Nonprofit Organization: How to Start and Get Tax-Exempt Status
Starting a nonprofit can be a way to organize a mission around charitable, educational, religious, scientific, or community-focused work. But creating the organization is only the first step.
A nonprofit is formed under state law, while federal tax-exempt status is governed by the IRS. Forming a nonprofit does not automatically make the organization exempt from federal income tax.
If you are planning to start a nonprofit, you need to understand the formation process, organizational rules, tax requirements, and ongoing filings.
What Is a Nonprofit Organization?
If you are wondering what is a nonprofit organization, it is an organization created to serve a public benefit or a specific group rather than distribute profits to owners. Nonprofits can support many purposes, including education, charitable work, religious activities, scientific research, arts, and community programs. The exact requirements depend on the type of nonprofit and the state where it is formed.
A nonprofit corporation does not have owners who receive business profits like shareholders in a typical for-profit corporation. Its funds are used to support its approved mission and activities. Nonprofit status and tax-exempt status are also different. A nonprofit may need to apply to the IRS for federal tax exemption after forming the organization at the state level.
How to Start a Nonprofit
Learning how to start a nonprofit involves both state formation and federal requirements.
The process can vary by state, but the main steps often include choosing a name, preparing formation documents, appointing a registered agent, creating bylaws, getting an EIN, and applying for federal tax-exempt status when eligible.
Here are the main steps to consider.
STEP 1
Choose a Name for Your Nonprofit
Learning how to start a nonprofit involves both state formation and federal requirements.
The process can vary by state, but the main steps often include choosing a name, preparing formation documents, appointing a registered agent, creating bylaws, getting an EIN, and applying for federal tax-exempt status when eligible.
Here are the main steps to consider.
STEP 2
Appoint a Registered Agent
A nonprofit corporation generally needs a registered agent in the state where it is formed.
The registered agent receives official documents and legal notices for the organization. Keeping this information current is also part of maintaining the nonprofit’s state records.
If the nonprofit operates in additional states, those states may have their own registration and agent requirements.
STEP 3
File Nonprofit Articles of Incorporation
The next step is to officially create the nonprofit under state law.
This usually means filing Articles of Incorporation or a similar formation document with the appropriate state agency. Requirements vary by state, but formation documents commonly include the organization’s name, purpose, registered agent, address, and incorporator information.
If you plan to apply for 501(c)(3) status, your organizing document should include the provisions required by the IRS.
STEP 4
Create Nonprofit Bylaws
Bylaws explain how the nonprofit will operate.
They can cover board responsibilities, meetings, voting procedures, officer duties, recordkeeping, and other internal rules.
Good bylaws help establish clear procedures for making decisions and managing the organization.
STEP 5
Appoint Directors and Officers
Nonprofits generally use a board of directors to oversee the organization.
The board may help set policies, oversee finances, approve major decisions, and keep the organization focused on its stated purpose.
State rules can vary regarding directors, officers, meetings, and governance requirements, so check the rules that apply to your nonprofit.
STEP 6
Get an EIN
A nonprofit corporation generally needs an Employer Identification Number, or EIN, from the IRS.
The EIN identifies the organization for federal tax purposes and can be needed for activities such as opening a bank account, hiring employees, and filing tax documents.
The IRS lists obtaining an EIN as one of the steps to complete before applying for federal tax-exempt status.
Get Help Forming Your Nonprofit
Nonprofit Tax Exempt Status
Nonprofit tax exempt status is not automatically granted when you form a nonprofit corporation.
Federal tax exemption is governed by the Internal Revenue Code. Organizations seeking 501(c)(3) status generally need to meet specific requirements related to their purpose, activities, organization, and use of earnings.
Many charitable organizations apply to the IRS for recognition under Section 501(c)(3).
Eligible organizations generally apply using Form 1023 or, when permitted, Form 1023-EZ.
The IRS reviews the organization’s documents and activities to determine whether it qualifies.
What Is 501(c)(3) Status?
Section 501(c)(3) covers organizations organized and operated for certain exempt purposes, including charitable, religious, educational, scientific, literary, and other qualifying purposes.
A 501(c)(3) organization must follow rules that limit private benefit and the use of organizational earnings.
There are also restrictions involving political campaign activity and certain lobbying activities.
Receiving 501(c)(3) recognition can provide important federal tax benefits and can also affect whether contributions to the organization are deductible by donors.
Are Donations Tax Deductible?
