Helping people start nonprofit organizations is one of the most important things we do at Foundation Group. In fact, we have helped over 14,000 organizations get started since 1995. The following is really more of an overview than an exhaustive examination.
Why Do You Want to Start a Nonprofit?
Before we get into the “how” of establishing a 501(c)(3) – or other nonprofit – let’s first look at the “why”. We get a lot of interesting answers when we ask prospective clients that question, ranging from totally clueless to totally clued-in. Most are somewhere in between. Whether it is an after-school tutoring program, a food bank or a church, the answer usually involves people wanting to provide a service or program to other people who need it.
What Types of Organizations Can Be a 501(c)(3)?
Not all ideas qualify for 501(c)(3) status. The IRS requires nonprofits to be organized for the following purposes to qualify: religious, educational, charitable (benevolence), scientific, literary, testing for public safety, fostering of national or international amateur sports, or prevention of cruelty to animals and children. Even if a proposed organization’s program matches one of the above categories, that alone is not enough. Neither the activities nor the assets of the organization can “inure” to the benefit of insiders. In other words, organizational leaders cannot unfairly direct the resources of the charity to their own benefit.
What Are the Technical Requirements?
This is the “how”. Starting a 501(c)(3) usually involves a two-step process: 1) incorporating a nonprofit organization and, 2) applying to the IRS for recognition of tax-exemption. While it is possible to skip the incorporation process, that is not advisable. Let’s look at these steps a little more closely:
1) Incorporation. Forming a corporation involves the creation a legal entity. While for-profit corporations are owned by their shareholders, nonprofit corporations do not have owners. Both types are typically governed by a board of directors. Corporations are created at the state-level by filing a formation document, usually called Articles of Incorporation.
2) IRS tax-exemption. Once the corporation is formed, obtaining 501(c)(3) status involves the preparation and filing of IRS Form 1023, an exhaustive document that can range from 20 to more than 100 pages of documentation. Going through the IRS 501(c)(3) process is best described as a cross between preparing a detailed business plan and enduring an IRS audit. It is not an easy process, nor one that should be entered into lightly. It takes most organizations between 6-12 months to be approved (assuming they qualify). And though it may sound self-serving to say so, this is not typically a do-it-yourself process. It’s best left to a professional.
We’ll explore the concept of fiscal sponsorships or fiscal agencies in an upcoming post, but let’s just say that you may wish to avoid them. These setups are frequently pushed by recruiters who get paid referral fees for signing people up and are typically not favored by the IRS. The theory is that you can establish a 501(c)(3) “project” under the fiscal sponsor that allows you to get all the benefit of a 501(c)(3), but shortcut the administrative headaches of setting up a real organization. The reality is not that simple. If you want to start a 501(c)(3) organization, consider starting a real one.
Are There Other Things That Must Be Done?
As we sometimes jokingly say, “There’s always something else.” Sales tax exemption, property tax exemption, and charitable solicitation permits are among the things that many organizations need to explore once they achieve 501(c)(3) status. From an ongoing compliance standpoint, the annual filing of IRS Form 990 is an inescapable reality.
A Final Word
If it sounds like there is a lot to starting a nonprofit, there is! But, nonprofits represent an indispensible element of our nation’s social fabric. There are things that nonprofits can accomplish that no company or government agency can come close to. And in this age of recession, layoffs and slashed social services budgets, nonprofits are needed now more than ever. It has been our distinct pleasure for the last 20 years to serve those who serve others. We look forward to doing so for many years to come.