Apply for Tax Exemption
Tax exemption isn’t automatic. Every nonprofit must apply for tax exemption.
Your next priority is to apply for tax-exempt status. To do this, you should seek advice from your attorney and your CPA.
Also, keep an open line of communication with your State’s Department of Revenue. You can ask questions about state-specific regulations, including how to apply for local tax exemption after you qualify at the federal level.
Step 6: Create Bylaws
Next, you’ll want to put your vision on paper by drafting bylaws that will regulate how you want your organization to operate. This will provide shape for your company and will help you to govern it more effectively.
When drafting your bylaws, ask your attorney for assistance. He or she can offer you insight on how to plan for future circumstances. It’s also wise to have your board of directors approve the bylaws as soon as possible.
Although this article covers the basics of starting and running a nonprofit, there are many other considerations, including obtaining a nonprofit mailing permit and adhering to your state’s fundraising requirements.
If you need further assistance, my team at IncFile offers a variety of free resources as well as a consultation service. To learn more about the legalities of a nonprofit venture, you can view the resources section of this website.