Wait… What did we just get ourselves into?

Most nonprofit organizations begin when someone imagines a solution to an unmet need in our community. The process for forming an nonprofit organization can be confusing, and a good attorney can help substantially. For most of my organizational clients, the process to prepare to file a request for tax-exempt status takes at least 6 months — but only if the application is correct the first time. If you want to become tax-exempt, it is important to keep that goal front and center as you take the first steps.

First Step

The first thing to do is make sure that the mission or purpose of your organization is a qualified exempt purpose. The exempt purposes set forth in section 501(c)(3) are charitable, religious, educational, scientific, literary, testing for public safety, fostering national or international amateur sports competition, and preventing cruelty to children or animals. These categories are considered broadly; for example, most nonprofit musical groups fall under the “educational” exempt purpose, while food banks have a “charitable” purpose.

Next, file to incorporate with the Secretary of State. To do this, you will need articles of incorporation (that specifically state your exempt purpose), by-laws, and founding board members. If you later change your purpose, you will need to amend your articles with the Secretary of State — which is why it’s so important to keep your exempt purpose in front of you while you go through this process.

Three other required clauses for your articles of incorporation are:

What happens to your assets should the nonprofit be dissolved (hint: they go to other nonprofit organizations);
Nondiscrimination clause: the organization does not discriminate on the basis of race, national origin, sex, gender, ethnicity, or any other protected class status; and
Conflict of interest: that no director or officer should privately benefit from the business of the nonprofit organization.

The Secretary of State will mail you a certificate of formation, along with a letter that includes your Uniform Business Identification (UBI) number. With your UBI, you can request an Employer Identification Number (EIN) from the IRS. These two numbers can be used to open business bank accounts, which is very important. You never want to mingle your monies with the monies of your organization (the IRS might decide all of the donations are your personal income — eek!). You can also use these numbers to hire employees, but you should have an EIN even if you do not intend to hire anyone in the foreseeable future. You cannot apply for 501(c)(3) status without an EIN.

You are now ready to submit Form 1023 to request tax-exempt status. In the next post, I’ll discuss the items you need line by line.