Starting a nonprofit requires strategy, planning, commitment, and organization skills. The first step is to apply with the Internal Revenue Service (IRS) for the official 501(c)(3) status. In this article, we’ll break down what it means to be a 501(c)(3) organization, share the benefits, and provide a nine-step process to start your own 501(c)(3) organization.
Starting a 501(c)(3) can seem like a complicated and daunting task. However, equipped with the right information and a resilient approach, the process is easier than it seems.
This is not to say that establishing a nonprofit is without its challenges. Starting a nonprofit requires strategy, planning, commitment, and organizational skills. Not to mention, years of hard work and strong willpower to sustain your nonprofit for years to come.
When establishing a new nonprofit, the first step for most organizations is to apply for the official 501(c)(3) status.
Section 501(c)(3) is the part of the U.S. Internal Revenue Code that allows for federal tax exemption of nonprofit organizations. A 501(c)(3) organization is a corporation, trust, unincorporated association, or other type of organization exempt from federal income tax under section 501(c)(3) of Title 26 of the United States Code.
Organizations must be considered “charitable” by the IRS to receive a 501(c)(3) classification. According to the IRS, a charitable organization has been established for the following purposes :
Organizations that also help the poor and underprivileged, help erect or maintain public buildings or national/state monuments, promote civil rights, and combat juvenile delinquency and urban decay can also be considered nonprofit organizations.
There are many reasons why organizations choose to apply for the official 501(c)(3) status.
There are numerous perks of being tax-exempt under Section 501(c)(3).
A public charity, identified by the Internal Revenue Service (IRS) as “not a private foundation,” must obtain at least a third of its donated revenue from a fairly broad base of public support. This support can come from the general public or the government. Public charities are defined in the Internal Revenue Code under sections 509(a)(0) through 509(a)(4).
Donations to public charities can be tax-deductible to the individual donor up to 60% of the donor’s income. Additionally, public charities must maintain a governing body that is mostly made up of independent, unrelated individuals.
Additional reading: Everything You Need to Know about 509(a)(1) Public Charities
A private foundation, sometimes called a non-operating foundation, receives most of its income from investments and endowments. This income is used to support the work of public charities through grants, rather than being disbursed directly for charitable activities. They are not required to be publicly supported, so revenue may come from a relatively small number of donors, even single individuals or families.
Section 509(a) of the Internal Revenue Code defines private foundations as 501(c)(3) organizations, but they do not qualify as public charities.
Donations to private foundations can be tax-deductible up to 30% of the donor’s income.
A private operating foundation may be run similarly to a private foundation when it comes to where its funding comes from, but it will spend money directly on charitable, exempt activities. These types of organizations spend 85% of their balanced net gain or base speculation return, whichever is less, on charitable activities and programming.
On top of that, the foundation has to meet one of the following tests:
Also, contributions to private operating foundations as described in Internal Revenue Code section 4942(j)(3) are deductible by the donors to the extent of 50% of the donor’s adjusted gross income.
To learn how to start a 501(c)(3) organization, check out this video with 10 easy steps!
To help you move through the motions of establishing a nonprofit, we’ve outlined nine steps below. You can also read this in-depth checklist to make sure you don’t miss anything.
At first glance, this might not seem like an essential task. But knowing – and being able to articulate – your purpose will help you with every step of establishing your organization.
A clear purpose motivates staff and volunteers, attracts donors and supporters, and helps build a positive image amongst the general public.
Once you have the answers to these questions, you can begin to flesh out a clear mission statement and a one- to three-year strategic plan for your organization.
If you’ve completed step one, this step should be relatively easy. Based on your nonprofit’s purpose, decide which type of nonprofit you want to register as (e.g. arts, education, politics, religion, research).
These 29 types of nonprofit organizations can file for tax exemption under section 501(c) of the Internal Revenue Code. The most common of these is the 501(c)(3), which includes all charitable, religious, scientific, and literary organizations. Other types of tax-exempt nonprofits fall under different 501(c) codes such as:
If you are not sure about 501(c)(3) or 501(c)(4), don’t forget to check out our in-depth guide.
