Whether you're just starting to think about forming a nonprofit or you've informally been doing this kind of work for a while, it's a good idea to understand how to form a 501(c)3 organization and how it might further your goals.
There are many benefits to officially forming a nonprofit organization. Once you gain official 501(c)3 status, you can apply for grants, become tax-exempt, and protect yourself from liability. Formally becoming a 501(c)3 also elevates your position in others' eyes and may make it easier for you to receive donations to help your cause.
What Is a Nonprofit?
A nonprofit organization is one whose purpose is not to earn a profit but instead to do charitable work or public service. A tax-exempt organization is officially recognized by the Internal Revenue Service (IRS) as exempt from paying federal income tax.
A 501(c)3 organization is a type of nonprofit that meets specific provisions in the Internal Revenue Code. A charity or nonprofit need not be a 501(c)3 organization. However, if your organization does not qualify for other tax-exempt statuses, you are considered a for-profit entity and subject to federal income tax.
Who Can Apply?
To form a 501(c)3 organization, you must fall under one of the exempt purposes listed in the Internal Revenue Code. Qualifying purposes include:
- Testing for public safety
- Fostering national or international amateur sports competitions
- Preventing cruelty to children or animals
Other types of organizations can qualify for tax-exempt status under different sections of the law (such as section 501(c)4), including civic leagues, agricultural organizations, chambers of commerce, and fraternal societies. A complete list of qualifying organizations can be found in the Internal Revenue Code, Section 501(c). Action organizations that seek to influence legislation do not qualify and neither do organizations with income that benefits private individuals.
How Can I Apply?
- Search your state's secretary of state database to be sure the name of your organization is available.
- Complete your state's corporation registration process, which includes articles of incorporation, indicating that your entity will be a 501(c)3.
- Apply for an employee identification number (EIN) from the IRS, which functions as your organization's tax number, similar to a Social Security number for an individual.
- File an IRS Form 1023, Application for Recognition of Exemption under Section 501(c)3 of the Internal Revenue Code, or Form 1023EZ, the streamlined version. Use the EZ form if your organization has less than $50,000 in gross receipts and less than $200,000 in assets. You have 15 months from the date you formed your organization to file this document, but extensions are available. The form is lengthy, detailed, and complex, so you may need professional assistance to complete it.
- Request a state tax exemption by submitting your IRS letter of tax-exempt status to the appropriate state entity, if your state requires this.
- Request state charitable solicitation status, which most states require if you will be seeking donations.
- Write your corporation's bylaws—the rules it will follow as it does business, convenes meetings, votes, and holds elections.
- Appoint a board of directors to assist you in running the nonprofit.
Costs of Filing for a 501(c)3
Although you are starting an organization that's purpose is not to make a profit, some costs are associated with legally obtaining nonprofit status. Here are costs you need to consider:
- State incorporation fee. Each state has its own fee schedule for filing incorporation papers and obtaining copies of your registration, ranging from $50 to over $100.
- IRS fee. You will need to pay $600 to file Form 1023 or $125 to file Form 1023EZ.
- Annual report. Your organization will need to file an annual report with your state, and fees will vary, usually between $100 and $200.
Forming a 501(c)3 organization requires careful planning and attention to detail, but checking all the boxes will allow you to start on the right foot and meet your goals.