If you wanted to know how to start a non-profit organization then read on below. Hiring a lawyer can definitely be helpful and the if you follow the steps below you can greatly minimize the time and costs associated of having a lawyer by gathering the relevant information beforehand.
Step #1: Filing Articles of Incorporation as a non-profit Organization
Please note: laws vary by state. Check with your local government websites to verify fulfillment of requirements.
1) Choose an Incorporator (or “Promoter” in some states)
- Incorporators do the organizational/prep work. This includes bringing together the resources (people and money) to create the organization, and putting together and filing the Articles of Incorporation.
- The Incorporator usually has lots of power until the Directors take over the corporation. Once the Directors take over, the Incorporator will have little power.
- S/he must be over the age of 18
- We highly recommend you hire a lawyer for this.
2) Choose a business name that meets state requirements.
- You must make sure no one else has already claimed your name
- Your name must end in one of the following: LLC, Corp, Co, Inc, or LTD (or one of those not abbreviated)
- If your name implies any purpose other than what is listed as your purpose (below), you may be required to add “NFP” to the name
3) Appoint a registered agent
- A registered agent is the person (or organization) that receives the legal and tax documents on behalf of your non-profit. Either a member of your organization or a third party (like a lawyer or service company) can act as a registered agent
- Your registered agent must list a real (non P.O. Box) address
4) Appoint a Board of Directors: In Illinois, you must have a board of directors consisting of between 3 and 7 members when becoming a non-profit organization
5) Declare your purpose: In the state of Illinois, your organization must fall under one of 34 categories listed here:http://www.ilga.gov/legislation/ilcs/fulltext.asp?DocName=080501050K103.05
If needed, you may choose more than one category
6) Paperwork: If you’re in the state of Illinois, find your NFP 102.10: Articles of Incorporation here:http://www.cyberdriveillinois.com/publications/pdf_publications/nfp10210.pdf
- In the state of Illinois: $50 filing fee
- If you wish to have it expedited (reviewed within 24 hours), add on another $25. I don’t recommend this. The IRS will likely take a year to get back to you when you file your 501(c)(3) forms so you don’t need to be in any hurry
- $2.75 processing fee
Step #2: Registering for an EIN (Employer ID Number)
Please note: Though this step is through the IRS, laws for other aspects still vary by state. Check with your local government websites to verify fulfillment of all requirements.
An Employee Identification Number, also known as a Federal Tax ID Number, is a 9-digit number assigned to any business entity (including non-profits), estate, or trust for the purposes of tax filing and report purposes. You must have your EIN before applying for tax-exempt 501(c)(3) status. If you are an established business but you were not previously a non-profit, or you are still working under the same company name, but are establishing a new entity that is non-profit, you still must register for a separate EIN before you can become a tax exempt non-profit.
You will need IRS form SS-4:
Option 1: Apply online! This is the fastest, easiest way. You will have your EIN the very same day (during regular business hours).
- Here is the IRS website to fill out SS-4:
- This form is only available 6 a.m. to 9 p.m. Central-Standard Time. The link will not work outside those hours.
- If you are nervous about disclosing information online, here’s a little tip: check the URL at the top of your browser. See how it says “https”? That little “s” means “secure” (this applies to any website, actually). So as long as that “s” is there, you should not have to worry about your information being viewed by anyone else online.
- This is a FREE service offered by the IRS! Get excited: how often do the words “free” and “IRS” go in the same sentence?
- You will have the option to review and print everything before you click to submit.
Option 2: Call them.
- This is quick, but you really should have the form filled out before you call.
Option 3: Filing through snail-mail or fax
- You can find the form here:http://www.irs.gov/pub/irs-pdf/fss4.pdf
- Send to:
Internal Revenue Service Center
Attn: EIN International Operation
Cincinnati, OH 45999
The form is pretty straightforward, but here are a few tips:
- Save yourself some time: look at Page 3 before you do anything. If any of the listed items apply to you, note which lines you do not have to fill out.
- Remember to be consistent. Make sure everything you write on this form matches up all the previous documents you have filed. Do not use abbreviations when filling out your company’s name.
- Line 2 asks for your “Trade Name”. This is what you may be known as outside of the legal name. An example would be “McDonalds” being the trade name of “McDonalds Corporation”.
- Line 3: Your Executor is your Registered Agent – If you recall from my last blog post, this is the person (or organization) that receives the legal and tax documents on behalf of your non-profit. Either a member of your organization or a third party (like a lawyer or service company) can act as a registered agent. If this is a designated person within a company, indicate “care of” with the company.
- Line 9a asks if you are an “other non-profit organization”. “Other” means not a church or church-controlled organization.
o “GEN” is Group Exemption Number – i.e. it is for organizations already working under an established tax-exempt non-profit, so you can ignore this.
Step #3: Filing for Tax Exempt Status (501(c)(3)):
The longest and final step to becoming a non-profit is filling out Form 1023 to submit to the IRS. This gives your organization tax exempt status which means that you will not have to pay any income taxes on any money that is raised.
