A 501(c) NONPROFIT ORGANIZATION
Simple Steps To Create Your Nonprofit
Awesome. You’ve decided to form a nonprofit organization. We can help!
Step 1: Choose a Legal Structure
The first step is to determine whether the organization is ultimately a not-for-profit.
- Primary purpose: Your primary purpose of the organization will align with a traditional 501(c) exemption – such as a charitable, religious, or educational purposes.
- Unrelated Business Income (UBI): 501(c)s are limited to conducting the exempt purpose stated in their formation documents. In practice, 501(c)s may collect unrelated business income and are required to pay taxes on this portion. If you start collecting too much UBI, you are at risk of losing your 501(c) status and owing back-taxes. The IRS decides this by conducting an “operational test” to consider if the nonprofit is being run in line with its exempt mission.
- Private Funding: Your Nonprofit 501(c) will primarily obtain funding from donations, grants, membership dues, and other tax-exempt income sources. Unlike For-profits, you may not attract shareholder-like investors or obtain SBA-backed loans. Nonprofits never disburse profits to owners and investors; they are prohibited from private inurement.
- Control of the organization: The founder of a non-profit should expect community-based decision-making by the board of directors. Control in for-profit corporations is clearly in the hands of shareholders who vote their shares. A founder can keep control by holding 51% or more of outstanding shares.
- Personal payout: A non-profit permits a “reasonable” salary. You can never “sell” a nonprofit for a pay-out.
Step 2: Filling Out the Paperwork
STATE:
File an application packet for a non-profit organization with your Secretary of State. A non-profit charity is considered a corporation, so application paperwork should be directed to the corporations division within the Secretary of State’s office. There is usually a small fee associated with filing. The packet will include the articles of incorporation that you filled out earlier.
Do not apply for an EIN until your organization is legally formed. Applying for an EIN signals to IRS computer systems that an organization has been created, and, therefore, triggers filing requirements.
FEDERAL:
Get a Federal Employer Identification Number (EIN). This is the number the IRS will use to identify your organization for tax purposes. You’ll enter the EIN on just about every form you fill out, including IRS paperwork and grant submissions.
You can call the IRS at (800) 829-4933 or apply online to get an EIN assigned immediately, or you can apply by mail or fax. For this you will need IRS Form SS-4.
Step 3: Get Your IRS Approval for Tax Exempt Status
The IRS code allows you to operate as a nonprofit, tax-exempt organization. We recommend having a lawyer and accountant with nonprofit experience advise you on the proper steps to register and operate within government rules.
There are 27 different types of tax-exempt organizations under section 501(c) of the Internal Revenue Code.
1. 501(c)(1) – Corporations organized under the Act of Congress
2. 501(c)(2) – Title-holding companies for exempt organizations
3. 501(c)(3) – Religious, educational, charitable, scientific, literary, testing for public safety, to foster national or international amateur sports competition or prevention of cruelty to children or animals organizations
4. 501(c)(4) – Civic leagues, social welfare organizations, and local associations ofemployees
5. 501(c)(5) – Labor, agricultural and horticultural organizations
6. 501(c)(6) – Business leagues, chambers of commerce, real estate boards, etc.
7. 501(c)(7) – Social and recreational clubs
8. 501(c)(8) – Fraternal beneficiary societies and associations
9. 501(c)(9) – Voluntary employee beneficiary associations
10. 501(c)(10) – Domestic fraternal societies and associations
11. 501(c)(11) – Teacher’s retirement fund associations
12. 501(c)(12) – Benevolent life insurance associations, mutual ditch or irrigation companies, mutual or cooperative telephone companies, etc.
13. 501(c)(13) – Cemetery companies
14. 501(c)(14) – State-chartered credit unions, federal credit unions, and mutual reserve funds
15. 501(c)(15) – Mutual insurance companies or associations
16. 501(c)(16) – Cooperative organizations to finance crop operations
17. 501(c)(17) – Supplemental unemployment benefit trusts
18. 501(c)(18) – Employee funded pension trusts
19. 501(c)(19) – Post or organization of past or present members of the Armed Forces
20. 501(c)(20) – Group legal services organizations
21. 501(c)(21) – Black lung benefit trusts
22. 501(c)(22) – Withdrawal liability payment fund
23. 501(c)(23) – Veterans organizations
24. 501(c)(24) – Section 501(c)(3) Black Lung Benefit Trusts
25. 501(c)(25) – Title-holding corporations for exempt organizations
26. 501(c)(26) – State-sponsored organization providing health coverage for high-risk individuals
27. 501(c)(27) – State-Sponsored Workers’ Compensation Reinsurance Organizations
Remember that each type has specific requirements and qualifications that must be met to maintain tax-exempt status.