08 Jul How to Register a Nonprofit
One of the common requests that we get as a firm is to help new nonprofits register on the state and federal level.
We believe that nonprofits operate like a business. A good nonprofit is hopefully turning a “profit.” The difference is that the goal is not to make a profit but to use the profit to provide a good or service to meet a social need or make a positive impact.
The nonprofit entity, however, still operates like a business. Its budget tends to be more restrictive with a smaller overhead.
People coming to see us say that they want to form a nonprofit. Forming a nonprofit involves three separate and distinct steps. Step one involves your registration as a corporation with your state, and steps 2 and 3 work with the IRS.
Step 1: Form the Legal Entity with your State
The first step is that you must form the legal entity. This is done on the state-level. Every state has a corporation’s office with a process to register a not-for-profit entity. Usually the state will say the nonprofit is a not-for-profit nonstock corporation. When we say “nonstock” that simply means that the organization will not issue stock certificates that prove ownership.
The corporate structure allows the organization to exist in perpetuity (meaning the registration does not legally expire). The registration forms and fees can range from $20 to several hundred dollars depending on the state.
When you register the nonprofit with the state you must disclose some basic information, for example: the name of the organization, address, and usually at least three of the initial board members that are launching the nonprofit. More board members can be named, but the President, Secretary, and Treasurer are typically required (again, it can vary depending on the state in which you are registering).
Step 2: Get an EIN with the IRS
Next, it’s time to turn to the IRS to get your EIN (Employer ID Number). Whether or not you will have employees, the EIN is a requirement for any nonprofit or business. Before your nonprofit can file for your 501c3 status, you must obtain your EIN. You can think of this as the Social Security Number for your nonprofit. Protect it well.
Step 3: File for 501c3 status with the IRS
Once you have the nonprofit established with the state, the next step is to turn to the IRS to get your 501c3 designation. This makes you a tax-exempt organization and allows you as an organization to solicit income from donors and grant makers, and not have that income be taxed.
There are two different forms that can be used for the 501c3 application: the short form (Form 1023 EZ) and the long form (Form 1023). You guessed it, the long form is more complicated and costs more. Depending on what circumstances your nonprofit is coming from, you will qualify for one or the other.
First, we need to figure out which version you will use. The default position of the IRS is to go through the long form. We work with our clients to see if they can qualify for the short form, which saves some time and energy going through the process. You can check out the eligibility form to see if you qualify.
Once your form is submitted, the IRS will go through their review process and will send you your tax-exempt letter. A simple but wise piece of advice: keep that tax-exempt letter in a safe place, and scan a digital copy ASAP. This is the document that, if necessary, you can show to donors and grant makers.
A nonprofit entity operates like a business, and it is possible that a nonprofit may have to pay taxes. Taxes come in the form of unrelated business income. Let’s say you are a nonprofit dedicated to helping homelessness. You receive grant money and public donations. That income is almost always marked as non-taxable income. But, let’s say you run a car wash and the car wash is owned by the nonprofit entity. That income is then being given back to the nonprofit. That would, for example, be classified as unrelated business income and subject to tax just as any other business.
It can get a little complicated, but from a federal point of view a nonprofit is a tax-exempt organization and from a state point of view it is a corporation. You must maintain your paperwork in both places in order to maintain your nonprofit status. If you fail to keep up your state reporting, that may cause you to lose your corporate status, which could then impact your tax-exempt designation. If you don’t file your income tax 990 forms with the IRS every year, you could lose your exempt status and may have to pay income tax. In that circumstance, your donors would lose their tax deduction as well.
It is important to understand that there is a registration with the state and a registration with the IRS. You must maintain both in order to keep your tax-exempt status.