I Have A Nonprofit… Now What?
Over 1.5 million nonprofits are currently registered in the US—and now you’re one of them. State registration, however, is just the first of several steps to setting up a fully functional nonprofit. You’ll need to navigate taxes, licenses and more. The following 9 steps will help take your nonprofit from “existing” to “operating.”
Step 1: Hold a meeting and adopt bylaws
One of the first things any corporation—including nonprofits—must do is hold an organizational meeting. At this meeting, you can finish any setup that still needs to be done, such as electing officers. This is also the time to adopt bylaws.
Bylaws are the internal rules of your nonprofit. They determine the scope of authority for each person and spell out important details on general policies and procedures, such as what it takes to pass a resolution, how to replace board members and who can approve contracts. If you intend to apply for tax exemption, you should include your business purpose in your bylaws (as well as in your corporate charter). It’s a good idea to follow the IRS’s guidelines for business purpose, such as their suggested language for charities.
You’ll likely need bylaws for many of the steps below, including registering as a charity (if applicable) and opening a bank account.
Step 2: Get an EIN
An Employer Identification Number (EIN) is an ID number issued by the IRS. The IRS requires this number for federal tax filings. Applying for an EIN is pretty straightforward—you can apply online on the IRS website. There’s no filing fee to apply, and you’ll receive your EIN immediately.
Much like bylaws, your EIN will be required for many of the following steps, including applying for tax exemptions, registering as a charity, opening a bank account and more.
Step 3: Apply for federal tax exemptions
This is the part that gets a bit muddy for many nonprofits. First of all, not every nonprofit is going to (or can) seek tax-exempt status. You’ll have to qualify as a 501(c) organization. There are over two dozen different 501(c) categories for various types of nonprofit organizations. By far the most common type, however, is 501(c)(3), which includes religious, educational and charitable organizations.
To apply for 501(c)(3) status, nonprofits file either Form 1023 or 1023-EZ. To apply for a different 501(c) status, nonprofits most commonly file Form 1024. All applications require an EIN and copies of organizing documents (your corporate charter and bylaws). Most applications also require either financial statements or proposed budgets as well.
Now for the frustrating part. In most cases, the applications are long and complicated, the fees are steep, and the approval process is lengthy. For instance, Form 1023 is 28 pages long, will set you back $600, and will take at least 6 months for approval. While the application and approval process can be discouraging, the benefits are substantial—tax-deductible contributions, no federal income tax and even the possibility of tax-exempt financing.
Step 4: Apply for state tax exemptions
This is another area where states have radically different procedures. In some states, like Kentucky, federal 501(c) tax-exempt status automatically exempts a nonprofit from the state’s corporate taxes.
In other states, however, state-level tax exemption is a separate process altogether. In California, for instance, federal exemption doesn’t automatically confer state exemption—and state exemption is possible without federal exemption by filing Form 3500.
Be sure to check with your state’s department of taxation or revenue to learn specific requirements. Even if exemption is generally automatic, you may still have to file some paperwork for exemption from sales and use taxes.
Step 5: Obtain business licenses or permits
Whether or not you’ll need a license or permit mostly depends on where you’re operating and what types of business activities you plan to engage in. Licenses and permits may be required on the state, county or municipal level, so it’s important to check in with the state licensing agency as well as the county and city clerks in your area.
Additionally, some places waive business license requirements for nonprofits (or certain nonprofits). For example, Nevada normally requires nonprofits to pay $200 a year for a state business license, but nonprofits with 501(c) status with the IRS can avoid this fee and fill out a Declaration of Eligibility for State Business License Exemption instead.
Step 6: Register as a charity if necessary
Plan to take donations? You may have to register as a charity. Much like tax exemption, charity registration is an area that varies greatly state to state. In some states, such as Vermont and Wyoming, nonprofits aren’t required to register as a charity in order to seek donations. However, in many other states, like Nevada, you can’t solicit or receive any donations or contributions before registering as a charity. Other states give you a short leeway—California, for instance, requires charity registration within 30 days of operation.
Step 7: Open a bank account
Your nonprofit’s finances are going to be closely examined, especially if you’re applying for tax-exempt status. You’ll absolutely want to open a business bank account for your nonprofit as soon as possible. It’s important to avoid even the appearance of financial impropriety—for instance, you don’t want to put donations in your personal account, even temporarily.
Opening a business bank account typically requires your EIN and bylaws. Sometimes, you’ll also need your corporate charter or a resolution permitting an officer or other authorized person to open the account. The best strategy is to call ahead and find out exactly which documents are required before you head to the bank.
Step 8: Submit state reports
Many states require nonprofits to submit an annual, biennial or periodic report to the state. These reports typically confirm or update basic information about your nonprofit, such as your principal address and registered agent. There’s usually a filing fee as well—although it’s often significantly less than that of for-profit businesses. For instance, nonprofits in Maine pay $35 to file an annual report while for-profit corporations and LLCs pay $85.
Step 9: File required taxes and returns
Nonprofits will still have tax filings with the IRS—even if your nonprofit is tax exempt, there are still informational returns to file. For instance, 501(c)(3) public charities are required to file Form 990, 990-EZ or 990-N with the IRS each year. Also, even if your nonprofit is tax exempt, you may still have to pay taxes on income unrelated to your primary purpose, such as profits from real estate sales. States may require their own returns as well—and nearly always require one if you have taxable business income unrelated to your primary purpose.
Setting up your nonprofit requires a surprising amount of patience and paperwork (especially when it comes to filing for tax-exempt status). However, taking the time and effort to set up your nonprofit for success will pay off down the road. With a solid start, you can better devote your time to what you really want to do: manage and grow your nonprofit.