How to establish a new 501c3 Organization

https://donorbox.org/nonprofit-blog/how-to-start-a-501c3

1. Define your tax-exempt purpose. This will be required on all paperwork

2. Decide on the type of 501c3 you want to establish. See IRS guidelines
3. Decide on a name
4. Form a board
5. Write your bylaws
6. File Paperwork: Prepare and file your incorporation paperwork

-Having chosen a name for your nonprofit and appointed a Board of Directors, completing and
filing your incorporation paperwork should be simple.

Within your incorporation paperwork, you will be officially declaring your organization’s name,
location, purpose, the initial Board of Directors, and more.

-You must file “articles of incorporation” with your state’s corporate filing office. Experts
recommend that you incorporate in the state where you will conduct your nonprofit’s programs
or services.

-If you want to incorporate into another state, you would need to register and apply for
separate tax exemptions in each state in which you conduct activities.

-Filings and fees will vary by state. Incorporating a nonprofit does not make it 501(c)(3) exempt.
The IRS requires you to include specific language in your articles of incorporation for those
intending to apply for federal tax-exempt status.

-After completing your paperwork, you will be ready to send them to your state filing office (in
most cases, this is your secretary of state.) The requirements will vary from state to state. Some
may want you to submit your articles electronically, others may ask for multiple copies sent via
mail, etc. After filing your articles, many states also require you to publish a notice of
incorporation with your local newspaper.
7. Obtain a Federal employer identification number EIN prior to applying for
your 501c3 tax exemption even if you don’t have employees
8. File for 501(c)(3) tax-exempt status

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-You apply for exempt status with the Internal Revenue Service (IRS) for recognition of tax
exemption by filing IRS Form 1023. To get the most out of your tax-exempt status, file your
Form 1023 within 27 months of the date you file your nonprofit articles of incorporation.

-Be aware, the user fee will be $275 or $600, depending on your application method. You must
register an account at pay.gov and pay a registration fee with a credit or debit card. It also can
take 3-12 months for the IRS to return its decision, depending on how many questions the IRS
has about your application. That’s why many experts advise starting with this process as soon
as possible.

-Form 1023 itself is up to 28 pages long. With the required attachments, schedules, and other
materials that may be necessary, it is not uncommon for these submissions to the IRS to be up
to 100 pages. Think of Form 1023 as an audit of proposed (and/or previous) activity and a
thorough examination of your nonprofit’s governing structure, purpose, and planned programs.
The IRS is looking to make sure that the organization is formed for exclusively 501(c)(3)
purposes and that its programs are designed to fulfill these stated purposes. In addition, the IRS
is looking closely for conflicts-of-interest and the potential for benefit to insiders, both possible
grounds for denial.
Step 9: Ensure ongoing compliance
-Once you’ve obtained the 501(c)(3) status, you do not need to file any kind of document to
renew the application. In other words, there is no expiration date on a 501(c)(3) organization.
However, there are other actions that need to be taken to maintain tax-exempt status.
Once the state approves everything, you should prepare for annual reporting requirements.

-In most cases, an exempt organization must file some version of Form 990 with the IRS,
depending on its financial activity. Form 990 shows your finances, activities, governance
processes, directors, and key staff, and it is open to public inspection.

-Keep adequate accounting records of income, expenses, assets, and liabilities. You also need to
keep appropriate records for employees, such as payroll records and payment of withholding
taxes, workers’ compensation, unemployment taxes, etc. If you hire any independent
contractors, you need to keep copies of any Miscellaneous Income (Form 1099-MISC)
documents that are provided to them.

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-States have their own reporting and renewal requirements too. Therefore, consider tracking
your organization’s finances and activities throughout the year. This will help the reporting
happen smoothly.

-Should you wish to change your name or address in the future, the IRS mandates that an
exempt organization must report the name, address, and structural and operational changes.
When an organization files an annual return (such as form 990 or 990-EZ), it must report the
changes on its return. If your organization needs to report a change of name, see Change of ---
Name- Exempt Organizations. If you need to report a change of address, see Change of Address
– Exempt Organizations. The EO Determinations Office can issue an affirmation letter showing
an organization’s new name and/or address and affirming the section of the Internal Revenue
Code.

What are the benefits of having a 501(c)(3)?

There are numerous perks of being tax-exempt under Section 501(c)(3).

1. Tax-exempt status: Exemption from federal and/or state corporate income taxes;
2. Deductibility of Donations: Your individual and corporate donors will be able to
deduct their donations from their personal and corporate taxes. Your organization
can acknowledge and thank its donors by providing tax deduction receipts for cash
and non-cash donations.
3. Limited Liability Protection: Nonprofit corporations provide their founders, officers,
and directors with protection against personal liability for the activities of the
nonprofit.
4. Possible exemption from state sales and property taxes (varies by state)
5. Exemption from Federal unemployment tax: Potentially higher thresholds before
incurring federal and/or state unemployment tax liabilities
6. Grant eligibility: Being eligible for grants on federal, state, and local levels. An
organization with 501(c)(3) status can also benefit from available private and
government grants.
7. Discount postage rates and special nonprofit mailing privileges.
8. Discounts on publicity: Free or discounted rates for announcements and press
releases from nonprofit organizations.
9. Online apps at discounted rates: As a registered nonprofit, you can qualify for
discounts on many online applications. Here’s a detailed list of online apps that
provides deep discounts to nonprofits.

