Learning how to register a new nonprofit small business in the United States is a lot like learning how to file taxes. After all, you're submitting a form to the Internal Revenue Service (IRS), which means you'll need to read an instruction sheet about as long as the application itself. The process isn't really complicated but is more time intensive than just filling out a form. That's because you need to spend some time setting up your corporation before you can ask the government to consider that corporation tax exempt.
Therefore, the first step to registering a nonprofit is to submit your articles of incorporation to your state government and become one of the three business structures eligible for tax-exempt status: a limited liability corporation, an S corporation or a C corporation. Compiling your articles of incorporation requires you to assemble a board of directors, create a statement of purpose and develop bylaws.
Next, you need to do a little research to discover which of the types of nonprofit is appropriate for your organization's purpose. The most recognizable and common classification is 501(c)(3), but numerous other specialized classifications exist, and each one has its own application form. Finally, once you've compiled all the appropriate paperwork, it can be submitted electronically along with a filing fee.
1. Research How to Register a Nonprofit
IRS Form 1023 is the appropriate tax form for corporations seeking tax-exempt status under the 501(c)(3) classification. If your nonprofit does not meet the requirements for a 501(c)(3) charitable organization but would meet the requirements of a 501(c)(4), for example, then you'll need to search the IRS website for the appropriate form. Note that the IRS has announced that it will now require Form 1023 to be submitted online through pay.gov. Paper applications have a 90-day grace period but will no longer be accepted after April 2020.
On pay.gov, you can enter "Form 1023" into the search bar to easily pull up the application. Two options exist: Form 1023 and Form 1023 EZ, which is a "streamlined" version of the main form. To understand if you're eligible to file Form 1023 EZ, you need to answer "no" on all 30 questions on the Form 1023 EZ eligibility worksheet, located within the Form 1023 EZ instructions. Filing Form 1023 EZ is not only more streamlined but also has a more affordable user fee, so it's worthwhile to check the eligibility worksheet.
Before you begin filling out either form, download a copy of the appropriate instructions to help guide you in interpreting each section and to ensure that you attach a copy of all the appropriate supplemental forms. You can view a preview of the form and even print a copy to help you draft responses but remember that you're required to submit it electronically. If you feel overwhelmed about this process, you can always obtain legal advice or grant a lawyer the power of attorney to complete the application on your behalf.
2. Assemble Your Board of Directors
By law, a nonprofit needs to have a board of directors for governance. You're required to list the initial board members on your articles of incorporation and on your nonprofit status paperwork. Ensure none of your board members has any conflicts of interest (Form 1023 will ask about this) and that your board has the legally required minimum of three directors. You'll also need to meet at least once a year by law.
As a board, you'll also need to create your bylaws, not only for practical purposes but also because a copy of the bylaws must be attached to the federal tax-exemption paperwork for federal income tax. While creating your bylaws, spend some time creating a mission statement or a statement of purpose so that you can describe it in both your articles of incorporation and Form 1023. You will also need to have a dissolution clause for Form 1023 that describes how the organization's assets will be distributed in the event that the nonprofit is dissolved.
3. Fill Out the Articles of Incorporation
The exact requirements for filing your articles of incorporation (sometimes called a certificate of incorporation or articles of organization) will vary from state to state. However, it's typically a simple document that includes the organization's name, the names and contact information of the founding board members, a statement of purpose, information about stock shares and the signature of the person filling out the paperwork. Contact your secretary of state for more information about filing your articles of incorporation.
4. Get an Employee Identification Number
You'll need to enter an ID number on Form 1023, but it cannot be a Social Security number. Instead, an employer identification number is required. If you don't already have an EIN, you'll need to fill out an application to receive one, which can be done online at the IRS website.
Fortunately, this step won't throw a wrench in your nonprofit application because you will receive your unique EIN immediately upon filling out the form.
5. Complete the Form and Create a PDF
With your EIN in hand, your articles of incorporation assembled and your bylaws created, you should have everything you need in order to complete Form 1023. After completing it online via pay.gov, you will be asked to submit a single PDF file that compiles all of your supplemental documentation in a specific order.
Check the instruction sheet for the exact order in which that information should appear. The instruction sheet will also mention two additional forms that you can fill out and include in the PDF, but these are generally filled out by lawyers completing the form to verify their power of attorney.
Pay attention to whether your organization may also need to fill out an additional schedule. For example, churches need to file Form 1023 Schedule A, and corporations applying for tax-exempt status more than 27 months after their original formation need to file Form 1023 Schedule E.
