In order to become a viable nonprofit organization, you need to apply for tax-exempt status with the IRS, which is also referred to as 501(c)(3) status. Having this status allows your organization to receive grants and receive tax-deductible donations. But, how do you know how to apply for a 501(c)(3) status in a sea of information that is overwhelming and hard to understand? If you’re not careful, one misstep in your paperwork can set you back for months. Doing a simple Google search can leave you utterly confused about where to start and what paperwork to file.This blog will help you cut through the noise and understand the 4 documents you need to complete your application process.
Before we get started, there’s something we need to get straight: being a nonprofit does not automatically grant you 501(c)(3) status. There are two main processes you will go through to set up your nonprofit.The first is incorporating with your state. The second step is to apply for federal tax-exempt status, if you choose to become a 501c3 organization. Note, there are other types of federal tax-exempt statuses that you can apply for besides 501(c)(3) (learn more).
You have to establish yourself as an organization first, then you can move forward with federal paperwork. Remember: the paperwork, fees, laws, and requirements to incorporate as a nonprofit all differ from state to state. What’s required of you to incorporate in California is going to be wayyyy different than what’s required of you in Florida. If you want to conduct business in a state, read the regulations pertaining to nonprofits to learn the right steps.
Don’t rely on a generic search on the Internet to tell you the process. Your best bet is to check with your the Secretary of State (or a similar entity) in your state and they can direct you to the correct paperwork and processes. The other option is to talk to your nonprofit association. They will more than likely have a startup guide for nonprofits. Once you do that, the process to apply for 501(c)(3) status is the same, no matter where you incorporated in the U.S.
Now, back to applying for 501(c)(3) status. Once you are incorporated, submit form 1023 to the IRS. The IRS is very specific about how your organization should be run, but their website isn’t always the easiest to navigate. So let’s talk about the 4 must-have documents you should have to make your application process seamless. If you need help figuring out the steps to starting a nonprofit overall, download my free nonprofit startup checklist.
Articles of Incorporation
This is your organization’s founding legal document which establishes you as a business entity in your state. The format of your articles will depend on what’s required by your state laws. Some states provide a template that you can copy, while other states will allow you to submit your own articles of incorporation. When you submit your articles, make sure you include the IRS-required language that must be included in order for you to be granted your 501(c)(3) tax exempt status.
Be mindful:some state templates may not include the IRS recommended language, so be diligent when completing your articles to make sure you have your bases covered. The wording that must be present in your articles in order to be eligible for tax exempt status includes the following:
That the organization is organized exclusively for charitable, religious, educational, 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.
No part of the net earnings of the corporation shall inure to the benefit of, or be distributable to its members, trustees, officers, or other private persons, except that the corporation shall be authorized and empowered to pay reasonable compensation for services rendered and to make payments and distributions in furtherance of the purposes set forth in these Articles hereof.
Upon the dissolution of the corporation, assets shall be distributed for one or more exempt purposes within the meaning of section 501(c)(3) of the Internal Revenue Code, or the corresponding section of any future federal tax code, or shall be distributed to the federal government, or to a state or local government, for a public purpose. Any such assets not so disposed of shall be disposed of by a Court of Competent Jurisdiction of the county in which the principal office of the corporation is then located, exclusively for such purposes or to such organization or organizations, as said Court shall determine, which are organized and operated exclusively for such purposes.
That language MUST be in your articles in order to be approved by the IRS. So to be clear, your state may not require this language in your articles, but if you want to be eligible to be a 501(c)(3) organization at any point, this language must be added. Don’t worry if you’ve already created your articles and it’s not in there! You can amend your articles before you approach the IRS.
Make sure you keep track of your documents as you file. See how I help nonprofits organize their documents using my startup mini-kit.
Bylaws
Your bylaws are the governing rules of your organization. They will dictate how your board operates, include information about the incorporation and dissolution of your organization, and information about membership. You’ll find that your bylaws come in handy when there is conflict on the board, if you have a disruptive member, or if you need to hold members accountable. Bylaws are required by your state but you should also keep them handy when you apply for federal tax-exempt status. If you are submitting the long form 1023, you will be required to include them with your submission.
Bylaws are the internal guiding rules for your organization.Bylaws are a legal document that will guide how high-level decisions are made for your organization and dictate the functions and roles of Your Board of directors. Your state may require certain language in your by-laws. Make sure you do your research before you write them. Many state nonprofit associations or the Secretary of State’s office will have sample copies of organization bylaws that you can use. If you are doing a search on the Internet, be sure to find sample bylaws that apply to the specific laws in your location. The worst thing you can do is reference Michigan law when you’re in Connecticut. Below is a list of typical sections of an organization’s bylaws:
Name and purpose
Election, roles, and terms of board members and officers
Membership issues (categories, responsibilities)
Meeting guidelines (frequency, quorum)
Board structure (size, standing committees, if any)
Compensation and indemnification of board members
Role of chief executive
Conflict of interest policy
Amendment of bylaws
Dissolution of the organization
The IRS does not require any specific language in your bylaws, but it’s good to be thorough, but flexible enough to make changes as necessary.
Conflict of Interest Policy & Disclosure Statement
The IRS expects each tax exempt organization to be open and transparent about how their money is spent and who benefits from their earnings. Board members and staff must disclose annually any potential conflicts of interest. An example could be if the nonprofit wants to pursue services from a vendor that’s somehow related to or connected to a staff member or someone on the board. If a conflict exists, make sure you have clear documentation and procedures to document those conflicts.
The IRS doesn’t state that a conflict can’t exist, but it DOES need to be disclosed. The IRS has a sample conflict of interest policy in its instructions for form 1023. Set a reminder to update your disclosures every year. My nonprofit compliance calendar can help you keep track.
Organizational Budget / Prior Financial Statements
The IRS expects you to project your operating costs to help determine which version of form 1023 to complete. For example, if you’re projected income is 50,000 or less within the first 3 years after filing for your tax-exempt status, then you would complete the 1023 EZ form, which is a streamlined version of the regular 1023 (long) form. If you are completing the long form, you will be asked to provide financial information for the past 3 years, as well as projections for the next year. Having your budget and financial statements handy can make the incorporation process go smoothly. If you’ve been in operation for a longer period of time when you’re applying for your 501(c)(3) status, you may need to supply more information in order to get your status. Take a look at the requirements for financial reporting on the 990 which match the reporting required for the 1023 long form so you can easily report your income and expenses from prior years.
Before you decide to file for your tax-exempt status, make sure you have these 4 items, and you’ll be in good shape to apply.
Keep reading to find out your next step for starting your nonprofit ———-> How To Start a Nonprofit That Doesn’t Fail.
