Running a nonprofit organization can prove a rewarding experience, but not everyone who begins a nonprofit properly plans the organization. Sometimes nonprofit organizations are started without a well-thought out financial plan and end up sinking quickly because of poor financial management. It is important to plan ahead and to know how to set up a 501c3 before beginning the tax-exempt incorporation process with the state and federal government.
Develop a nonprofit strategic plan or business plan prior to starting your nonprofit organization to help guide your organization’s finances, so that you know what income and expenses to expect for the first three years. Outline all projected expenses by program and operating expenses, as well as sources of income, including potential amount of funding from each source.
Build a nonprofit board prior to applying for 501c3 status, since the IRS will likely require that you have documentation with a list of board members and their roles before you can receive nonprofit status. Make sure that each board member is aware of his legal responsibilities to keep the organization on track, secure funds and provide necessary expertise.
Create a fund-raising plan before you apply for nonprofit status. Develop your fund-raising goals to outline the specific amount that you need to raise, the purpose of funds and whether there will be a deficit in the budget. Create a time line for raising funds and how you will identify your funding sources, which may include grants, corporate sponsors and private donors.
Make sure that your organization qualifies as a charitable cause. Look up the Internal Revenue Service (IRS) classifications for nonprofits, which normally focus on charitable, educational, religious and similar organizations. Examples of qualifying organization are churches, parent teacher associations and social service organizations, to name a few.
Request an EIN or federal tax-identification number through the IRS online at IRS.gov to help you manage employees and your organization’s taxes. Figure out how many employees you will have, as well as how much you may spend on salaries and taxes.
Establish your 501c3 by filing your articles of incorporation and bylaws with the Secretary of State in the state in which you want to incorporate. Include all necessary filing fees based on the requirements created by the Secretary of State.
Send your nonprofit incorporation verification from the state, along with your full 501c3 tax-exempt application, articles of incorporation and bylaws to the IRS. Include a copy of your budget for the first one to three years, as well as information about the nonprofit's board of directors.
- Finding the right board members can prove a time-consuming process, so allow a few months for board interviews and final selection of candidates.
- The process with the Internal Revenue Service can take several months, and the IRS may request additional documentation in order to process your application.
- Make sure that you follow all regulations for nonprofit organizations. Nonprofits are heavily regulated to protect donors from fraud, which means that you need to raise funds properly and follow your by-laws and articles of incorporation in order to avoid audits or other legal ramifications.
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