Creating a Nonprofit
Determine what type of nonprofit organization you want to create. Choose an issue that is important to you or something that is a matter of public interest. Such issues may include arts, charities, education, politics, religion, research or some other non-commercial endeavor. There are 29 types of organizations that can file for 501c3 tax exemption.
Choose a name for your organization. Although each state has its own set of regulations, you can expect 3 general rules to apply: The name cannot be the same as the name of any other corporation on file with the state's corporations division. About half of all states require the name to end with a corporate designator, such as Corporation (Corp.), Incorporated (Inc.) or Limited (Ltd.). Your name cannot contain certain designations reserved for the state, such as United States, Reserve, Federal, National, Cooperative or Bank.
Apply for the name that you've chosen. Take the following steps: Visit your state's filing office website or call your state's corporations division. Ask to see if the name is available or if it is already taken. If the name is available, then you can usually pay a small fee that will reserve the name for you until you've filed your Articles of Incorporation. If the name is taken, then create another name.
Formulate your mission statement. As a nonprofit organization, you exist to accomplish your mission based upon your purpose, services and values. The mission statement is a concise expression that covers in one or two sentences the name of the organization, what it does, for whom it performs services and where it dispenses service. It should also portray how your organization is distinct from others like it. Make your mission statement compelling. It will be used in all published materials, funding requests and public relations handouts. Use some of these mission statements as examples: "The mission of St. Jude Children's Research Hospital is to advance cures, and means of prevention, for pediatric catastrophic diseases through research and treatment." "The National Mental Health Association is dedicated to promoting mental health, preventing mental disorders and achieving victory over mental illnesses through advocacy, education, research and service." "The National Consumer Supporter Technical Assistance Center's purpose is to strengthen consumer organizations by providing technical assistance in the forms of research, informational materials, and financial aid." "The mission of Texas Mental Health Consumers is to organize, encourage, and educate mental health consumers in Texas. TMHC supports and promotes the mental health recovery process through peer directed and operated services, advocacy, economic development, and participation in public mental health policy design."
Hire an attorney. Your attorney will help you with your Articles of Incorporation and the bylaws. Hire someone with 501(c)(3) experience to help you file your state and federal exemption forms. You'll save both time and money in the long run. Most paralegals and attorneys have little experience with nonprofits. You can usually check out these services via the state bar association, references from fellow nonprofit owners or the Better Business Bureau.
Filing Documents
File Articles of Incorporation. Articles of Incorporation are official statements that you are creating an organization, and they are filed with a state's corporations office. Articles of Incorporation protect both board and staff from legal liabilities incurred by the organization, making the corporation the holder of debts and liabilities instead of placing responsibility with the individuals and officers who work for the organization. The specific requirements governing how to incorporate are determined by each state. You can obtain the information you need to proceed with this step from your state Attorney General’s office or your Secretary of State's office. These official documents may have different names in different states. For example, you may see names like "corporate charter," "trust instrument" or "articles of association." Before you spend any money, consider consulting with an attorney who is experienced in the area of nonprofit law. This step will help you to avoid many major mistakes that people make when they try to incorporate without legal representation.
Apply for a federal employer identification number. Regardless of whether or not you have employees, nonprofits are required to obtain a federal Employer Identification Number (EIN), which is also referred to as the federal ID number. This number is used to identify the organization when tax documents are filed and is used not unlike an individual’s Social Security number. If you received your number prior to incorporation, you will need to apply for a new number under the corporate name. Ask for Form SS-4 when applying for your EIN.
Determining Finances
Hire a certified public accountant (CPA). Consider the following factors: Look for an accountant who has experience with organizations like yours. Someone who's never worked with a 501c3 may not have the experience to handle the nuances of the process. Make sure that you feel comfortable with the person. The person should be reliable, should listen to your concerns and should respond to requests as soon as possible. Choose a firm that matches the size of your nonprofit. If you're a small 501c3, then choose a CPA who works alone or a small firm. For large nonprofits, choose a large firm with a good reputation. Take time to make your choice. Look for referrals and references and interview different candidates so that you make the best choice from a pool of available accountants.
Develop a budget. Creating a budget is often one of the most challenging tasks when creating a nonprofit organization. A budget is the expression, in financial terms, of the plan of operation designed to achieve the objectives of an organization. New organizations may start the budgeting process with their accountants by looking at potential income and then figuring out how much money they have to spend.
