Most nonprofits filed with the Internal Revenue Service fall under IRS code 501(c)(3). These organizations include public charities or private foundations, which are established for purposes such as religious, educational, scientific, literary and testing for public safety, to name a few. There are other nonprofits — 501(c)(4) and 501(c)(27) — that are considered tax-exempt, but not charitable. You must apply separately for tax-exempt status via the IRS.
Be prepared: The process of forming a nonprofit with the IRS isn’t simple and can be time-consuming. You may become overwhelmed when starting out after discovering all of the rules, regulations and paperwork that come with it. However, there are some significant perks.
Three primary benefits of being tax-exempt under a 501(c)(3) nonprofit are:
- You are tax-exempt from federal and/or state corporate income taxes.
- You are able to apply for grants and other public or private allocations available only to IRS-recognized, 501(c)(3) organizations.
- You have potentially higher thresholds before incurring federal and/or state unemployment tax liabilities.
Action Steps
The best contacts and resources to help you get it done
Do you qualify to be a nonprofit?
First determine if your business qualifies for nonprofit status under IRS stipulations.
I recommend: The
IRS lists requirements for an organization's eligibility for tax-exemption, which these
FAQs can help you determine. Refer to
Managementhelp.org for help getting started, or use the
University of Wisconsin's company assessment to assist with strategic planning.
Get a checklist to simplify the must-dos
Before applying for nonprofit status, your business must have a mission statement, articles of organization, and be incorporated, among other things. Save time by having a checklist to ensure you have everything in order on the front end.
I recommend: IRS Publication 557 stipulates in detail what you need. Use
Columbus Metropolitan Library's online tutorial to walk you through the initial steps.
Forms and fees to apply
Filling out forms can be the worst part of the process. Applying for 501(c)(3) status requires filling out the 28-page-long IRS form 1023. The IRS estimates a preparation time of more than 100 hours for a novice to complete. Approval can take four to six months.
I recommend: Print 1023 from the
IRS Web site. It also lists user fees associated with all tax-exempt applications. Call (877) 829-5500 for specific questions.
Hire someone to help
While you can do a lot of the work yourself, you should also enlist the professional help of an attorney and/or accountant to review your application. Use specialists in forming nonprofits. Many businesses will skip the hassle and hire a firm to complete all of the paperwork.
I recommend: Try the
American Bar Association for referrals to local attorneys. Seek out attorneys who do pro bono work for nonprofits, as well as for reputable consulting firms such as
the Foundation Group and the
Authenticity Consulting.
Tips & Tactics
Helpful advice for making the most of this Guide
- If your application is rejected, you can appeal within 30 days or apply again from scratch.
- Don't forget your user fee; it is required to process your application.
- You cannot file an application online.
- Call (800) 829-3676 to order forms, instructions and publications from the IRS regarding nonprofits.
The official source of Starting a Nonprofit Organization is
the Starting a Nonprofit Organization page at Business.com
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