Section 501(c)(3) Nonprofit Organizations - An Overview

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Usually when people use the term “nonprofit,” they are referring to nonprofits formed under Section 501(c)(3) of the Internal Revenue Code. These organizations—known as 501(c)(3) nonprofits--must be formed for charitable, educational, scientific, or religious purposes. There are 27 other types of nonprofits that can be formed under other subsections of 501(c) of the Internal Revenue Code. These other nonprofits are primarily social welfare organizations or membership organizations, such as volunteer fire departments, chambers of commerce, social and recreational clubs, and credit unions. What all these 501(c) organizations (both 501(c)(3) and other 501(c)s) have in common is that they are tax-exempt organizations. However, Section 501(c)(3) organizations enjoy additional tax benefits—and are subject to additional rules--that don’t apply to other 501(c) organizations.  One major tax advantage that 501(c)(3) organizations have is that all donations they receive are tax deductible for the donor. This is not true for other tax-exempt nonprofits and gives 501(c)(3) nonprofits a tremendous advantage when it comes to raising money.

Forming Your Nonprofit Corporation

The first step to obtaining tax-exempt status is to decide what type of entity you want to form. Most people choose a nonprofit corporation, which means you must check and comply with the laws of the state where you decide to incorporate. The rules for forming a nonprofit corporation are similar to those for forming a regular corporation, except that you must include a statement in your articles of incorporation that your corporation is formed for 501(c))(3) purposes (charitable, educational, scientific, religious, literary, testing for public safety, fostering amateur sports competition, or preventing cruelty to animals or children). There may be other language required for your articles depending on what state you are incorporating in. Most states’ corporate filing offices provide sample articles of incorporation with instructions for completing and filing these and other organizational documents. Check your secretary of state’s website for this information as well as filing fees, name availability and name reservation procedures, registered agent requirements, and other forms and information.

The Federal Exemption Application - Form 1023

The next step after forming your nonprofit corporation is to tackle the federal tax exemption application: IRS Form 1023. This is a complicated and lengthy form which asks for specific operational, organizational, and financial information related to IRS tax-exempt requirements. You can find a copy of the form online at the IRS website at www.irs.gov. The IRS website has a lot of useful information about the 1023 application and filing requirements which is worth reviewing before you get started. Completing the form will take time and energy, and you may decide you need professional help.

Obtaining Your State Tax Exemption

In addition to obtaining federal tax exemption, you will want to get your state tax exemption as well. Unlike the federal application, this is usually a fairly simple process. In some states, the state tax exemption is automatic once you obtain your federal 501(c)(3) status. In others, you must notify the state when you obtain your IRS federal exemption in order to obtain your state exemption. A few states require that you submit a separate state exemption application.

Bylaws and Other Corporate Formalities

You will also need to create bylaws for your nonprofit corporation. In addition to the normal meeting, voting, and other operational rules that all bylaws contain, nonprofit bylaws have provisions that restate the legal and tax requirements necessary for tax-exempt status. This is crucial both as a reminder for your organization about the rules you need to follow and as evidence to the IRS and the state that you are eligible for tax-exempt status. Finally, you need to elect directors and hold your initial meeting of the board of directors.

For help with forming your nonprofit corporation, including step-by-step instructions for completing the Form 1023 application, see How to Form a Nonprofit Corporation, by Anthony Mancuso (Nolo). 

 

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