Develop a record-keeping system. Legally, you must save all Board documents including minutes and financial statements. You'll have to preserve your important corporate documents, including board meeting minutes, bylaws, Articles of Incorporation, financial reports and other official records. You should contact your appropriate state agency for more information on what records you are required to keep in the official files.
Develop an accounting system in partnership with your CPA. Nonprofits are accountable to the public, their funders (contributors), and, in some instances, government granting bodies. You have to establish a system of controls (checks and balances) when establishing the organization’s accounting practices. Make sure that your system meets both your current and your anticipated future needs. The organization needs to open a bank account and decide whether to use the accrual or cash method of accounting. The difference between the two types of accounting is when revenues and expenses are recorded. In cash basis accounting, revenues are recorded when cash is actually received and expenses are recorded when they are actually paid (no matter when they were actually invoiced). In accrual basis accounting, income is reported in the fiscal period it is earned, regardless of when it is received, and expenses are deducted in the fiscal period they are incurred, whether they are paid or not.
Applying for Tax Exempt Status
Apply for recognition of tax-exempt public charity status. You'll need to fill out either Form 1023 or 1024, which is an application. Publication 557 will provide detailed instructions for filling out either form and will let you know which one, 1023 or 1024, your organization needs to file. Submit financial statements for the current year as well as budgets for the next 2 years in Part XI of Form 1023. If an attorney is representing you, fill out Form 2848 to designate power of attorney. Either can be obtained from your local IRS office or the IRS website. The filing fee will depend upon the size of your organization’s budget. This application is an important legal document, so seek the assistance of an experienced attorney or certified public accountant (CPA) when preparing it.
Send your forms to one of the following addresses: For applications sent by regular mail: Internal Revenue Service P.O. Box 12192 Covington, KY 41012-0192 For applications shipped by express mail or delivery service: Internal Revenue Service 201 W. Rivercenter Blvd. Attn: Extracting Stop 312 Covington, KY 41011
Ask the IRS to expedite your application if you can. The IRS usually considers applications in the order in which they are received. They may be willing to expedite your application if you have a pending grant that is necessary for continued operation, if your newly created organization is providing relief to disaster victims or if IRS delays have caused significant problems with the release of a determination letter.
File for state and local tax exemption. In accordance with state, county and municipal law, you may apply for exemption from income, sales and property taxes. Contact your state Department of Revenue, your county or municipal Department of Revenue, local Departments of Revenue and your county or municipal clerk’s offices for information on how to apply for exemption in your state or municipality.
Organizing Your Corporation
Draft bylaws. Bylaws are simply the "rules" of how the organization operates. Although bylaws are not required to file for 501(c)(3) status, they will help you in governing your organization. Bylaws should be drafted with the help of an attorney and approved by the board early in the organization's development. Depending on who you use to assist in the process, some firms require that your bylaws are sent to the IRS.
Form a Board of Directors. Forming a board requires careful thought and extensive recruitment efforts. Each state has regulations that determine the minimum size of the board, which is typically 3, 5 or 7, but the optimum number of people who sit on the board should be determined by the needs of the organization. Based on what your organization would like to accomplish, you should decide what special skills and qualities you will require of the individuals on your board. Identify qualified individuals who are supportive of your mission and are willing to give of their talents and time. Include the community at large, not just your specific community of focus (e.g. the mental health community). Consider the religious community, local service clubs, legal professionals and colleges and universities as sources for a prospective Board of Directors. Do not overload people who already serve on many committees so that you can seek a balance between old and new leadership.
Fulfill charitable solicitation law requirements. If your organization’s plans include fundraising, be aware that many states and a few local jurisdictions regulate organizations that solicit funds within that state, county or city. Usually compliance involves obtaining a permit or license and then filing an annual report and financial statement. Contact the state Attorney General’s office, the state Department of Commerce, state and local Departments of Revenue and county or municipal clerk’s offices to get more information.
Apply for a nonprofit mailing permit. The federal government provides further subsidies for nonprofits with reduced postage rates on bulk mailings. While first-class postage rates for nonprofits remain the same as those for the for-profit sector, second- and third-class rates are substantially less when nonprofits mail to a large number of addresses. For more information on eligibility, contact the U.S. Postal Service and ask for Publication 417, Nonprofit Standard Mail Eligibility.
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