Get Non Profit Status
Having federal income tax exemption is commonly referred to as having 501(c)(3) nonprofit status. The name comes from section 501(c)(3) of the Internal Revenue Code (IRC), which is the section allowing educational, charitable, religious, and certain other organizations to obtain federal tax exemption. To qualify as exempt from federal income tax, you must first create and register an eligible organization. After creating your organization, you will be able to apply for tax exempt status with the Internal Revenue Service (IRS). Obtaining tax exempt status offers a number of benefits for your nonprofit.
Creating An Eligible Organization
- Know the benefits of tax exemption. When your organization is recognized as tax exempt under section 501(c)(3) of the IRC, you will not need to pay federal income tax and you will be eligible to receive tax-deductible charitable contributions. Nonprofit organizations are dependent on donations in order to function and donors are much more willing to support organizations exempt under section 501(c)(3) because the donations are tax deductible. In addition, gaining 501(c)(3) status assures grant-making institutions that they are issuing grants to permitted beneficiaries.
- Choose an organizational structure. In order to be eligible for 501(c)(3) status, your organization must be structured as a corporation, trust, or unincorporated association. The most common type of 501(c)(3) is the nonprofit corporation. However, you should research your options before creating your organization.
- A nonprofit corporation is one where no part of their income is distributable to members, directors, or officers. This means that the corporation's profits must be used for charitable purposes and not pocketed by executives.
- A trust is a formal relationship where one person holds property subject to an obligation to use or distribute that property for the benefit of someone else. For example, a trust may be created if you give Ted $400 to be given to Jake in equal installments over five years.
- An unincorporated nonprofit association consists of a minimum number of members joined together for a common, nonprofit purpose.
- Pick a name. Before you can register your business, you need to choose an acceptable name. Your name should be descriptive of your organization but you need to make sure your name is not the same or similar to a name already in use.
- Appoint initial directors. Some states require you to name a specified number of initial directors when you register with the state. The directors govern the nonprofit corporation and make high level decisions. Board members must be natural people (i.e., they cannot be other corporations) but they do not need to live in the state you register in.
- In Texas, for example, you must name a minimum of three directors in your certificate of formation (i.e., articles of incorporation).
- In Oregon, you do not need to name any directors in your articles of incorporation.
- Select a registered agent and address. A registered agent is responsible for receiving any legal notices or official documentation. Your registered agent can usually be an entity registered to do business in the state you are filing in or a natural person residing in the state. The registered office address you choose must be a physical address (i.e., you cannot use a P.O. Box) located within the state you are registering in. The registered agent should be reachable at the address you choose during normal business hours.
- Limit your purpose. To be eligible for tax exempt status, you must create a purpose statement for your organization. The purpose you choose must fall within one of the categories described in section 501(c)(3) of the IRC. In addition, you cannot expressly permit activities that do not further the purpose you choose.
In general, the following exempt purposes are allowed:
- Charitable, which includes relief of the poor, the distressed, or the underprivileged; advancement of religion; advancement of education or science; erecting or maintaining public buildings, monuments, or works; lessening the burdens of government; lessening neighborhood tensions; eliminating prejudice and discrimination; defending human and civil rights; and combating community deterioration;
- Testing for public safety;
- Fostering national or international amateur sports competition; and
- Preventing cruelty to children or animals.
- Dedicate your assets to exempt purposes. When you fill out your articles of incorporation, you will be required to permanently dedicate your assets to exempt purposes in order to be eligible for 501(c)(3) tax exemption.
This means that if your organization were ever to dissolve, your assets would be distributed to other charities and not to your members or directors.
- For example, your articles of incorporation could state: "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."
Registering Your Organization
- Fill out your articles of incorporation. Your articles of incorporation are your creation documents and they will be filed with a state agency, often the Secretary of State's office. You should be able to find a form on your state's Secretary of State website. Once you locate the form, you will need to fill it out accurately and completely. In general, the articles of incorporation must contain the following:
- Your organization's name and type;
- Your registered agent and registered office;
- Your initial directors (in some states);
- Your purpose; and
- Your dissolution statement.
- File your articles of incorporation. When your articles of incorporation are complete, you will file them online. If your state does not offer an online filing service, you may have to file in person or through fax.
