A2Z Filings

Setting Up a Tax-Exempt Organization 501(c) (3) in 3 Steps

Starting a nonprofit organization can be very rewarding. However, the process of setting up a nonprofit, especially a tax-exempt organization with a 501(c) (3) status, can be very challenging. From preparing comprehensive paperwork to filling out several forms, a lot of work is required to start up a tax-exempt organization 501(c) (3). Even a tiny mistake in the process can cost you the 501(c) (3) status. Therefore, there is no room for error when you are setting up a tax-exempt organization 501(c) (3). 

An easy way to streamline the process of setting up a tax-exempt organization 501(c) (3) is to hire professionals that can help you with paperwork and assist you every step of the way. It is advisable to take the time to learn more about the process of setting up a nonprofit and acquiring the 501(c) (3) status before you set things in motion. Scroll down to learn everything you need to know to set up your nonprofit organization.

Step 1 – The Formation Process

The first step in setting up a tax-exempt organization 501(c) (3) is to establish your nonprofit organization with the state. Once you are approved, you are eligible to apply for the tax-exempt status. The formation process for nonprofits is quite similar to the process for for-profit corporations. You can start by choosing a suitable business name and appointing the board of directors. Next, you will have to file the articles of incorporation. The incorporator can be the registered agent.

It must be noted that the exact steps and requirements for incorporating a nonprofit entity vary from state to state. For instance, some states require you to have a designated board of directors before you can file the articles of incorporation. In other states, you may have to follow a set of rules for naming nonprofit organizations. However, while the exact steps may differ, the general formation process is the same.

Keep in mind that your formation documents must align with your future goal, i.e., to acquire a tax-exempt status. It must be clearly specified in the formation documents that your organization has an exempt purpose. The formation papers must also indicate that the organization is in compliance with the 501(c) (3) requirements pertaining to the disposition of the assets in case the organization is terminated. The plan for the final distribution of the assets must be stated in the formation documents even if it is already stated in the operating agreement or bylaws.

These are some factors that you must consider when you are preparing formation documents. Otherwise, you will have to amend the documents in order to apply for tax-exempt status, even if your nonprofit is established with the state.    

Women applying for a tax-exempt status

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Step 2 – Request Tax-Exempt Status

Once your nonprofit is approved, you can begin the process of applying for the tax-exempt status. However, for setting up a nonprofit on the state level, you need to be familiar with the special IRS terms and jargon. Here are a few things that must be in order to successfully request tax-exempt status.

· Additional 501 (c) (3) Requirements

Before you can apply for the exempt-status, you must acquire an EIN for your nonprofit. The EIN number is your tax ID that you put on your receipts for tax deductible. It is the employer ID number. Organizations generally require an EIN for tax and banking purposes. You must obtain it even if you don’t have any employees currently working for the nonprofit.  

Some other documents that must be in order before you can apply for the IRS form to set up a tax-exempt organization 501(c) (3) include the following:

  • Bylaws
  • Conflict of interest
  • Mission statement
  • Financial statement budget 
  • Salary documents for directors and other employees  
  • Amendment documents (if any)

· Apply to the IRS for Recognition through Form 1023

You need to apply to the Internal Revenue Service (IRS) in order to qualify to receive the 501(c) (3) status. You can do this by filling Form 1023, also known as Form 1023-EZ. The form is around 28 pages long. It requires various attachments and there may be several other requirements that you must fulfill for successful submission. Moreover, you may have to work on a tight schedule to meet the time constraints.   

Think of the IRS Form 1023 as a thorough assessment of the purpose, planned programs, structure, and governance of your nonprofit organization. The main purpose of the IRS is to make sure that your nonprofit is created exclusively for charitable purposes and the processes are refined enough to fulfill the stated charitable purposes. Your application can be denied if the IRS finds a conflict of interest in your application. Potential for benefits to insiders is another common reason for denial.     

· Checking the Local Status of 501(c) (3)

It must be noted that not all states consider nonprofit organizations with a federal 501(c) (3) status valid for tax-exempt on the local or state level. The local status of 501(c) (3) varies from state to state.

Some states only require IRS recognition to approve a nonprofit at the state level. Other states, like Texas and California, have their own application processes that you must go through in order to obtain charity status. Therefore, once you get approved by the IRS, you must make sure that your 501(c) (3) has tax-exempt status at the state level.       

Step 3 – Maintain Tax-Exempt Status

Once your 501(c) (3) status is recognized at the federal and state level, you need to make sure that your organization continues to operate according to the purpose and plans that you listed in the IRS application. You must also appoint a registered agent and file annual reports in compliance with the state requirements. Also, make sure that the organization is not associated with any political campaigns.

Any changes in the management must be filed with the state. Most importantly, the assets or income of the nonprofit must not be used for personal benefit. Failing to comply with these requirements can result in penalties or even invalidation of the charity status of your organization. Some organizations have to file a 990 tax return to be compliant with the IRS.  

 The Bottom Line

Setting up a tax-exempt organization 501(c) (3) is not a straightforward process by any means. It requires a lot of time, effort, and expert knowledge to get the tax-exempt status. If you are considering starting a nonprofit, you can rely on A2Z Filings to guide you through the process.

We can help you prepare the paperwork and secure a tax-exempt organization 501(c) (3) from the IRS. Contact us today or visit our website to learn more about our services.