When you hear the term “nonprofit,” you probably think of a charity or organization working towards a way to benefit the community. Nonprofits also benefit the economy, adding millions of people with full-time positions to the American workforce, and generating billions of dollars each year. According to the National Center for Charitable Statistics, approximately 1.56 million nonprofits were registered in 2015. In 2018, Swyft Filings alone filed a little over 2,200 organizations — an average of 9 a day!
Nonprofits and corporations are alike in terms of the filing process, startup efforts, and even during operations. However, while the process may be very similar to forming a business, there are a number of special details required to establish a nonprofit organization. When starting your nonprofit, these 8 steps will help you navigate the filing process:
Step 1: Identify your nonprofit’s purpose.
It’s important to identify your nonprofit’s purpose, for the sake of the organization. Additionally, in order to receive a tax-exempt status, the articles of incorporation must include a purpose statement that falls under section 501(c)(3) of the Internal Revenue Code:
“... corporations, and any community chest, fund, or foundation, organized and operated exclusively for religious, charitable, scientific, testing for public safety, literary, or educational purposes, or to foster national or international amateur sports competition (but only if no part of its activities involve the provision of athletic facilities or equipment), or for the prevention of cruelty to children or animals.”
It’s important to note that 501(c)(3) nonprofit corporations pursue charitable goals and are tax-exempt, whereas 501(c)(4) through 501(c)(29) are tax-exempt but do not have a charitable purpose.
Step 2: Choose a name for your organization.
Due to the eventual tax-exempt status and the philanthropic nature of most non-profits, you must use an identifying word in your new organization’s name to signify that you are incorporated. The most common identifiers are “Corporation,” “Inc.,” “Limited,” or “Company.”
You will also need to make sure that your preferred company name is already not in use in your state. Be sure to search trademark listings, both state and federal, to make sure your company is unique. Most nonprofits also elect to ensure that their name accurately reflects their social purpose or cause.
Step 3: Create bylaws.
The bylaws serve as a guide for your nonprofit, as well as a requirement for when you file your nonprofit with the IRS. Bylaws may vary depending on your organization, but they should outline basic rules such as when board meetings are held, voting procedures, how to handle conflict, who serves on the board, creating and ending committees, and how to change or amend the bylaws.
Step 4: Elect a registered agent.
You must list a registered agent in your nonprofit filing, and provide the information of the person listed. A registered agent’s role is to receive any formal correspondence between government agencies and your business. In the event of a lawsuit or other legal action, all the contact information for the registered agent must be up-to-date.
Step 5: Organize your leadership structure.
Much like a corporation, nonprofits must appoint directors, executives, managers, and administrative staff to run the organization effectively. The board of directors typically oversee the organization’s activities, hire the executive staff, and vote on major decisions for strategy and finance. The executive staff runs the daily operations and serves as the face(s) of the organization, and includes the president, vice president, and other chief officers. Managers work directly with clients and handle most of the day-to-day activities. Administrative staff tend to assist the managerial and executive staff with any needed program or entry-level work.
Most states require one director, but it is highly recommended to appoint three directors—one of which is not immediate family. This is due to the IRS rule for filing a 501(c)(3), and as a result, business owners must pay for an amendment to add directors.
Step 6: File the Articles of Incorporation.
Sometimes referred to as “Certificate of Incorporation” or “Charter Document,” this document is required in order to keep your organization in good standing with the state. The Articles of Incorporation include:
- Organization name
- Type of nonprofit
- Purpose statement
- Registered agent
- Names of incorporators
- Names of directors
- Designation of stock or non-stock
- Statement of whether membership-based or not
Step 7: Apply for tax exemptions.
The next step is to ensure you obtain 501(c)(3) status by filing a form 1023 with the IRS. Before you can file paperwork, you need to apply for an EIN (Employer Identification Number). From there, you can follow the Form 1023 checklist to make sure you include everything in the application.
Once you receive approval at the federal level, you also need to make sure that the organization is exempt at the state and local levels — as in, avoiding state income tax, sales tax, and property tax. Also keep in mind that after being approved for 501c3, tax-exempt organizations have to file Form 990 with the IRS each year to maintain exempt status.
Step 8: Obtain licenses & permits.
After you have successfully incorporated your nonprofit, you must obtain a business license to manage sales and employment taxes. The local business license allows the nonprofit to operate locally. Depending on your state, fundraising activities might also be governed by the state.
There are many contextual issues that may affect your nonprofit’s incorporation, such as the industry and size of your organization. With this in mind, consider contacting a professional filing service before starting your new venture.
The Swyft Filings team is ready to help you launch your nonprofit. Contact us today!