Organizations benefit from forming 501(c)(3) nonprofits because they can lawfully ask for tax-exempt donations from donors. selecting a name for your nonprofit, writing your purpose statement and bylaws, hiring and assembling a board of directors, submitting your articles of incorporation, applying for federal tax-exempt status as a 501(c)(3), and requesting state recognition of tax exemption are all steps involved in starting a 501(c)(3). In this post, we shall be bringing to you how to start a 501c3 nonprofit company, its application, and its organizations.
501C3 NONPROFIT
An organization that has applied for IRS certification as a tax-exempt organization and received approval is known as a 501(c)(3) nonprofit. The 501(c)(3) designation of nonprofits is useful to entice grants, donations, and other forms of funding. The ability of contributors to claim contributions as a tax deduction thanks to nonprofit status aids groups in raising funds.
Benefits of a 501c3 Nonprofit
A 501(c)(3) organization offers liability protection, federal and state tax exemption, discounts, and the ability to legally solicit donations from citizens of the state. Here’s a closer look at what these benefits entail for your business:
- Liability defense. Board members of nonprofit organizations are shielded from personal liability by an indemnification clause in the 501(c)(3) organization’s articles of incorporation when it comes to ideas like organizational debt.
- Free from both federal and state taxes. Money donors to the charity could be eligible to write off their contributions on their tax returns. The organization itself is also not subject to federal or state taxes.
- Contribution solicitation. You are in allowance to lawfully request donations from individuals, businesses, and foundations even without your 501(c)(3) designation.
- More choices for financing. Your group is eligible to apply for funds from foundations and the government as a 501(c)(3).
- The greater attraction of donors. Donors are more inclined to believe in and support your nonprofit because it is subject to government examination to confirm its authenticity and purpose.
Disadvantages of a 501c3 Nonprofit
The drawbacks of starting a 501(c)(3) organization include the time and costs required, the lack of personal control over the organization’s direction, IRS financial audits, a ton of paperwork during startup (and annually thereafter), and rules and limitations on the types of work the nonprofit can engage in. Here are these drawbacks in further detail:
- Expenses. Starting a 501(c)(3) requires initial costs that cover, among other things, federal, state, and attorney fees. These usually start at $2,500. A 501(c)(3)’s initial expenditures also include expenses for establishing an online presence. Then, the addition of ongoing charges to keep a tax-exempt status to the expenses each year.
- Time commitment. To form a 501(c)(3), you must complete and submit an application, set up recordkeeping procedures, assemble a board of directors, file articles of incorporation, and write your statement of purpose and bylaws.
- Financial examination. Every year, the IRS reviews all of your nonprofit’s spending to make sure donor funds are being used as intended. This examination is continuous because required financial statements must be submitted annually.
- Stipulations and limitations. As a 501(c)(3), your organization is in requirement to adhere to rules and limitations on how donations can be useful and the causes they can support.
- Loosing of control. Your organization must abide by your bylaws, the board of directors’ fiduciary responsibility, IRS and state regulations, and donor intent. As a result, the organization develops into something bigger than just you.
501c3 Nonprofit Organizations
Internal Revenue Code (IRC) Section 501(c)(3) designates a special tax classification for nonprofit organizations. Organizations are exempt from paying federal income tax if they comply with Section 501(c)(3) standards. Although there are more than 30 different kinds of nonprofit organizations recognized by the Internal Revenue Service (IRS), only those who are granted 501(c)(3) status are able to claim that donations to them are tax-deductible.
The majority of businesses that may qualify for 501(c)(3) designations belong to one of three groups: charity organizations, churches and other places of worship, or private foundations.
The U.S. Treasury regulates Section 501(c)(3) requirements through the IRS.
How a 501c3 Nonprofit Organizations Works
The IRS defines a charitable organization as one that operates solely for one of the following purposes: charitable, religious, educational, scientific, literary, testing for the general welfare, promoting amateur sports competition on a national or international scale, or stopping cruelty to children or animals. Additionally, the IRS outlines what constitutes “charitable” activities as “relief of the poor, the distressed, or the underprivileged; advancement of religion; advancement of education or science; erecting or maintaining public buildings, monuments, or works; lessening the burdens of government; reducing neighborhood tensions; eliminating prejudice and discrimination; defending human and civil rights secured by law; and combating community deterioration and juvenile delinquency.”