A common question is, are donations tax deductible?
Donations to a qualified organization may be deductible by the donor when the applicable federal requirements are met. The IRS states that contributions to qualifying 501(c)(3) organizations are generally eligible for charitable deduction treatment.
Not every nonprofit automatically qualifies to receive tax-deductible donations.
The organization’s tax status matters, and donors may need proper documentation to claim a deduction. There can also be limits and special rules depending on the type of contribution and the donor’s circumstances.
A nonprofit should clearly understand its status before representing contributions as tax deductible.
Applying for Federal Tax-Exempt Status
After forming the nonprofit and obtaining an EIN, an eligible organization can apply for federal tax-exempt status.
For organizations seeking 501(c)(3) recognition, the IRS generally requires Form 1023 or Form 1023-EZ when eligible. The application asks for information about the organization’s structure, activities, finances, and purpose.
Your formation documents also matter. If they do not contain the provisions required for 501(c)(3) status, you may need to amend them before applying.
Public Charity vs. Private Foundation
501(c)(3) organizations can generally fall into different categories, including public charities and private foundations.
A public charity typically receives support from a broader group of donors or from activities that qualify under IRS rules.
A private foundation is generally funded more narrowly and follows its own set of federal rules.
The right classification depends on how your organization is funded, operated, and structured
Nonprofit Compliance After Formation
Starting a nonprofit does not end when your formation documents are approved.
You may need to maintain state registrations, board records, financial records, licenses, charitable solicitation registrations, and federal filings.
Tax-exempt organizations also have ongoing IRS reporting responsibilities. The specific filing depends on the organization’s type, size, activities, and tax status.
Keeping accurate records from the beginning can make ongoing compliance easier.
Can a Nonprofit Make Money?
Yes. A nonprofit can generate revenue.
It may receive donations, grants, membership payments, program fees, and other forms of income that support its mission.
The important difference is what happens to the organization’s earnings. A nonprofit is not formed to distribute profits to private owners. Its funds generally need to support its exempt purpose and comply with applicable rules.
Certain income-producing activities can also create separate tax or reporting issues, so nonprofits should review their activities carefully.
Start Your Nonprofit With the Right Structure
Creating a nonprofit requires more than filing one document. You need to choose the right structure, prepare the required documents, establish governance rules, obtain an EIN, and determine whether federal tax-exempt recognition applies to your organization.
RegisterMyBizNow can help with nonprofit formation and other business filing services, so you can focus on building your organization’s mission.
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Frequently Asked Questions
What is a nonprofit organization?
A nonprofit organization is formed to serve a public benefit or a shared interest rather than distribute profits to private owners. Nonprofits can serve charitable, educational, religious, scientific, and other qualifying purposes.
How to start a nonprofit?
To start a nonprofit, you generally need to choose a name, appoint a registered agent, file nonprofit formation documents, create bylaws, establish governance, obtain an EIN, and apply for tax-exempt recognition if eligible.
Does forming a nonprofit make it tax exempt?
No. Forming a nonprofit under state law does not automatically provide federal tax-exempt status. Most organizations seeking federal exemption need to apply to the IRS for recognition.
Are donations to every nonprofit tax deductible?
No. Donations are not automatically deductible simply because an organization is called a nonprofit. Contributions generally need to be made to a qualified organization and meet IRS requirements.
What is nonprofit tax exempt status?
Nonprofit tax exempt status means an organization qualifies for an exemption from certain federal taxes under a specific section of the Internal Revenue Code. The requirements depend on the type of exemption being sought.
Does a nonprofit need an EIN?
A nonprofit corporation generally needs an EIN from the IRS. The EIN can be used for federal tax purposes and other activities such as banking and employment.
How does a nonprofit apply for 501(c)(3) status?
An eligible organization generally applies for recognition under Section 501(c)(3) by submitting Form 1023 or Form 1023-EZ when eligible.
Can a nonprofit receive donations before getting tax-exempt status?
The tax treatment of donations made while an exemption application is pending can depend on whether the organization is ultimately recognized as exempt and when the application is filed. Donors do not always have advance assurance that a contribution is deductible while an application is pending.
Does a nonprofit need bylaws?
Bylaws help establish the organization’s internal governance and procedures. They can define board duties, voting, meetings, and other operating rules.
Can a nonprofit have employees?
Yes. A nonprofit can hire employees and must generally follow applicable employment, payroll, and tax requirements.