Pro tip: Plan for startup costs for your nonprofit. For example, depending on your state, incorporation can cost you from $8 (Kentucky) to $170 (Maryland). If you intend to start a 501(c)(3), expect to pay between $275 if you fill out the simpler Form 1023-EZ and $600 for the more complex Form 1023 (which has more detail).
Every state in the United States has different rules and regulations when it comes to establishing a nonprofit. However, it’s safe to say you should select a name that’s unique and somehow related to the main activities of your nonprofit.
This decision will set the tone and influence your nonprofit’s brand for years to come. So it’s smart to take some time to think through this decision.
Make sure your nonprofit’s name is easy to say and remember. Use descriptive words, but try not to overdo it or make it too long. Don’t use technical/industry-specific jargon. Abbreviations are good if you use them well.
Use our Nonprofit Naming & Branding Worksheet to help establish a name that is unique, descriptive, and attractive.
When you have selected your name, you need to check with your Secretary of State to see if it is available and the U.S. Department of Commerce website to be sure the name you want is not trademarked.
Pro tip: Your state’s corporation’s office can tell you how to find out whether your proposed name is available for your use. For a small fee, you can usually reserve the name for a short period until you file your articles of incorporation.
Forming a board before incorporating is generally a good idea. Some states require that you list the names of your board members in your incorporation documents. Even if your state doesn’t require this, recruiting a board before incorporating is helpful.
Your board can help you with the incorporation and the rest of the sometimes challenging process of establishing a 501(c)(3). Hiring the right board is essential to the success of your nonprofit.
Who the “right” board members are will depend on your nonprofit. However, whatever the size or the purpose of your nonprofit – it’s essential to hire board members who are dependable, committed, and aligned with your mission and values.
Take time to define their roles and job descriptions before you start looking for them. Learn more about board member responsibilities in this blog.
The bylaws contain the operating rules and provide a framework for your management procedures. They are the tools of internal accountability and they outline the inner workings of your nonprofit.
Bylaws contain the rules and procedures for things like holding meetings, electing directors, appointing officers, and taking care of other business matters.
In order to obtain the 501(c)(3) status, you must include language in your articles of incorporation specifically stating that:
See IRS Publication 557 for more help and sample language.
You must file “articles of incorporation” with your state’s corporate filing office. Experts recommend that you incorporate in the state where you will conduct your nonprofit’s programs or services.
If you want to incorporate into another state, you would need to register and apply for separate tax exemptions in each state in which you conduct activities.
Filings and fees will vary by state. Incorporating a nonprofit does not make it 501(c)(3) exempt. The IRS requires you to include specific language in your articles of incorporation for those wanting to apply for federal tax-exempt status.
When the state approves your articles of incorporation, you should organize your first official board meeting. The chair of the meeting should report to the board that the state has approved the articles. At this point, the board needs to make the articles of incorporation part of the official record. This meeting is usually referred to as the “organizational meeting” of the organization.
Obtain a federal employer identification number (EIN) prior to applying for 501(c)(3) tax exemption, even if you don’t have employees. You can do this quickly and easily. For information on how to apply for an EIN, check out this compact guide to EINs.
Your EIN will be used to track your organization’s financial activity and make it possible to open a business bank account and hire paid employees. Pretty much every major transaction your nonprofit engages in will require an EIN.
You apply for exempt status with the Internal Revenue Service for recognition of tax exemption by filing IRS Form 1023 or 1023-EZ. To get the most out of your tax-exempt status, file within 27 months of the date you file your nonprofit articles of incorporation.
Check out our comprehensive guide to Form 1023 and Form 1023-EZ, which includes the differences between the two forms and some pros and cons for each.
Be aware, the user fee will be $275 or $600, depending on your application method. You must register an account at pay.gov and pay a registration fee with a credit or debit card. It also can take 3-12 months for the IRS to return its decision, depending on how many questions the IRS has about your application. That’s why many experts advise starting this process as soon as possible.
Once you’ve obtained the 501(c)(3) status, you do not need to file any kind of document to renew the application. In other words, there is no expiration date on a 501(c)(3) organization. However, other actions need to be taken to maintain tax-exempt status.
