You recently started gathering food, toiletries and other basic necessities for local people in need. Friends and neighbors donated money and goods to your cause, and now you want to expand your efforts to include neighboring communities. Donors asked if they can deduct the cost of the donated items on their tax return, and a few people suggested you make your project legal by filing for nonprofit status. Projects that help others are fantastic, but if you want your charity to be official, it’s important to cover your bases. Read the following tips on how to start a nonprofit organization before launching your charity, so it can be successful from the start.
Starting a nonprofit organization: Consider the local need
Is there a similar organization in your area? Is there a big enough need for your services? Nancy Eberhardt, executive director at Pro Bono Partnership, an organization that helps nonprofits with legal support in the tri-state area, explains that nonprofits need to check the industry, just like any other for-profit business, to make sure there is a need in the community for the charitable service you intend to provide. You may have a harder time obtaining funds from donors if the charitable group you want to support already has access to the resources you intend to offer.
“A nonprofit is just like any other business,” Eberhardt says. “Yes, the organization is operating for a mission instead of for profit, but a nonprofit is still a business that has to cover costs, raise money and comply with the same rules as many organizations.”
Then, obtain the necessary support
Once you know your nonprofit fills a charitable need, make sure you have a game plan, solid people by your side and resources to fund your mission. Begin with the following when starting a nonprofit:
- Mission statement: While the goal of the organization may seem simple to you, it’s still important to write down the exact mission of the nonprofit. A mission statement should explain the services the organization will provide and what charitable group will benefit from the funds.
- Board of directors: Members of the board of directors should not only be aligned with the mission but should also have the skills necessary to support the business. A president, secretary and treasurer are all key roles, and the people filling these positions should be capable and willing to complete the required job, says Eberhardt. Will the treasurer be able to oversee the money, including finding someone to prepare the annual tax return? Will the secretary be able to keep track of the records and filings?
- Estimated budget: An estimated budget is also essential for any new business. While you may not be sure how your nonprofit is going to solicit donations in the foreseeable future, it’s important to estimate income for the next three years in order to know which form to use when you apply for tax-exempt status.
While gathering this information may seem overwhelming when starting a nonprofit organization, none of this has to be set in stone. “You don’t have to have everything figured out,” says Eberhardt, “but it’s important that you’ve at least thought about it and have some ideas.”
How to start a nonprofit and make it official
Once you meet the criteria above, the next step is to make it official. You should complete the process outlined below in the order listed.
1. File a certificate of incorporation with the state
The articles of incorporation for the organization will typically include the name of the entity, the principal address, the charitable purpose and other basic information. Each state has different rules and regulations for filing. For example, one state may require the board to have at least three members, and another state may require only one. A charity can incorporate in a different state from where they are based.
2. Apply for a federal employer identification number (EIN) from the IRS
An employer identification number (EIN) is a nine-digit number assigned by the Internal Revenue Service (IRS) and the number an organization uses when filing paperwork. Filing for an EIN can be done on the IRS website, and the task is relatively simple. Once the basic information is completed, you will receive a PDF with the new EIN—a document that should be stored in a safe place but kept handy because the entity’s EIN will be used on many documents going forward.
3. Apply for tax-exempt status from the IRS
Many people are familiar with the term 501(c)(3), which refers to the section of the tax code set up for entities with charitable purposes. What is less familiar are the 28 subsections under section 501(c). Because of the various ways a group can help a community, the IRS has designated quite a few other subdivisions under section 501(c). For example, section 501(c)(4) is for social welfare organizations, section 501(c)(7) is for social and recreation clubs and section 501(c)((19) is for veterans’ organizations. A complete list can be found on the IRS website.
Form 1023 is the application needed to apply for section 501(c)(3) status. The cost to file is $600, and the form itself is 28 pages long, although many organizations can skip some of the pages.
Smaller organizations that want tax-exempt status (those with revenue less than $50,000 a year) can file Form 1023-EZ. The cost to file Form 1023-EZ is $275.
“Very often, a new nonprofit wants to collect money right away, or it has a pending grant that is dependent on it receiving its tax-exempt status,” says Tracy Snow, partner at Lowenstein Sandler. “The founders should form the organization as soon as possible, but the application can take months for the IRS to review and approve. The good news is that once you incorporate, as long as you file the tax-exempt application within the next 27 months, your exemption is retroactive to the date of incorporation.”
4. File for charitable registration (in your state, plus others where you will solicit)
Generally, when starting a nonprofit, you should register with the attorney general’s office in the state where the charity is incorporated, along with any states where it solicits donations, whether in person or by mail, email or telephone.
5. Apply for sales and use tax exemption with your state
While 501(c)(3) organizations do not pay income tax, they still need to pay sales tax when they purchase items for the organization. Another form to consider obtaining is a sales tax exemption form. Rules vary by jurisdiction, but in general, a sales tax exemption will allow sales tax free purchases for businesses that are registered nonprofits.
Moving forward with your nonprofit
Now that you have an official nonprofit, how do you maintain that designation? While the first priority of any nonprofit organization is to keep up with the needs of those benefiting from the charity’s work, paperwork should also be at the top of the list.
Most states require nonprofit corporations to file an annual report. The report is straightforward and includes confirmation of the nonprofit’s address and registered agent, as well as a payment. You can complete the annual report online, and it is often due at the end of the fiscal period. For example, in New Jersey, an annual report is due on the last day of the anniversary month of when the entity first filed for nonprofit status.
Don’t forget taxes
Nonprofits do not pay income tax, but all nonprofits must file Form 990, or a Return of Organization Exempt from Tax. Form 990 asks for detailed information about revenue and expenses for the current and prior years, a current balance sheet, as well as the names and titles of everyone on the board, including any salaries of those individuals. It’s due five and a half months after the end of the fiscal year, but can be extended for an additional six months.
Some organizations with income less than $50,000 can file Form 990 E-Z or Form 990-N, a short electronic form also referred to as an “e-postcard.”
“The general public is entitled to see these documents,” says Snow. “You’re not just filing the 990 to maintain your tax-exempt status with the IRS. Charitable money is public money since 501(c)(3) organizations receive such tremendous tax benefits. The flip side is that they must stay accountable to the general public and are subject to public scrutiny. Any member of the public can easily access a charity’s Form 990 online if they want to understand the charity’s operations.”
If a nonprofit fails to file a 990 for three consecutive years, it will automatically lose its tax-exempt status. By making sure all paperwork is well documented, incoming board members can easily understand the process and continue to keep the organization running smoothly. This way, everyone involved can spend as much time as possible focused on the mission at hand.
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