Recently, you began collecting food, personal care items, and other essential supplies for individuals in your community who are struggling. With generous contributions from friends and neighbors, you’re now considering extending your initiative to nearby areas. Some donors have inquired about whether they can claim the value of their donations on their tax returns, and others have suggested that you formalize your effort by applying for nonprofit status. While charitable projects are wonderful, establishing an official nonprofit requires careful planning. Before you initiate your charity, review these important guidelines to ensure it starts off on the right foot.
Launching a nonprofit organization: Assessing local demand
Are there any similar organizations nearby? Is the demand for your services significant enough? Nancy Eberhardt, executive director of Pro Bono Partnership, which assists nonprofits with legal matters across the tri-state area, emphasizes that those starting nonprofits must evaluate the market just like any business. This ensures that there is a genuine community need for your intended services. If a similar charitable organization already provides the help you aim to deliver, donors may be less inclined to support your venture.
“A nonprofit operates similarly to any business,” explains Eberhardt. “Although its focus is on a mission instead of profit, it still has to manage expenses, raise funds, and follow regulations, much like other organizations.”
Next, gather the needed support
Once you’ve determined that your nonprofit addresses a charitable need, it’s crucial to have a strategic plan in place, along with a solid team and the necessary resources to support your mission. Begin your nonprofit journey with the following steps:
- Mission statement: Even if the purpose of your organization seems straightforward, it’s vital to articulate a clear mission statement. This statement should detail the services provided and identify the charitable group that will benefit from the funds raised.
- Board of directors: Your board of directors should not only resonate with the mission but also bring essential skills to the organization. Key roles include a president, secretary, and treasurer, each of whom should be prepared and capable of fulfilling their responsibilities, according to Eberhardt. Can the treasurer manage finances, ensuring someone is appointed to handle the annual tax filing? Can the secretary maintain accurate records and documentation?
- Projected budget: An anticipated budget is crucial for any startup organization. While you might be uncertain about how to attract donations initially, estimating your income over the next three years is vital for understanding which forms to utilize for tax-exempt applications.
Though compiling this information may seem daunting when launching a nonprofit, remember that nothing is set in stone. “You don’t need to have everything figured out from the start,” Eberhardt states, “but it’s crucial to have given it some thought and to have a few ideas in mind.”
Steps to officially establish your nonprofit
Once you’ve completed the preliminary steps, the next action is to formalize your nonprofit status. Follow the steps outlined below in the specified order.
1. Submit a certificate of incorporation to the state
The organization’s articles of incorporation generally include the entity’s name, primary address, charitable mission, and other essential details. Different states have various filing requirements. For instance, some may necessitate a minimum of three board members, while others may allow a single member. A charity may choose to incorporate in a state different from its operational location.
2. Request a federal employer identification number (EIN) from the IRS
The EIN, a nine-digit identifier assigned by the Internal Revenue Service (IRS), is required for an organization when completing various filings. Obtaining an EIN is a straightforward process that can be done through the IRS’s website. After filling out basic details, you will receive a PDF containing your new EIN. Store this document safely; it will be crucial for numerous future documents.
3. Seek tax-exempt status through the IRS
Many are aware of the term 501(c)(3) which pertains to a specific section of the tax code aimed at organizations with charitable objectives. However, there are actually 28 subsections within 501(c) designed for various types of community support. For instance, section 501(c)(4) covers social welfare groups, section 501(c)(7) pertains to social clubs, and section 501(c)(19) applies to veterans’ organizations. A comprehensive listing is accessible on the IRS website.
Form 1023 is necessary to apply for the 501(c)(3) designation. The filing fee is $600, and while the form is 28 pages long, many applicants can bypass certain sections.
Smaller nonprofits aiming for tax-exempt status (those generating under $50,000 annually) may use Form 1023-EZ, which has a filing cost of $275.
“Often, a new nonprofit is eager to start fundraising immediately or has a pending grant that hinges on its tax-exempt status,” remarks Tracy Snow, a partner at Lowenstein Sandler. “Founders should establish the organization promptly, even though the IRS review of the application can take several months. The encouraging aspect is that once you incorporate, your tax exemption can be retroactively applied back to the incorporation date as long as you submit your tax-exempt application within 27 months.”
4. Register for charitable solicitation (in your state and any others where you intend to ask for donations)
Typically, nonprofits need to register with the attorney general in the state of incorporation, as well as in every state where they solicit donations in person, by mail, email, or phone.
5. Obtain a sales and use tax exemption from your state
While 501(c)(3) organizations are exempt from income tax, they are still responsible for sales tax on purchases made for the nonprofit. It may be beneficial to also apply for a sales tax exemption form. Regulations differ by area, but typically, possessing a sales tax exemption allows registered nonprofits to buy supplies without paying sales tax.
Progressing with your nonprofit
Having established your nonprofit, what are the next steps for retaining this designation? First and foremost, the priority for any nonprofit is continuing to meet the needs of those they serve, alongside maintaining documentation and compliance.
Most states mandate nonprofits to submit an annual report. This report is fairly straightforward, requiring verification of the nonprofit’s address, registered agent, and a fee. Generally, you can file this annual report online, and it’s usually due at the end of your fiscal year. In New Jersey, for example, the annual report is required on the last day of the month marking the anniversary of your initial nonprofit filing.
Keep in mind your tax obligations
While nonprofits are exempt from income tax, they must complete Form 990, the Return of Organization Exempt from Tax. This form requires detailed documentation of the organization’s revenue and expenditures for the current and previous years, a current balance sheet, and the names and positions of all board members, including any paid salaries. It is due five and a half months post fiscal year-end, though an additional six-month extension can be requested.
Organizations earning less than $50,000 may opt to file Form 990 E-Z or Form 990-N, a brief electronic form often referred to as an “e-postcard.”
“The general public has the right to access these documents,” states Snow. “Filing the 990 isn’t solely for maintaining IRS tax-exempt status; charitable funds are essentially public resources because 501(c)(3) entities enjoy considerable tax advantages. Therefore, these organizations must remain accountable and transparent to the public. Any member of the public can easily find a charity’s Form 990 online if they wish to familiarize themselves with its operations.”
If a nonprofit fails to submit a 990 for three consecutive years, it risks automatic revocation of its tax-exempt status. By ensuring thorough documentation of all paperwork, new board members will readily grasp the processes, allowing for smooth continuation of the organization’s objectives. This approach allows all stakeholders to devote as much time as possible to fulfilling the primary mission.