- In Texas, you can file your creation documents online using their SOSDirect system.
- In Oregon, you can file your documents online through the Secretary of State's website.
- Pay the filing fee. At the time you file your articles of incorporation, you will also be required to pay a filing fee. These fees are often not waivable. In Texas the filing fee is $25. In Oregon, the filing fee is $50.
- Obtain required local licenses and permits. In addition to filing paperwork with the secretary of state, some organizations are required to obtain local licenses and permits in order to conduct business. This will most often be the case if you are opening up your business to the public (e.g., selling clothes or offering medical services).
- Fulfill insurance requirements. Most nonprofit corporations will need to have certain types of insurance in order to conduct business. For example, if you are going to have employees, you will most likely be required to obtain unemployment insurance and workers compensation insurance.
Applying for Federal Tax Exemption
- Apply for your Employer Identification Number (EIN). The IRS will require you to obtain an EIN, which is considered your account number with the IRS. This EIN will be used whenever you correspond with the IRS. To apply for an EIN, complete Form SS-4 and submit it online through the IRS' website. Do not apply for an EIN until your organization is registered with the state.
Form SS-4 should include the following information:
- Your business's information, including its name and address;
- The type of entity you have, which in this case will usually be a corporation or other nonprofit organization;
- The reason you are applying; and
- The business's purpose and employee information.
- Start the application in a timely manner. Most organizations will need to file for exemption by the end of the 27th month after you were legally formed. Your organization will be considered legally formed on the date you filed your articles of incorporation.
- If you file late, you will need to complete Schedule E, which is part of Form 1023. The schedule will help the IRS determine the effective date of your exemption.
- Complete Form 1023. Form 1023 is the IRS form required to apply for recognition of exemption under section 501(c)(3) of the IRC. You must complete Parts I through XI and any required schedules. The schedules you will have to submit will depend on the type of organization you have. Parts I through XI need to include the following information:
- The applicant's identification;
- Your organizational structure;
- Proof of required provisions in your organizing document;
- A description of your activities;
- Any financial arrangements you have with directors, officers, employees, etc.;
- A list of individuals receiving benefits from you;
- Your history;
- Your specific activities;
- Your financial data;
- Your public charity status; and
- Your user fee information.
- Pay the user fee. After you complete Form 1023, you will need to file it promptly. When you file, you will pay what is called a "user fee." The user fee you will pay will depend on your organization's annual gross receipts. If your gross receipts have exceeded, or will exceed, $10,000 annually over a four-year period, the user fee will be $850. If you do not meet that threshold, the user fee will be $400.
- Your gross receipts will be certified in Part XI of Form 1023.
- Comply with IRS requests. Once you file, an IRS tax specialist will review your Form 1023 and may request additional information. If you get a written request for information, gather the required information and submit it.
- Receive your determination letter. Once the tax specialist determines that your organization meets the requirements for exemption, the IRS will send you a determination letter. This determination letter is an important document and you should keep it with your other permanent records.
Operating as a Tax Exempt Organization
- Refrain from conducting prohibited activities. In order to receive and keep your tax exempt status, you must refrain from taking part in activities that could jeopardize your status. For example, you may need to refrain from taking part in some or all of the following activities:
- Participating in political campaigns;
- Lobbying substantially;
- Providing benefits to private individuals;
- Operating for the benefit of private interests;
- Conducting illegal activities or activities that violate public policy.
- Keep good records. Your 501(c)(3) organization is required to keep in-depth books and records evidencing all your financial and non-financial activities. You should keep track of all grants and donations received; your employee information; and decisions made at board meetings.
- Meet federal filing requirements. As a 501(c)(3) organization, you will be required to file a number of documents with the IRS. Most importantly, you will be required to submit an information return (Form 990), which will provide the IRS with tax related information. This information will generally be available for public inspection.
- Disclose all required information. In addition to your Form 990s being disclosed to the public, a number of other documents will be public as well. Your exemption application (Form 1023), your articles of incorporation, and certain information regarding charitable contributions must be documented and disclosed.
- Start a Not For Profit Ad Agency
- Start a Nonprofit Organization
- Prepare a Tax Return for a Nonprofit
- Start a 501(c)(3) Nonprofit Organization
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