In most cases, an exempt organization must file some version of Form 990 with the IRS, depending on its financial activity. Form 990 shows your finances, activities, governance processes, directors, and key staff, and it is open to public inspection.
Keep solid accounting records of income, expenses, assets, and liabilities. You also need to keep appropriate records for employees, such as payroll records and payment of withholding taxes, workers’ compensation, unemployment taxes, etc. If you hire any independent contractors, you need to keep copies of any Miscellaneous Income (Form 1099) documents that are provided to them.
Should you wish to change your name or address in the future, the IRS mandates that an exempt organization must report the name, address, and structural and operational changes. When an organization files an annual return (such as Form 990 or 990-EZ), it must report the changes on its return. If your organization needs to report a change of name, see Change of Name- Exempt Organizations. If you need to report a change of address, see Change of Address – Exempt Organizations.
Nonprofits have several fundraising options, from events to in-person fundraising, online giving, and more.
For a small 1.75% processing fee on donations and no contracts, Donorbox offers nonprofits custom donation forms, donor management tools, third-party integrations with your favorite apps, event ticketing, on-site giving, and more.
Here are just some of the powerful tools Donorbox offers. Check out our features to learn why more than 50,000 organizations trust Donorbox to boost their fundraising.
Donorbox offers multi-step donation forms that you can embed on your website or host on Donorbox. Customize them to match your branding, include descriptions for each donation level (like this example!) to encourage more giving, and allow your donors to use many different payment methods for a 4x faster checkout.
Learn more about our donation forms here.
Recurring donations are a fantastic revenue source for nonprofits. These funds can be depended on and included in your annual budget. Donors love the convenience of recurring donations because they can regularly support their favorite organizations without needing to think about it. Donorbox gives nonprofits the chance to collect weekly, monthly, quarterly, and annual recurring donations. Check out this example that includes three recurring donation intervals.
Donorbox has partnered with Double the Donation to give nonprofits an affordable alternative for company gift matching. Nonprofits can offer their donors an easier way to find out if their companies offer matching gifts. Integrate Double the Donation on your website and watch your revenue increase.
Donorbox allows nonprofits to create crowdfunding campaigns, send updates to donors, and share successes online. With these customized campaigns, nonprofits can encourage donors to get involved and share their stories with a new audience. Here’s an example –
Text-to-give allows your donors to quickly and easily give with their smartphones. Local nonprofits, churches, and politicians have all found success with these campaigns.
By sending your donors a text that contains your campaign ID and a link to your donation page, donors can make a one-time or recurring donation within minutes. Learn more about text-to-give here.
The Donorbox Live™ Kiosk app makes it easy to turn your tablet and card reader into a powerful donation collector. Set your giving kiosk in your lobby or around your building, or use it at events to raise more. Donors can pay using a card, smartphone, or smartwatch.
That depends on which IRS form you use to file, and you have two options.
The user fees must be paid through Pay.gov when the application is filed.
There is also the cost of hiring an experienced advisor or professional to prepare your 501(c)(3) application. Learn in detail about the cost of filing here.
Typically, IRS 501(c)(3) approval takes between two and 12 months, and will likely involve written follow-up questions. Sometimes it takes a little less; sometimes a little more.
Filers of Form 1023-EZ experience a shorter time frame due to the quick process of e-filing.
The expedited review can be requested if a new organization is being formed to provide immediate disaster relief or if a promised grant is substantial relative to the organization’s budget and the grant has a defined expiration date. However, there is no guarantee the IRS will grant faster review requests.
There are informal nonprofits – those without formal recognition from the IRS – and it is entirely allowed for them to remain that way. However, without official IRS 501(c)(3) tax-exempt status, the group is not tax-exempt, and people giving it cannot deduct the amount from their taxes.
Typically, very small nonprofits with annual gross receipts under $5,000, and churches and integrated auxiliaries of churches and conventions or associations of churches operate without 501(c)(3) status. Donations to these organizations are tax-deductible even though the nonprofit does not hold tax-exempt status.