There Are Three Main Types of 501c3 Nonprofit Organizations
The IRS lists the three primary categories of 501c3 nonprofit organizations that are eligible to operate under the 501(c)(3) form. To grant a 501c3 status grant to an organization their goal must be its exclusive motivation. A board of directors that oversees the organization is a requirement for all 501c3 nonprofit organizations. Following are descriptions of each of the many 501(c)(3) entities:
#1. Charitable Organizations
The most prevalent category of 501(c)(3) NGOs is public charities. These NGOs get a sizable chunk of their funding from the public or from the government. At least one-third of a public charity’s revenue must come from donations. Individuals, businesses, private foundations, and other nonprofit organizations are frequently the sources of donations. Here are a few instances of public charities:
- Schools
- Health research institutions
- Environment-related businesses
- Organizations for human rights
- Food pantries
- Charitable organizations
#2. Churches and Other Religious Organizations
The 501(c)(3) designation is available to churches, religious institutions, and other religious organizations. This covers all religious affiliations and denominations, which include churches, synagogues, mosques, and temples. When submitting a 501c3 nonprofit application, churches, and religious groups are exempt from formal recognition requirements and are not required to file yearly tax reports. Church organizations are not obliged to formally declare their 501(c)(3) status, but they still need to follow all the same rules as other nonprofits.
#3. Private Foundations
Non-operating foundations are another name for private foundations. Typically, the funding of the foundation is out of the personal funds of one donor, one family, or a few donors. A typical form of a private foundation is the family foundation. Private foundation donors are exempt from paying taxes on donations of up to 30% of their income. This particular 501(c)(3) has no running programs. Private foundations also provide funding to individuals or other nonprofits working toward the same tax-exempt goal.
Restrictions for 501c3 Nonprofit Organizations
The 501(c)(3) regulations are intended to encourage NGOs to concentrate their efforts on charitable purposes.
The nonprofits must follow the limitations below:
- Nonprofits are not allowed to represent the shareholders, the founder’s family, or other individuals with significant power over the business.
- All gifts made to nonprofit organizations must be in use solely to further the designated charitable cause.
- Political advocacy or lobbying cannot be a nonprofit’s main activity.
- The campaign fund of any political candidate may not accept direct contributions from nonprofits.
- Active political campaigning is not permitted by nonprofit organizations.
So long as it doesn’t make up a sizable portion of the nonprofit’s programs and activities, nonprofit organizations are permitted to support particular legislation or speak out for their cause in relation to politics.
Rules for Tax Exemptions for 501c3 Nonprofit Organizations
If a nonprofit doesn’t adhere to the 501(c)(3) requirements, they risk fines, penalties, and losing its tax-exempt status. Nonprofit boards must be aware that not all activities are exempt from taxes. These ideas are excellent for board instruction and conversation:
- A significant proportion of money from unrelated business operations (UBI, or unrelated business income) is not permitted for nonprofit organizations.
- Some forms of UBI are permitted, but the 501(c)(3)’s stated purpose must be supported by the vast majority of income.
- Limited goods and rental property sales are permitted for nonprofit organizations.
- Employers who are nonprofits are required to deduct federal income taxes from employees’ paychecks when they earn more than $100 in a given year.
- Unless they generate less than $5,000 annually, nonprofits must file IRS Form 1023 or Form 1023 EZ within the first 27 months of their date of incorporation (nonprofits may elect to file it so that donors receive the tax benefits).
- Every year, nonprofits are obliged to submit Form 990.
501c3 Nonprofit Application
Although you can fill out this form on your own and submit it, we advise you to seek legal counsel to be sure you do so appropriately. Why? Since it may take three to 18 months to hear back after filing the standard Form 1023. This implies that you must resubmit it and wait again if you do it incorrectly and the IRS does not grant you 501(c)(3) certification. That equates to you paying taxes for at least six months.
Even though the turnaround time for the 1023-EZ is much shorter (two to four weeks), accuracy is still something you want to make sure of. Because it does not require the same amount of detail, this form is not as trusted. As a result, you should prepare for some arbitrary audits. Furthermore, you don’t want one of the auditors doing these audits to discover inaccurate information on any of your financial records, including your 1023-EZ.
