How to Start a Non Profit A Step-by-Step Guide
Making a Difference the Right Way
Registering your nonprofit agency is essential to establish your organization’s legitimacy and comes with an additional benefit of tax exemption status under 501(c)(3). Today you will get a complete step-by-step to register your nonprofit!
Why should You always start a non-profit with 501(c)(3) Registration?
While you can operate informally as a nonprofit, official registration brings multiple advantages, including tax benefits. Here are the advantages and disadvantages of a 501(c)(3) Organization:
Advantages:
Tax Exemptions
Are exempt from federal income and unemployment taxes; saving expenses on taxes means additional sources for funding. Moreover, even the donors contributing to a 501(c)(3) organization claim tax deductions. 501(c)(3) is a win-win for the organization and its supporters.
Can Receive Gifts (donations)
Both from government and private sources. This is important because non-profit organizations are not state-registered and can not solicit funds. To qualify, they must demonstrate that their goals align with the grant’s purpose and require assistance. They may also enjoy discounts from retailers, free advertising through public service announcements, and aid from other nonprofits when needed.
Disadvantages
Loss of Ownership:
Once registered as a 501(c)(3), a nonprofit organization becomes an entity owned by the public, not its founder. This means the founder now has limited control over the organization.
Limited Operations:
Adhering to the ‘nonprofit operations’ as laid down by the law becomes necessary for 501(c)(3) organizations. In other words, any activity the nonprofit organization wants to participate in can only do if allowed by the law. For example, a nonprofit organization formed to provide medical assistance in underserved areas can’t participate in activities in non-health-related projects or can’t participate in health-related projects in well-served areas.
Transparency
Since a nonprofit organization stands to serve the public, it must be super transparent about the finances, especially about the salaries. And this information must be open to public scrutiny for anyone to review.
501(c)(3) organizations enjoy tax benefits and grant access but must operate transparently and follow specific rules. It’s a trade-off, but for those dedicated to positively impacting their communities, it can be a rewarding path to pursue.
8 Simple Steps to Register Your 501(c)(3) Nonprofit:
Step 1: Select a Name
Before forming a nonprofit, founders must choose a unique and concise name that reflects its primary purpose. Checking with the Secretary of State’s office and the U.S. Department of Commerce website is a good way to ensure the name is available and not already trademarked by another organization. Most states have online databases to search for registered business names. Note that Alabama requires reserving the name before filing nonprofit Articles of Incorporation.
Step 2: Form Your Board of Directors
Founders must form a Board of Directors before starting a nonprofit. At least three board members must not be related by blood or marriage. Some states may require directors’ names to be included in the incorporation documents.
Step 3: File Articles of Incorporation
When filing for a non-profit startup, founders must make their nonprofit official by filing Articles of Incorporation with the state. This document and a state filing fee are required in every state. Essential information such as the organization’s name, registered agent details, business address, statement of purpose, and the incorporator’s signature must be included.
Step 4: Write Bylaws
Bylaws are rules and guidelines that govern a nonprofit organization’s internal operations and management. And to register nonprofit organizations, founders must hold an organizational meeting and adopt nonprofit bylaws after filing Articles of Incorporation.
Bylaws include the organization’s functions, including officer and director duties, conflict of interest policy, meeting minutes procedures, and other essential matters. Adopting bylaws before opening a bank account or applying for tax-exempt status is necessary.
Incorporation is crucial in registering your 501(c)(3) nonprofit. Once these initial steps are complete, founders can obtain federal tax-exempt status. Founders must comply with all the rules and regulations for nonprofit agencies to thrive and positively impact their communities.
Step 5: Hold First Board Meeting:
A first board meeting is necessary to make articles of incorporation official, adopt bylaws, and elect officers. The first board meeting must take place before applying for tax-exempt status.
Remember to keep detailed minutes of the forum on file. It’s essential to conduct this meeting before applying for tax-exempt status.
Step 6: File for EIN
Nonprofit agencies must apply for an Employer Identification Number (EIN) for legal, operational, and tax matters. EIN is necessary for tax-exempt status, financial activity tracking, and business bank account opening. It can be applied by filling out Form SS-4 with the IRS, and this process can be completed online, by fax, or by mail, and it’s free of charge.
Step 7: File for Tax-Exempt Status
In other words, applying for 501(c)(3) status and the most significant benefit of it is tax-exempt status for nonprofit organizations, and even the donors can apply for tax breaks for giving to 501(c)(3) organizations. For the non-profit startup to obtain 501(c)(3) status, it needs to submit an Application for Recognition of Exemption (Form 1023 or 1023-EZ) to the IRS, also called a tax-exempt form. This application requires a fee and provides detailed information about the organization’s purpose, history, and finances. If eligible, you can use the shorter 1023-EZ as a tax-exempt form for a streamlined process.
Nonprofits must know that each state has its own rules and application process. So they must check for state-level tax exemptions, such as sales, property, and income tax. Sometimes state tax exemptions can be granted automatically once a nonprofit obtains 501(c)(3) status from IRS.
Step 8: Obtain Business Licenses & Permits
Profit or nonprofit organizations must have business licenses and permits to operate from state to state. Depending on the functions and activities of nonprofit organizations, they may need to obtain specific licenses and permits. This requires research, as requirements vary among states and municipalities. It is a good practice to check with the local Department of Consumer Affairs to understand the specific licensing and permitting obligations nonprofits must meet. Ensuring compliance will help nonprofit organizations operate smoothly and avoid any legal issues.
Launching & Promoting Your Nonprofit:
Your nonprofit is now official and tax-exempt. You can accept online donations through secure portals; accounting software will help you keep track of finances. Look into credit cards designed specifically for nonprofits; they may offer additional benefits.
What's Next for Nonprofit?
Officers must file for a nonprofit’s annual or bi-annual reports with the state entities to maintain a nonprofit organization’s good standing. Register nonprofit organizations legally to fundraise and stay compliant with tax returns. Hard work and diligence will be critical to a nonprofit’s success and its positive impact on those they serve.
Starting a nonprofit can be a journey with some complexities, but the rewards are truly invaluable. Following correct procedures and seeking expert guidance to ensure the nonprofit thrives. As a registered 501(c)(3) nonprofit, you’ll be well-positioned to create a lasting positive change in the lives of those in need.
And with Smart Charity’s years of experience registering charities, you can have your charity registered in half the time it typically requires.
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