This Article is not intended to be legal or tax advice! You should always contact your Tax Consultant or Legal Advisor before you undertake any operation.
That Legal disclaimer being stated
Entrepreneurs with a heart to help others may be looking to turn their good deeds into official charities.
The idea is not a unique one; more than 1.4 million nonprofits were registered in 2013, up 2.8% from 10 years earlier so says the IRS website.
Since many small business owners have what it takes to start one, it may be an appealing option to marry your mission to your start-up skills.
Even the best intentions need a plan, however. Just what does it take to put your goals into action? Here are the basic steps to take to bring your vision for good to the rest of the world—and earn tax-preferred status from the IRS.
The Money of Non-Profits
While the term “nonprofit” may suggest that no one’s making any money, the stats prove otherwise. Registered charities generated 5.4% of the U.S. GDP and contributed $906 billion to the U.S. economy in 2013 alone.
With most of these registered as 501(c)(3) public charities, it proves that it’s very important to get your tax situation right from the start.
Do Your Research
The Council of Nonprofits suggests that you check with your state for specific requirements they may have prior to going through the process of forming a nonprofit.
Because each state may have additional forms or tax rules, it’s never a good idea to assume that a template list of steps will apply to you.
There may even be local or county laws that effect how and when you can operate, so be aware of those.
Taking time to find out everything there is to know about your specific type of nonprofit is also important. This first step should take you longer than the rest.
Many nonprofits have avoided red tape and hassles down the road by consulting with an attorney, accountant, or someone in your area who has formed a similar type of organization.
Develop a Plan
Just as you wouldn’t start a new for-profit business without some kind of business plan, you shouldn’t begin the steps for registering your charity without this important step, as well. Knowing the details of how everything will work is essential.
Some questions to ask yourself include:
Given the economy today, is this idea viable?
Who will come on to help with this project and serve on the board?
What type of organizational structure will you choose?
What is the three-year plan for funding and expenses?
What type of paid staff will you have? What skills will they need?
While not everything will be covered by this simple checklist, it will help you start brainstorming all the possibilities for your endeavor.
This is also the point in the process where you are encouraged to develop some of the guidelines that will govern your organization.
These may include bylaws, a conflict of interest policy, or compensation guidelines.
Incorporate
Filing to incorporate your nonprofit is done at the state level, so each jurisdiction will have its own deadlines, forms, and requirements.
Contact your Secretary of State’s office for information on forming a “not-for-profit” or “non-stock” entity. Keep in mind that they can give you the right forms to fill out, but they generally cannot give advice on how to complete them.
Tasks that fall under this step include:
Registering your corporation name or DBA
Filing the actual articles of incorporation (also known as a “certificate of incorporation”)
Assembling and providing additional documentation, as needed, including certificate of disclosure or the proof of corporate name (from your DBA)
Payment of filing fees
Publishing of your articles of incorporation in a local newspaper, as may be required by state law
File for Federal Tax-Exempt Status
This step is perhaps the most cumbersome, but it’s vital to get right.
The IRS will usually only consider a corporation, trust, or association for this status, so your incorporation papers must be in order before you apply. (Additionally, it may be possible for some nonprofits to get tax-exempt status without the incorporation, but this leaves everyone open to additional liability and is not recommended.)
The IRS requires that the person filing the forms for tax-exempt status be registered with the IRS. (This requirement doesn’t apply to attorneys or CPAs, however.)
Always use the golden rule. If you are not sure, check with your Tax Advisor, Legal Consultant, local tax office or the IRS.
According to the Council of Nonprofits, the numerous forms required to file include:
EIN application
Form 1023-EZ for small organizations with gross receipts of $50,000 or less and assets of $250,000 or less
Regular Application for Tax-Exemption (Form 1023)
Power of attorney (Form 2848)
Election to Make Expenditures to Influence Legislation (Form 5768)
It can take weeks or months to determine your eligibility and approve your status. Note that, while you are waiting, you still need to file and pay taxes as a regular corporation.
Keep Up with Compliance and Reporting
Once you get approved, there are many, many more steps to take.
In fact, most nonprofits find that this is when the real work begins!
Even though you have filed and been accepted for tax-exempt status with the IRS, you still need to register with your state and local tax enforcers. There are also local ordinances to be followed regarding fundraising.
Many jurisdictions will need you to register to collect money, lobby, or get necessary permits for dealing with the populations you serve. (This may include background checks for volunteers working with children or vulnerable adults, for instance.)
You will also need to comply with zoning laws, which may be very different for charities than they are for regular businesses.
Certain blocks or parts of the city may be reserved for nonprofits, however. You may also have access to grants or funding now that you have been approved!
In addition to the reporting requirements of a traditional corporation (which usually occurs at least annually, if not quarterly), you’ll need to disclose and report your fundraising efforts and keep your tax info current.
While the amount of reporting will depend on the type of work you do, there is usually enough of this type of work to assign a dedicated staff member to this job.
Is a Nonprofit for You?
While there is a heavy amount of paperwork and compliance associated with running a nonprofit, it is worth the effort for many. Even with a somewhat shaky few years in the economy, giving is up and there is money to be put toward charitable causes.
In 2014 alone, more than $350 billion was given to charities in the U.S., rising for the fifth consecutive year.
No matter how much people struggle these days, caring for others seems to fit into the budget. It may be the perfect time for you to fund your mission through a nonprofit, too.
and again….
ALWAYS CONSULT A TAX ADVISOR OR LEGAL CONSULTANT BEFORE MAKING ANY DECISIONS.