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Becoming a 501(c)3 Nonprofit

If you want to solve a social problem by starting a new nonprofit, you may want to stop and reconsider.  

Starting a nonprofit is complex, with many missteps possible at any point. Going from nothing to a sustainable and financially healthy nonprofit is not for the timid.

Do you understand what a nonprofit is?   For instance, there are many types of nonprofits, but the 501(c)(3) organization (pubic charity) is what we usually think of when we set out to solve some social problem.

These are the groups that educate, heal, advocate, alleviate, or bring together people of a particular faith. They are "charitable nonprofits" and receive special treatment from the IRS, such as being able to provide a tax deduction to their donors and exemption from many federal and state taxes.

Do you understand how a charitable nonprofit organization is different from a for-profit organization? For example, a business pursues a profit. Profit is its reason to exist. But charitable nonprofits pursue a social mission first, and all its income goes to that mission. A for-profit business is owned by someone, either a person or shareholders. A charitable nonprofit belongs to no one. It answers to the public and exists for a common good.

There are more than a million public charities in the US but, just as with small businesses, many fail to thrive.  Just having passion about a cause will not be enough. Nonprofits require just as much foresight and knowledge about running an organization as any for-profit business does.

Here are the most common mistakes nonprofit founders make.  Avoid them, and you just might be off to a great start.

1. Poor Research and Planning

Lack of a business plan is one of the most common mistakes that startup nonprofits make.

In their enthusiasm to do good, many founders of nonprofits forget that a nonprofit is a type of business. Businesses have business plans in hand before launching. A business plan includes an evaluation of the competitive environment, sources of funding, potential products or services to be offered and to whom, and a needs assessment.

2. Lack of Financial Knowledge

Close behind the lack of planning is an unrealistic expectation about funding for a startup nonprofit. Many founders do not anticipate what it will cost to start their nonprofit, much less have any idea of where to get the funds.

Any nonprofit startup needs a funding plan, must decide if it will charge a fee for its services, and should set up a proper financial records system. A nonprofit with weak funding at the beginning is unlikely to sustain itself long enough to get a vigorous fundraising program going.

3. Thinking It's Easier to Start a Nonprofit Than It Is

It is harder to start a nonprofit than most people think.

The process of incorporating at the state level and then applying for exempt status with the IRS entails numerous steps. Passion is not enough. Hard-nosed realism about what is involved and the time it takes to achieve success will be more important for the long haul.

4. Not Building an Effective Board

If there is one thing that could make or break your new nonprofit, it might be not putting together an active board. Your first board members represent your "circle of influence." They should be people who have resources, influence, and lots of other contacts. Your board members should believe in your organization's mission and be willing to sell that mission to others.

They should be able to open doors for you.

If you are ready to start your nonprofit here are the steps you need to take:  

  1. Choose a name. ...
  2. File articles of incorporation. ...
  3. Apply for your IRS tax exemption. ...
  4. Apply for a state tax exemption. ...
  5. Draft bylaws. ...
  6. Appoint directors. ...
  7. Hold a meeting of the board. ...
  8. Obtain licenses and permits.

1. Choose a name.

The name of your nonprofit corporation cannot be the same as the name of another corporation on file with your state's corporations office (usually the Secretary of State's office). It must end with a corporate designator, such as "Corporation," "Incorporated," or "Limited," or an abbreviation of any of those words.

Your state's corporations office can tell you how to find out whether your proposed name is available for your use. For a small fee, you can usually reserve the name for a short period of time until you file your articles of incorporation. For more information, contact your state's corporation’s office.

2. File articles of incorporation.
You must file "articles of incorporation" with the state's corporate filing office. In this document, you fill out some basic information such as your nonprofit's name and office address. Although preparing this document isn't difficult, you do need to include specific language to ensure that you'll receive tax-exempt status. Your state's nonprofit formation packet, if available, may include the required information. For more information, see Nolo's article on Nonprofit Formation Documents: Articles of Incorporation, Bylaws, and Organizational Minutes.