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 10. Public legitimacy of IRS recognition: Being recognized by the IRS as a 501c3 will
make your organization more official and credible in the eyes of the public and other
entities.
11. Permanent existence: An organization with a 501(c)(3) status continues to exist even
after the death of its founder(s). The moment your organization achieves 501(c)(3)
status, it is permanent. You’ll never have to renew it.

Registering 501(c)(3) Nonprofit – FAQs

How much does it cost to be a 501c3?

That depends on which IRS form you use to file, and you have two options.

• IRS Form 1023-EZ. The user fee for Form 1023-EZ is $275.
• IRS Form 1023 – IRS Form 1023 is the traditional application method that many new
organizations must file with the IRS to obtain their 501c3 tax-exempt status. The user
fee for Form 1023 is $600.

The user fees must be paid through Pay.gov when the application is filed.

There is also the cost of hiring an experienced advisor or professional to prepare your 501c3
application Learn in detail about the cost of filing for 501c3 here.

2. How long does it take for a 501c3 to be approved?

Typically, IRS 501(c)(3) approval takes between 2 and 12 months, inclusive of likely written
follow-up questions. Sometimes it takes a little less; sometimes a little more.

Filers of Form 1023-EZ experience a shorter time frame due to the streamlined process of e-
filing.

One of the primary reasons for the long review period is the amount of time it takes for a
particular case to be assigned to a review agent. It can also depend on the time of year, the
type and classification of the nonprofit, and the complexity of the application itself.

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The expedited review can be requested if a new organization is being formed to provide
immediate disaster relief or if a promised grant is substantial relative to the organization’s
budget and the grant has a defined expiration date. However, there is no guarantee the IRS will
grant expedited review requests.

3. Can you be a nonprofit without 501c3?

There are informal nonprofits — those without formal recognition from the IRS — and it is
entirely permissible for them to remain that way. However, without official IRS 501(c)(3) tax-
exempt status, the group is not tax-exempt, and people giving it cannot deduct the amount
from their taxes.

Typically, very small nonprofits with annual gross receipts under $5,000, and churches and
integrated auxiliaries of churches and conventions or associations of churches operate without
501(c)(3) status. Donations to these organizations are tax-deductible even though the nonprofit
does not hold the tax-exempt status.

4. Do you have to be a 501c3 to get grants?

Grantmakers typically fund organizations that qualify for public charity status under Section
501(c)(3) of the Internal Revenue Code. There are few grants that are offered to organizations
without a 501c3 designation- but they are few. Nonprofits can apply for fiscal sponsorship, a
formal arrangement in which a 501(c)(3) public charity sponsors a project that may lack exempt
status. This enables the project to seek grants and solicit tax-deductible donations under your
sponsor’s exempt status.

5. Can I donate to my own 501c3?

Yes, you can donate to your own 501(c)(3) organization. You can make a tax-deductible
donation to any 501(c)(3) charity, regardless of your affiliation with it. It is not technically your
own charity as charitable organizations have no owners. However, money donated to charity
must be used for charitable purposes.

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You must make sure that the organization gives you a signed receipt for the donation. That
indicates what was donated, the value of the donation, and states that no goods or services
were received in exchange for the donation.

6. Does a 501c3 pay capital gains tax?

Organizations under Section 501(c)(3) of the IRC are generally exempt from most forms of
federal income tax, which includes income and capital gains tax on stock dividends and gains on
sales. As long as the 501(c)(3) corporation maintains its eligibility as a tax-exempt organization,
it will not have to pay tax on any profits.

7. Does a 501c3 pay property tax?

Properties owned by charitable nonprofits used for a tax-exempt purpose are exempt from
property taxes under state law. If the property or any portion of it is not used to promote the
nonprofit group’s mission, the group can be liable for property taxes. For instance, if the group
owns a property, but leases part of that property to a for-profit business. Then the group is
liable for property taxes on the leased portion of the property.

8. What are the 501c3 requirements for a board of directors?

The Board of Directors is the governing body of a 501C3 nonprofit, responsible for overseeing
the organization’s activities. The board is required to ensure that the organization is legally
compliant and is being run in the best possible way. In a 501c3 organization, the founders may
serve on the company’s board of directors. Certain states require a 501c3 organization to select
at least 3 people to serve on the organization’s board of directors. And, at least one director in
the organization is responsible for making strategic and financial decisions for the organization.

9. How to check 501c3 status?

You can check the IRS’s progress on applications on the IRS website. Once an agent is assigned
for your application, your application review process will begin. You can check the status of
your 501c3 application by contacting the IRS Exempt Organization Customer Account Services
at (877) 829-5500. You will need to provide tax identification and the mailing address of the
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organization. The IRS only provides information regarding the status of your 501(C)(3)
application to an identified officer of the organization.

10. Can 501c3 founders collect a salary?

As a 501c3 founder, you can pay yourself a reasonable compensation for your actual services in
the nonprofit. The IRS examines reasonableness on the basis of comparable salaries in other
comparable nonprofit organizations. You must be careful to pay yourself reasonable
compensation and in order to avoid any possible claim for excess taxes-benefits from being
paid “too much”. The salary should be within reasonable limits based on the number of hours
worked, the overall budget of the organization, the required level of education, and
compensation averages in your area.

11. Are 501c3 Organizations tax-exempt?

Yes, All 501c3 Organizations are exempted from federal and/or state corporate income taxes.
Although not all activities are tax exempt. Activities that are not related to a nonprofit’s core
mission or purpose are taxable. This can be any activity/business to support a nonprofit’s
income. Typically, these are categorized as unrelated business activities.

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