Taking a nonprofit from a dream to a viable entity involves weeding through the state incorporation and federal tax exemption process. Would-be founders of a nonprofit often find this a daunting marathon rather than a quick sprint. Indeed, there are many steps to be followed (with the proverbial “i” dotting and “t” crossing) and a bit of IRS grace to make this a reality. (Or, if you are hoping to form a 501(c)(4) on the wrong side of the political fence, maybe “grace” isn’t the operative word.)
I would like to give an overview of nonprofit incorporation and 501(c)(3) tax exemption, which is the most common way that charities are formed and become tax exempt entities. There are two main stages to the process:
1) State incorporation as a nonprofit entity. At a state level, founders of a nonprofit will create a nonprofit corporation after obtaining consent where required from government agencies. There should be helpful information the Department of State (or Secretary of State) website in your state. In New York, for example, you can visit the following website: http://www.dos.ny.gov/corps/nfpfaq.asp. A corporation is formed as a not-for-profit entity in a single step, which means among other things that it has a public purpose and is not formed for the benefit and financial interest of private individuals. Nonprofit status, however, does not equate to tax exempt status. That is the second step.
2) Tax exemption at the federal level. At a federal level, the Board of an incorporated nonprofit will file a Form 1023 to apply for tax exempt status with the IRS. This is a complex form and takes much diligence, thought and time to complete. Often a lawyer’s assistance is helpful so that the nonprofit knows it is answering questions correctly and completely. Important items on the Form 1023 include the Statement of Activities and financial data.
For more information, enclosed is a short video on the incorporation and tax exemption process:
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