What is a nonprofit organization?
A Nonprofit Organization, also known as 501 (c)(3) corporation, is an entity whose primary mission is to give charitable, educational, or religious benefit to society without gaining any economic benefits. Examples of nonprofit organizations range from the Bill and Melinda Gates Foundation which raises money for purposes such as scholarships, grants and humanitarian missions, to organizations like the Metropolitan Museum of Art which is mostly dedicated to the preservation of art.
How is a Nonprofit Organization Created?
The first step to creating your nonprofit organization is choosing a name. It must have a distinguishable name from any other nonprofit organizations in your state. By searching your respective Secretary of State office, you may verify for availability. Also note that your state may require the name to end with the words:
- Limited (Ltd.)
- Corporation (Corp.), or
- Incorporated (Inc.).
Once you have chosen the name and verified the availability, you may need to pay a small fee that will depend on each state and wait a shot period to have it approved.
Following this, you must reach your state’s corporate filing office to file “articles of incorporation”. Even though preparing this document is probably the simplest step when creating your nonprofit organization, you must include specific terms to make sure that you will receive the tax-exempt status. Just like naming your organization, the information requested by the corporate filing office may vary from state to state.
The next step is to apply for an IRS and state tax exemption. This is probably the most sought-after step for creating your nonprofit organization.
To apply for the IRS tax exemption, you must submit the IRS Package 1023, Application for Recognition of Exemption, and submit a federal 501 (c)(3) tax exemption application. For smaller organizations, there is a simpler application called the Form1023-EZ, Streamlined Application for Recognition of Exemption Under Section 501 (c) (3) of the Internal Revenue Code. You must check the IRS website to see if you are eligible to use this application.
As for state tax exemptions, most states only require the a federal 501 (c)(3) tax exemption status given by the IRS to automatically grant you the state tax exemption. The few remaining states who won’t automatically grant the state tax exemption, will require an additional application.
The following steps to creating your nonprofit organizations are just like any standard corporation creating steps. You must draft the bylaws which is basically the governing rules that contain the guidelines and procedures adopted usually by the organization’s directors at their first board meeting. You must also formally appoint the organization’s directors following your state standards. The you have to hold the first meeting of the board. For their first meeting, the directors need to adopt bylaws, select a corporate bank, appoint corporate officers and record the receipt of federal and state tax exemptions. The directors’ actions must be documented in corporate minutes prepared by the incorporator or the board’s secretary.
The final step is acquiring licenses and permits. This is mandatory if your nonprofit organization is planning to sell anything to consumers. This is acquired through the state department of consumer affairs, and each states requirement differ.