Are you considering starting a Pennsylvania nonprofit organization? If so, you need to know both the federal and state procedures regarding how to start a nonprofit in PA. It is a lengthy and complicated process to form a nonprofit to secure federal and state tax-exempt status. To increase the chance of success, it is advisable to consult with an attorney and an accountant with expertise in nonprofits.
Before beginning the filing process, you should:
- Read the Internal Revenue Service (IRS) publication, Tax-Exempt Status for Your Organization (Pub. 557).
- Read the Pennsylvania Department of State's A Guide to Business Registration in Pennsylvania.
- Determine the name your organization will use, and make sure it is available and doesn't infringe on any trademark.
- Develop a clear purpose for your organization that meets the requirements for a nonprofit.
- Create corporate bylaws that will support your tax-exempt status.
- Select your board of directors.
Nonprofit Organization Structures
Two considerations in structuring a nonprofit are limiting liability for the organizers and avoiding taxes. A Pennsylvania nonprofit may be organized in one of the following manners, all of which offer limited liability protection for organizers:
Unincorporated nonprofit association. This type of nonprofit entity is governed by the Pennsylvania Uniform Unincorporated Nonprofit Association Law, Title 15 Pennsylvania Consolidated Statutes Annotated, Part IV, Chapter 91. An unincorporated nonprofit association requires at least two members. There is no state requirement for any formation documents, or for state registration. However, if you seek a state sales tax exemption, it will be necessary to create bylaws prohibiting surplus funds from going to any person in the event of dissolution (see the section on state tax exemptions below).
Domestic nonprofit corporation. This type of nonprofit is governed by the Pennsylvania Nonprofit Corporation Law of 1988, Title 15 Pennsylvania Consolidated Statutes Annotated, Part II, Subpart C. This structure provides both limited liability for organizers and the greatest likelihood of obtaining both state and federal tax exemptions. Unlike the unincorporated association, a nonprofit corporation may be formed by only one person. You may reserve the name of your corporation for 120 days by filing a Name Reservation/Transfer of Registration (Form DSCB:15-208) with the Pennsylvania Department of State, Bureau of Corporations and Charitable Organizations.
Nonprofit LLC. A Pennsylvania limited liability company (LLC) may be formed for any lawful purpose, including a nonprofit purpose. However, there is no specific entity called a Pennsylvania nonprofit LLC. While an LLC with a nonprofit purpose provides the organizers with limited liability, it poses significant problems in obtaining federal tax-exempt status. The position of the IRS is that an LLC may only be granted tax-exempt status if all of the members of the LLC are exempt organizations.
Applying for a Federal Employer Identification Number
Regardless of whether your nonprofit will have employees, you will need to obtain an employer identification number. This will be needed for both state and federal filings. This is done by filing an Application for Employer Identification Number (Form SS-4) with the IRS. This may be done online, by fax, or by mail.
Filing Articles of Incorporation
Pennsylvania law requires a new corporation to publish a notice of its creation in two general circulation newspapers. If possible, one should be a legal journal, which is a newspaper that specializes in legal notices and is often much cheaper than a major public newspaper. The notice must contain the name of the corporation and a statement that it is being created pursuant to the Pennsylvania Nonprofit Corporation Law of 1988.
Applying for Federal Tax-Exempt Status
To avoid federal taxes, you will need to apply to the IRS for an exemption under Section 501(c) of the Internal Revenue Code. This is done by filing an Application for Recognition of Exemption (Form 1023) with the IRS, and paying a $600 "user fee." It can take several months for the IRS to process the application. The IRS says it will take several hours to learn how to complete Form 1023, and several more hours to complete it.
If your nonprofit meets certain requirements, you can use Form 1023-EZ, and pay a user fee of only $275. However, Form 1023-EZ may only be filed online, after you set up an online account with pay.gov.
Applying for Pennsylvania Tax-Exempt Status
To request a sales tax exemption, you will need to file an Application for Sales Tax Exemption (Form REV-72) with the Pennsylvania Department of Revenue. This form includes detailed instructions, including provisions that must be in the nonprofit's formation documents and what documents must be submitted with the application.
Pennsylvania Charitable Solicitation Registration
The Pennsylvania Solicitation of Funds for Charitable Purposes Act requires nonprofits that solicit charitable contributions to register with the Bureau of Corporations and Charitable Organizations. This is done by filing a Charitable Organization Registration Statement (Form BCO-10), and submitting certain documentation. There also are certain exemptions from registration.
Part of how to start a nonprofit in PA is knowing what is required—both at the federal and state levels—to help ensure that your organization succeeds. Give your good works a solid foundation by doing the research you need to do up front, to be sure that you are putting in place the right structures and protections.