Founding Your Nonprofit: Incorporation and Tax Exemption

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.)

[Note: This post was written while I was a practicing attorney running a solo law practice. Since April 2015, I have been working with attorney, executive and entrepreneur clients as a career coach and writer, and I am not currently available for legal engagements.]

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.

None of the information posted on this site constitutes legal advice or forms an attorney-client relationship, and there may be facts not discussed here that are relevant to your situation. 

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ABOUT ANNE MARIE SEGAL Anne Marie Segal, founder of Segal Coaching LLC, is a career and leadership coach, author and resume writer who guides attorneys, executives and entrepreneurs through career transitions, advancement, job interview preparation, leadership development and personal branding. A former finance and hedge fund attorney, Anne Marie has presented to the United Nations (ICTY/MICT), University of Chicago, United Way, Association of Corporate Counsel and National Resume Writers Association, among other organizations. She has published two career-related books: Master the Interview: A Guide for Working Professionals and Know Yourself, Grow Your Career: The Value Proposition Workbook, has written on career and resume topics as a Forbes Coaches Council member at Forbes.com and been quoted on CNBC.com, Monster.com and other media outlets. You can learn more at annemariesegal.com or visit her LinkedIn profile at linkedin.com/in/annemariesegal.