Some believe that creating a nonprofit automatically means their organization is tax exempt. This is not true. There is more to being a tax-exempt organization.
To become a tax-exempt nonprofit, there are few things the group must do up front. An organization must determine whether it’s a trust, corporation or association. Before applying for tax-exempt status, your charitable organization should determine if it’s one of the following:
Trust
A trust is formed under state law. You should review the law in the state of your organization. For a trust to qualify as a 501(c)(3) tax-exempt organization, its organizing document must contain certain language. Publication 557 (PDF) contains suggested language.
Corporation
In general, a corporation is formed under state law by filing articles of incorporation. The state must generally date-stamp the articles before they’re effective. For a corporation to qualify as a 501(c)(3) organization, its charter or articles of incorporation must contain certain language. Publication 557 (PDF) contains suggested language.
Association
In general, an association is a group organized for a specific purpose. To qualify as a 501(a) of the Code, the association must have a written document showing its creation. This document could be articles of association. The organization must date the document, and at least two people must sign it.
The definition of an association can vary under state law. The organizations should consult the law of the state where it’s organized. For an association to qualify as a 501(c)(3) tax-exempt organization, its articles of association must contain certain language. Publication 557 (PDF) contains suggested language.
You then must apply for tax-exempt status with the IRS and be approved. Note: The IRS requires that Form 1023 applications for recognition of exemption be submitted electronically online at www.pay.gov. For more information, refer to the Form 1023 product page.
This process includes these steps.
1) Gather documents
An organization applying for tax-exempt status must have organizing documents.
These documents include:
> Articles of incorporation for a corporation
> Articles of organization for a limited liability company
> Articles of association or constitution for an association
> Trust agreement or declaration of trust
If the organization’s name is legally changed by an amendment to these documents, also attach a copy of that amendment to the application.
2) Determine state’s registration requirements
State government websites have useful information for tax-exempt organizations. On these sites, they can find tax info and registration requirements for charities.
3) Get an employer identification number for your new organization
Organizations can apply for an EIN online, by fax or by mail.
An organization must be legally formed before applying for an EIN. Nearly all organizations will see their tax-exempt status terminated if they fail to file a required tax return or notice for three years in a row.
4) Submit your tax-exempt application
Use Form 1023 to submit your tax-exempt application. Certain small organizations can use Form 1023-EZ to submit for tax-exempt status.
A nonprofit organization may be tax-exempt under section 501(c)(3) if its primary activities are charitable, religious, educational, scientific, literary, testing for public safety, fostering amateur sports competition, preventing cruelty to children, or preventing cruelty to animals. 501(c) organizations can receive unlimited contributions from individuals, corporations, and unions.
Often non-profit memberships are formed to conquer a problem and serve a special need in the community. How will be members be identified?
Members as donors: Members pay a fee to gain benefits and satisfaction of knowing they are helping to make an impact.
Members as consumers: This is more about community-building. Low fees will hopefully attract more people, who will benefit from your services, while building a strong network of supporters.
Members as advocates: Advocacy groups prioritize growing their cause more than they do fundraising. It relies on an exchange of benefits, where members offer skills/expertise and the organization provides a formal way for the members to use them.
Understanding the non-exempt status requirements in advance will help your organization avoid the penalties. Before you begin, understand that a nonprofit is a complicated way to act on your passion to serve your community or industry. The challenge of developing and maintaining reliable income streams should be planned for in advance.
It is possible your organization has operated with the principles and strategy of a non-profit and would benefit from applying for a tax-exempt status. If so, please contact us. We would be happy to help!
