A step by step guide on starting a non-profit
January 19, 2024
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PART 1: HOW TO START A NONPROFIT
Let’s breakdown the process of setting up a nonprofit and obtaining tax-exempt status into manageable steps. Keep in mind that there are many different types of nonprofits and tax-exempt organizations, various exemption options within states, and always future and ongoing compliance requirements with the Internal Revenue Service (“IRS”) and states. This is not intended to cover every type of organization’s life cycle or rules and filing requirements, but the general guidelines will undoubtedly prepare you and help guide your decisions. Most importantly, while having tax-exempt status may mean no federal income tax1 – keep in mind the organization will generally still have other tax type obligations (e.g. employment tax, property tax, etc.). Throughout the life cycle of the organization, we recommend as a best practice having nonprofit focused tax advisors, like Rubino, as well as nonprofit focused legal advisors in your corner.
Before You Start
First things first – this is not to dissuade you at the onset, but you should first understand that while nonprofit organizations are necessary to our communities and deeply rewarding to those involved, they are also very challenging and not without costs, considerable planning, and continuous learning. Federal and state laws can change, so you should always be abreast of the rules and have good advisors, like Rubino, alerting you to changes that could have an impact on you and your organization.
“Ask yourself whether you are filling a need in your community that is not being addressed by another organization. Every organization has overhead—rent, salaries, insurance, accountant fees—that must be paid. If your organization’s goals overlap with those of an existing organization, you will be expending resources on overhead costs that duplicate those of the existing organization—resources that may be more efficiently spent on providing more services. Will your organization provide enough additional services to people in need to justify the additional overhead? If not, consider volunteering for the existing organization. You should also consider whether you will be able to recruit people to serve on the organization’s board of directors and how whether your organization will be able to raise sufficient funds to carry out its mission.”2
Here are some basic overall tips before you get started:
Need Help with Your Non-Profit?
The first step to establishing a nonprofit is to create an organization under state law. Most of the nonprofits we work with are generally formed as nonprofit corporations. While a typical corporation (i.e. C-Corporation) has some advantages by forming in states such as Delaware it’s not necessary that you set up a nonprofit in that state. We see most of our clients setting up where they are located. Filings and future obligations vary state by state so make sure you understand ahead of time what will be expected once your organization is created. Being tied to more than one state through formation and physical location could unnecessarily increase the amount of state filing requirements with no real benefit.
- Depending on the type of organization there will be required language in your articles that you must adhere to and activities you might be prohibited from engaging in
- These are easily obtainable online same day; just be very sure to complete the request accurately with proper entity type, year-end, main contact, and other particulars required
Applying For Exemption
- Beyond the legal name, address, year-end, etc. be prepared to answer several detailed questions about the organization’s structure, intended activities, policies, board of directors, compensation arrangements, financial data by year or future annual projections, etc. There will also be a requirement for attachments including but not limited to formation documents (e.g. articles, bylaws, etc.).
- In general, exempt organizations must make their applications for exemption available for public inspection and must provide copies of such applications to individuals who request them. Copies usually must be provided immediately in the case of in-person requests, and within 30 days in the case of written requests. The tax-exempt organization may charge a reasonable copying fee plus actual postage, if any.
- Once you obtain a federal tax exemption determination letter (this could be a months long wait) you should apply for status to be recognized at the state level (forms and processes vary by state)
- Most states are starting to require (or at minimum encouraging) the filing of state forms through online portals with account setup
- If you are found to be tax-exempt and described under certain code sections, you can oftentimes apply for other tax exemptions (e.g. sales and use tax3 and personal property tax)
Stay tuned for >Part 2: How to Maintain Tax Exempt Status, where we will cover keeping your organization’s tax-exempt status, ongoing compliance, and significant events to be aware of during the organization’s life cycle.
- Tax-exempt organizations could be required to pay federal income tax on business operations; they could also lose their exempt status if more than a significant portion of their activities are primarily engaged in business operations. Even if the tax-exempt organization donates all its funds to a charity. The key here in taxation is how the revenue was earned.
- Excerpt from DC Bar Pro Bono Program – Starting a Nonprofit in DC: A Guide dated July 2013
- Keep in mind that charitable organizations can be found by a state to be exempt from paying Sales and Use but that does not imply they are exempt from collecting sales and use tax on sales made.