When you hear the term “nonprofit,” you probably think of a charity or organization working towards a way to benefit the community, but they also benefit the economy. Nonprofits add millions of people with full-time positions to the American workforce and generate billions of dollars each year.
Nonprofit organizations are also one of the most popular business structures, too. 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!
If you think a nonprofit is the right structure for your new business, keep reading. In this blog, we compiled the 8 essential steps for forming a nonprofit organization.
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 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:
You can find a complete list of company suffix requirements by state here.
You will also need to make sure that your preferred company name is available 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.
You can see more tips for naming your business in our comprehensive guide here.
Step 3: Create bylaws for your organization
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 a few basic rules, including:
- When board meetings are held
- Voting procedure
- How to handle conflict
- Who serves on the board
- How to create or end committees
- How to change or amend bylaws
We can help you create custom bylaws tailored just for you. Learn more about our bylaw creation services here.
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: Appoint and organize your leaders
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 tends 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
See our blog on incorporating your business to find more information on how to file the Articles of Incorporation.
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 501(c)(3) status, tax-exempt organizations have to file Form 990 with the IRS each year to maintain exempt status.
Step 8: Obtain the required licenses and 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.
Obtaining business licenses and permits can be a daunting task to undertake on your own. Let our team of experts find and apply for all of the permits your business may need. Learn more here.
Let us help you form your nonprofit organization!
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!