Getting legal assistance does not necessarily require a large financial outlay. If you’re on a tight budget, look into local pro bono legal clinics, legal assistance agencies, and law firm programs. Once you locate a lawyer and they confirm that your form is valid, you can file it at Pay.gov and pay the relevant filing fee.
What Happens Next During 501c3 Nonprofit Application?
You will finally receive what is known as a determination letter from the IRS after spending months completing the application, sending it in, and watching for a response. Congratulations if your organization is given a good letter of determination! You now have 501(c)(3) status and are exempt from paying taxes.
You will receive a letter with a negative or unfavorable determination if the IRS discovers mistakes or other problems with your application. Also, you have the option to challenge this decision, but you must do so within 30 days of receiving your letter, and there is no guarantee that your appeal will be successful. Having said that, you can always start over and submit a totally new application if the reason you weren’t approved was that you filled out the form improperly rather than because you aren’t qualified for 501(c)(3) status.
How to Start a 501c3 Nonprofit
Writing a purpose statement, naming your organization, and electing your board of directors are all processes to start a 501c3 nonprofit. After that, you can submit your articles of incorporation and apply to the federal government for 501(c)(3) recognition. Let’s examine these actions on how to start a 501c3 nonprofit in more detail.
#1. Write a Purpose Statement
The mission statement of a nonprofit explains why the organization is required to exist. It is thus a requirement for a nonprofit’s tax-exempt status and is outlined in the organization’s bylaws. Additionally, it provides a statement for organizational directors to follow while they carry out their responsibilities as well as a guide for those who assist in achieving the organization’s goals, like volunteers, funders, and partners.
#2. Name Your Organization
The name of your organization should accurately reflect your mission statement and be brief enough to fit in domain names and social media handles. Use evocative words that convey the mood of your goal statement while selecting the name of your organization. Make sure the name you’ve chosen is simple to say by saying it aloud. To make sure it is simple to remember, write it out.
#3. Appoint a Board of Directors.
Despite the fact that the IRS wants 501(c)(3) organizations to have at least three directors, your state may simply require a single director for a nonprofit board. Make a list of the qualifications your nonprofit need in order to find and recruit suitable board members. Make a list of people who possess the necessary abilities next. Think about the individuals in your community who might share your dedication to the goals of your nonprofit, as well as the individuals in your personal and social media networks.
#4. Write Your Bylaws.
Find out what is covered under your state’s nonprofit corporate act for nonprofit bylaw inclusions before writing your bylaws. Additionally, most nonprofit bylaws have several common clauses. The nonprofit’s name, purpose statement, governing structure, decision-making procedures, bylaw modification procedures, a conflict of interest statement, and an indemnification act that shields directors from personal liability are among these clauses.
#5. File Paperwork To Establish a Corporation.
Your business becomes a legally binding entity when you file your nonprofit corporation’s articles of incorporation, but it is not yet a tax-exempt entity. You must submit your articles of incorporation to the state’s business filing office where you intend to operate your nonprofit organization. The Secretary of State is where you submit documents in the majority of states, although there are certain states where you must file with another state office.
The criteria for submitting your articles of incorporation vary by state. For guidance on how to properly file incorporation documents, we, therefore, advise consulting a business formation or business incorporation lawyer at the local level.
#6. Apply For Your 501(c)(3) Status.
When a nonprofit applies for 501(c)(3) registration, the IRS can review its operations to see if it meets the requirements for tax-exempt status. The IRS also works to prevent conflicts of interest so that donations will be used for their intended objectives. Locate the EIN that was given to your corporation in step 5 to get started. The majority of organizations must use this number to electronically complete IRS Form 1023 on Pay.gov in order to apply for their 501(c)(3) tax-exempt status. Application for Recognition of Exemption Under Section 501(c)(3) of the Internal Revenue Code is the name of the document.
What Does a 501c3 Number Look Like?
A nonprofit Employer Identification Number (EIN) is a nine-digit federal tax identification number that the IRS issues to businesses, organizations, and nonprofits in the format: XX-XXXXXXX
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