Grantmakers usually fund organizations that qualify for public charity status under Section 501(c)(3) of the Internal Revenue Code. Few grants are offered to organizations without a 501(c)(3) designation, but there are some. Nonprofits can apply for fiscal sponsorship, a formal arrangement in which a 501(c)(3) public charity sponsors a project that may lack exempt status. This enables the project to seek grants and solicit tax-deductible donations under your sponsor’s exempt status.
Yes, you can donate to your own 501(c)(3) organization. You can make a tax-deductible donation to any 501(c)(3) charity, regardless of your involvement with it. It is not technically your charity as charitable organizations have no owners. However, money donated to charity must be used for charitable purposes.
You must make sure that the organization gives you a signed receipt for the donation. That indicates what was donated and the value of the donation and states that no goods or services were received in exchange.
Organizations under Section 501(c)(3) of the IRC are generally exempt from most forms of federal income tax, which includes income and capital gains tax on stock dividends and gains on sales. As long as the 501(c)(3) corporation maintains its eligibility as a tax-exempt organization, it will not have to pay tax on any profits.
Properties owned by charitable nonprofits used for tax-exempt purposes are exempt from property taxes under state law. If the property or any portion of it is not used to promote the nonprofit group’s mission, the group can be liable for property taxes. For instance, if the group owns a property, but leases part of that property to a for-profit business. Then the group is liable for property taxes on the leased portion of the property.
The board of directors is the governing body of a 501(c)(3) nonprofit, responsible for overseeing the organization’s activities. The board is required to ensure that the organization is legally compliant and is being run in the best possible way. In a 501(c)(3) organization, the founders may serve on the company’s board of directors. Certain states require these organizations to select at least three people to serve on the organization’s board of directors. And, at least one director in the organization is responsible for making strategic and financial decisions for the organization.
You can check the IRS’s progress on applications on the IRS website. Once an agent is assigned to your application, your application review process will begin. You can check the status of your application by contacting the IRS Exempt Organization Customer Account Services at (877) 829-5500. You will need to provide tax identification and the mailing address of the organization. The IRS only provides information regarding the status of your application to an identified officer of the organization.
As a founder, you can pay yourself reasonable compensation for your actual services in the nonprofit. The IRS examines reasonableness based on salaries in other comparable nonprofit organizations. You must be careful to pay yourself reasonable compensation in order to avoid any possible claim for excess taxes-benefits from being paid “too much”. The salary should be within reasonable limits based on the number of hours worked, the overall budget of the organization, the required level of education, and compensation averages in your area.
Yes, all 501(c)(3) organizations are exempted from federal and/or state corporate income taxes. Although not all activities are tax exempt. Activities that are not related to a nonprofit’s core mission or purpose are taxable. This can be any activity/business to support a nonprofit’s income. Typically, these are unrelated business activities.
Without a doubt, the process of establishing a nonprofit is hard.
You should consult with local experts to ensure that your new nonprofit complies with state and federal laws and requirements. Look for attorneys and accountants with nonprofit experience to ensure you’re getting the best guidance throughout this process.
Hurdles and challenges should not keep you from your important mission! Remember why you’re doing what you’re doing. Come back to your mission and your beneficiaries whenever the process becomes a little bit too much.
We hope this article helped you begin to understand the process of incorporating and acquiring the nonprofit tax-exempt status.
We also have dedicated articles for starting a nonprofit in different states in the US, including Texas, Minnesota, Oregon, Arizona, Illinois, and more. Check out our Nonprofit Blog to read them and other nonprofit tips and resources.
Note: By sharing this information we do not intend to provide legal, tax, or accounting advice, or to address specific situations. The above article is intended to provide generalized financial and legal information designed to educate a broad segment of the public. Please consult with your legal or tax advisor to supplement and verify what you learn here.
Ilma Ibrisevic is a content creator and nonprofit writer. She’s passionate about meaningful work, sustainability, and social movements. If she’s not working, she’s obsessing over coffee or cooking. You can connect with her on Linkedin.
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Ilma Ibrisevic