This is a state-level process that establishes a nonprofit, corporate entity by the filing of Articles of Incorporation. The vast majority of nonprofits organize as corporations for a variety of reasons, including liability protection for the officers, directors and other key individuals.
Other parts of this initial process usually include obtaining a federal tax ID number (FEIN) from the IRS and the preparation of bylaws, the governance rules the board of directors must follow.
This next step is much more complex than incorporating. To obtain 501(c)(3) status, a nonprofit corporation must apply to the Internal Revenue Service for recognition of tax exemption by filing IRS Form 1023. Relatively speaking, forming the corporation is fairly straightforward (assuming that one completely understands the process). Applying for 501(c) (3) status, however, is another story altogether.
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 IRS examination. Instead of an audit of a tax return, the 501(c)(3) application process is more like an audit of proposed (and/or previous) activity. It is a thorough examination of the organization’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.
While obtaining 501(c)(3) status grants your new nonprofit federal tax exemption, there are several other, critical issues that must be addressed.
- Charitable Solicitations Registration – This is a required registration in 40 states and is usually administered through the Attorney General’s office, though not always. Most states require registration prior to soliciting donations.
- State Corporate Tax Exemption – Most states recognize the federal 501(c)(3) status as valid for state corporate tax exemption. California and Texas are big exceptions, requiring its own application and review process for charity status. Several other states require a separate application, but those are typically simpler registrations.
- State Sales Tax Exemption – Many states grant an exemption to charities that allows them to purchase items for use by the organization without having to pay sales tax. Applying for exemption usually requires a nonprofit to have already obtained 501(c)(3) status.
Nobody knows this process better than the experts at Foundation Group. Our consultants are career professionals who understand exactly what is required for your organization to succeed. We have assisted over 17,000 organizations since our inception in 1995 and have maintained a 100% IRS approval rate.
We are NOT a document prep service. We ARE consultants and IRS-licensed tax professionals. Our approach is to work with you, one- on-one, helping you properly structure your nonprofit, not only for IRS approval, but also for long-term success. And once you are approved, we provide ongoing, state and federal compliance services throughout the life of your nonprofit.
We don’t try to sell you with silly promises like “one week paperwork turn-around” or the “lowest price anywhere”. Neither have anything to do with moving your dreams toward reality. This is serious business…and we take it as seriously as you do. Our team deeply engages with you to guarantee that your 501(c)(3) will be properly structured, will be approved by the IRS, and that you will want to be one of our testimonials!
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Our nothing-left-to-chance package includes incorporation, 501(c)(3) status, state compliance, professional advice and council, and more.
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