6. Pay Fees and Submit Your Application
The IRS collects filing fees for nonprofit applications, and it's wise to visit the IRS website for up-to-date fee information. Currently, the user fee for Form 1023 is $600, and the user fee for Form 1023 EZ is $275. These are nonrefundable fees, so triple check that you have all the appropriate documentation in place before submitting your application. You can use a credit or debit card to pay the user fee or have the payment come directly out of your bank account.
You can also pay an additional fee to expedite the application review, which may prove helpful if you're applying for a grant with a looming deadline and need to show proof of 501(c)(3) status.
6. Wait for Application Approval
It can take up to 180 days to hear back from the IRS about your tax-exemption status. If you haven't received a determination letter from the IRS approving your application and identifying your particular nonprofit classification after 180 days, you can call the customer service hotline. Be sure to have your EIN handy. The IRS may also contact you via mail or phone if it needs additional information in order to make a decision about your application.
Once you officially receive tax-exempt status, you'll need to know whether it applies to previous donations or income. If you submitted your application within 27 months of forming your corporation, your new tax-exempt status will retroactively apply from the date of incorporation. This means any donations made since that time are tax-deductible and that you will not owe taxes on funds received. If your application is submitted after 27 months of incorporation, the exemption status starts on the filing date, and you will owe taxes on income received before the filing date.
7. Submit a Protest if Not Approved
The IRS will also send you a letter if it does not approve your request for nonprofit status. You have a right to appeal the decision, and the letter should contain information about the process. Initially, you will be invited to submit a "protest" to the decision in which you supply additional information that may allow the IRS to change the determination. A protest must be submitted within 30 days of receiving the IRS's letter.
You can also request an "appeals conference". Once you've pursued all administrative channels and still feel that the IRS is incorrect in denying your corporation tax-exempt status, you can choose to take the matter to court.
8. Maintain Your Nonprofit Status
After you've successfully obtained nonprofit status, you need to maintain that status by adhering to certain laws. For example, even though you are now a tax-exempt organization, there are still annual tax-reporting requirements. You need to file Form 990 each year at tax time even though you will not have to pay any taxes. Failure to file Form 990 for three consecutive years will result in your nonprofit status automatically being revoked, and you'll need to refile (and repay) for a tax-exempt status all over again.
As a 501(c)(3), your nonprofit organization must also take care not to engage in too much political lobbying, or it may have its status revoked. If you foresee that a large portion of your nonprofit's activities will be dedicated to influencing legislation, then a different nonprofit classification may be appropriate. The IRS has information available to help organizations measure their lobbying activities in terms of expenditures and time in order to determine continuing eligibility.
Other Nonprofit Classifications Besides 501(c)(3)
Most charitable organizations have 501(c)(3) nonprofit status, which allows donors to deduct their donation on their taxes. Did you know that nonprofit statuses range from 501(c)(1) all the way to 501(c)(27)? For which one should you really apply? The application process varies depending on the type of nonprofit classification you're seeking for your corporation.
For example, the 501(c)(4) classification is reserved for social-welfare organizations, local employee associations and civic leagues. An organization wishing to obtain this classification will only need to pay a $50 user fee and submit a much easier form called the Notice of Intent to Operate Under Section 501(c)(4), or Form 8976. As the name implies, you don't need to receive permission from the IRS to operate as a 501(c)(4); instead, the IRS will send you an acknowledgement within 60 days.
IRS Form 1024 is the starting point for applying for recognition of exemption under 13 other nonprofit classifications, including 501(c)(7) for social clubs, 501(c)(13) for cemetery corporations and 501(c)(19) for veterans' associations. Additional schedules are required based on the specific classification and are indicated on Form 1024. Articles of incorporation and an EIN are also required for classifications found under Form 1024.
Who Doesn't Need to Apply for 501(c)(3) Status?
Some organizations do not need to apply for 501(c)(3) status at all. These include religious organizations (churches, temples, synagogues, mosques) and their auxiliaries, such as church associations. Organizations (except private foundations) that typically bring in no more than $5,000 per year also do not need to fill out Form 1023 to be tax exempt. However, you're welcome to submit an application anyway.
- UpCounsel: Types of Nonprofits: Everything You Need to Know
- Foundation Group: Setting Up Your Nonprofit Board of Directors
- IRS: EIN Assistant
- IRS: Electronic Filing of Form 1023
- Fundera: What Are Articles of Incorporation and How to File Them
- IRS: Automatic Revocation - How to Have Your Tax-Exempt Status Retroactively Reinstated
- IRS: Form 1024 - Application for Recognition of Exemption Under Section 501(a)
- IRS: How to Appeal an IRS Determination on Tax-Exempt Status
- IRS: Organizations Not Required to File Form 1023