State-Specific Information

If your state does not offer a nonprofit formation packet, or if you need help understanding the requirements, consult How to Form a Nonprofit Corporation, by Anthony Mancuso (Nolo), to make sure your articles comply with your state's nonprofit law.

3. Apply for your IRS tax exemption.

Submit a federal 501(c)(3) tax exemption application to the IRS (along with a copy of your filed articles with your application). To apply, you must complete IRS Package 1023, Application for Recognition of Exemption. For help with this fairly complicated process, see Nolo's article How to Obrain 501(c)(3) Tax-Exempt Status for Your Nonprofit.

Smaller nonprofits may be eligible to file Form 1023-EZ, Streamlined Application for Recognition of Exemption Under Section 501(c)(3) of the Internal Revenue Code. This is a shorter, simpler application form that you complete online. Check the IRS website and instructions to the form which include an Eligibility Worksheet you must complete to determine if your nonprofit meets the requirements for using the shorter streamlined form.

4. Apply for a state tax exemption.

This step does not apply to nonprofits in all states. In a few states, you must complete a separate application to get a state tax exemption. In most states, as long as you file nonprofit articles of incorporation and obtain your federal 501(c)(3) tax-exempt status, your state tax exemption will be automatically granted. In still others, to get your state exemption you must send in a copy of the IRS determination letter that granted your federal exemption. Contact your state tax agency to find out what steps you must take.

5. Draft bylaws.

A nonprofit's bylaws are the internal governing rules that contain rules and procedures for holding meetings, voting on issues, and electing directors and officers. Typically, the bylaws are adopted by the corporation's directors at their first board meeting.

6. Appoint directors.

A nonprofit's directors make the major policy and financial decisions for the nonprofit. Many states allow nonprofits to have just one director, but other states require at least three.

7. Hold a meeting of the board.

At the first meeting of the board of directors, the directors take care of formalities such as adopting the bylaws, electing officers, and recording the receipt of federal and state tax exemptions. After the meeting is completed, minutes of the meeting should be created and filed in the nonprofit's records binder.

8. Obtain licenses and permits.

Check with your state department of consumer affairs (or similar state licensing agency) for information concerning state licensing requirements for your type of organization. For instance, if you sell anything to consumers, you'll need a sales tax permit, and your activities may require a zoning permit.

Approval Time

Typically, IRS 501(c)(3) approval takes between 2 and 12 months, inclusive of likely written follow-up questions. Sometimes it takes a little less; sometimes a little more. Expedited review can be requested if a new organization is being formed to provide immediate disaster relief or if a promised grant is both 1) substantial relative to the organization’s budget and 2) the grant has a specifically- defined expiration date. There is no guarantee the IRS will grant expedited review requests.

One of the primary reasons for the long review period is the amount of time it takes for a particular case to assigned to a review agent. Depending upon the volume of applications being received by the IRS at any given time, we've seen "inventory" periods be as short as 30 days and as long as 8 months.

Filers of Form 1023-EZ should experience a shorter time frame due to the streamlined process of the e-filing.

Cost associate with starting your nonprofit

The costs below reflect only the filing of required paperwork and not any costs you may have that are associated with lawyers, consultants or accountants.

Georgia

Georgia Articles of Incorporation: $100
Georgia Notice of Incorporation: $40
Georgia Initial “Annual” Registration: $50
501(c): $400 or $850 IRS fee
Georgia charitable registration: $35

South Carolina

Incorporation: $25
501(c): $400 or $850 IRS fee
South Carolina form SCDOR-111 (South Carolina State Tax Identification): varies based on taxes, licenses and permits required
South Carolina charitable registration: $50 (or $0 if filing for exemption)

 

Helpful information (and this information gathered from):

Foundation Group:  https://www.501c3.org/frequently-asked-questions/

The Balance:  https://www.thebalance.com/starting-a-nonprofit-4073769

The 4 most Common Nonprofit Startup Mistakes:  https://www.thebalance.com/mistakes-for-nonprofit-startups-2502142

National Council of Nonprofits:  https://www.councilofnonprofits.org/tools-resources/business-planning-nonprofit

Nonprofit Hub:  https://nonprofithub.org

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