Recently the IRS introduced a new, shorter application form to help small non-profits apply for 501(c)(3) tax-exempt status more easily. The new Form 1023-EZ, available on IRS.gov, is three pages long, compared with the standard 26-page Form 1023. Most small organizations, including as many as 70 percent of all applicants, qualify to use the new streamlined form. Most organizations with gross receipts of $50,000 or less and assets of $250,000 or less are eligible.
Below is information on filling out the standard Form 1023.
You will need Form 1023: Application for Recognition of Exemption Under Section 501(c)(3) of the Internal Revenue Code (it can be found here. If you want to fill it out on your computer, you can go here). The form is divided into eleven sections which are outlined below.
Section 1: Identification of Applicant: this just includes the basic information about your organization: name, contact information, and when your Articles of Incorporation was filed.
For #10: Gross receipts are the total amounts the organization received from all sources during a tax year, without subtracting any expenses. See Appendix B on Form 1023 for more details.
- Form 990: must be filed by an organization exempt from income tax if it has either (1) gross receipts greater than or equal to $200,000 or (2) total assets greater than or equal to $500,000 at the end of the tax year.
- Form 990-EZ: If an organization has gross receipts less than $200,000 and total assets at the end of the tax year less than $500,000
- Form 990-N: If an organization normally has gross receipts of $50,000 or less
Section 2: Organizational Structure: here you will need a copy of your Articles of Incorporation and your bylaws.
Section 3: Required Provisions: You will need to state wherein your Articles of Incorporation you included:
- A clause stating that your corporation was formed for a recognized tax-exempt purpose
- A clause stating that assets of the NPO that remain if the entity dissolves will be distributed to another 501(c)(3) organization, or the government. If you do not have this included in your bylaws, the state government will dissolve the organization according to its laws.
Section 4: Narrative Description of your Activities: They want a detailed narrative of all of your organization’s activities and future activities, in order of the amount of time and resources devoted to each (include a percentage). Write about:
- How will each activity further an exempt purpose of your organization?
- When each activity began or will begin
- Where/whom is involved?
- How will the activities be funded?
If your organization has a brochure describing your activities, you can provide this instead.
Section 5: Compensation & Finances: You must include the names, titles, addresses, qualifications, number of hours to work, duties, and all proposed compensation to the current directors and officers, the top five paid employees (not directors or officers) making over $50,000 annually (include 401K, bonuses, employer contributions, etc.), the top five paid independent contractors paid over $50,000 annually, and list any possible conflict of interests.
- This is where using the interactive form I posted above comes in handy. If you have a long list of employees or contractors, it will allow you to add more rows to the table. If you answered “yes” to either of the points above, you can insert a field with descriptions, instead of attaching a form at the end.
- “Common control” means that you and one or more other organization have either a majority control of governing boards/officers or a majority of your governing boards/officers consist of the same individuals. It can also occur when you and one or more commonly controlled organizations have a majority ownership interest in a corporation, partnership, or trust.
Section 6: Compensation & Others Receiving Benefits: The IRS just wants to make sure your organization is set up to provide to all members of the public (or a segment of the public), and it is not limited to particular individuals.
Section 7: Your History: The IRS just wants to know if you took over the activities of another organization or if you were a previous organization/corporation. If you took over more than 25% assets of a preexisting NPO, you need to disclose it here.
Section 8: Your Specific Activities: You must list your fundraising activities, including the time spent on each, here. This includes other organizations raising money for your organization.
- Your organization can not be involved with supporting or opposing a candidate in a political campaign.
- If you are using any type of gambling to raise funds (from casino nights to BINGO events) be sure to do a little research as far as what is allowed with a tax-exempt status.
- If you will have any operations in foreign countries, they will also be listed here. You should review the Office of Foreign Assets Control (OFAC) Specially Designated Nationals List (SDN) to ensure you do not give money to anyone on the list. This can be found here.
Section 9: Financials: If you have hired a lawyer this is one section where they likely will need a lot of your help or the help of your accountant. It starts with a pretty simple, itemized statement of revenues, but it will take a little sifting through your records to answer some of them. The second part is a Balance Sheet from the most recent tax year, which hopefully you will have already prepared previously.
- Don’t forget that donated items still count as donations. You need to include the cash value of any donations.
- The IRS requires you submit your financial data for the most recent five years. This form has slots for the current year and the last three years. I don’t know why they haven’t modified the form. We had to submit two more years of data after our initial review, and had to wait longer to get our status.
Section 10: Public non-profit Status: This section is different depending on if you are a public non-profit or a private foundation.
Secton 11: User Fees: This one’s an easy one – just tell them what your average annual gross receipts are, and it will tell you how much you need to pay them.
And finally, here is a checklist to make sure you have everything you need before sending it over: http://www.stayexempt.irs.gov/checklist.pdf
Now, you play the waiting game! We waited over a year for our status to be approved. You can see where the IRS is in approving status here: http://www.irs.gov/non-profits-&-Non-Profits/Where-Is-My-Exemption-Application
- I suggest writing a compelling letter to your congressman asking for assistance in expediting your application.
- There is a chance the IRS will request more information. Don’t be discouraged – they usually respond very quickly once your application has had its initial review. However, you will always have a week or two deadline to submit the information they request. They will disregard your application if they do not receive the requested information postmarked by the deadline.
After you have completed these steps your organization is on its way to becoming a 501(c)(3) tax exempt organization.