By: Minh Luong and Serena Junejo
501(c) nonprofits are on the rise, providing a great way for social entrepreneurs to give back to a cause. Federal and state regulations are of critical importance for nonprofits to stay compliant, remain in business, and maintain tax-exempt status. Consult with an experienced attorney to ensure your nonprofit – and your mission – thrives.
Legal Requirements for Starting a New Nonprofit
State laws vary, but the general process for establishing a nonprofit is the same across the country:
- Choose an organization name and get it approved
- File organizing documents based on state law
- Attain tax-exempt status:
- Apply for an Employer Identification Number (EIN)
- File Form 1023 with the IRS
Setting up your Nonprofit Organization
First, you’ll need to establish your organization based on your state’s laws. All states require corporations to choose and get their name approved before registering their nonprofit. File a free name availability form with the office of the Secretary of State if you are unsure whether a specific name will be approved.
Next, nonprofits should file organizing documents to qualify for 501(c) tax exemption at the state level. Organizing documents vary based on state requirements, but generally include a few staples like articles of incorporation and corporate bylaws. Articles of incorporation contain basic information about your nonprofit and tax-exempt mission. Corporate bylaws establish a nonprofit’s administrative policies and procedures. 501(c) organizations should work closely with their attorney to file compliant organizing documents.
Some states will require a statement of information, a shareholder’s agreement, business licenses/permits, and appointing directors before granting 501(c) status, depending on the nature of the non-profit organization. Local governments may have permits and if an organization is not compliant 501(c) status can be denied or revoked.
Getting Tax Exempt Status for Your Nonprofit
Organizations must apply for an Employer Identification Number (EIN) to obtain federal tax-exempt status, whether they plan to have employees or not.
Next, fill out Form 1023 with your attorney to apply for tax-exempt status with the IRS. The IRS determines whether a corporation should receive 501(c) status based on four requirements:
- Charitable purpose, as defined by the IRS
- No individual benefactors
- No endorsements or oppositions for political candidates
- Meets restrictions on lobbying
If the IRS believes there is another corporation very similar to the one you propose, the application will be rejected. Once a nonprofit is approved by the IRS, they can begin to raise money for their cause.
Ongoing Compliance Requirements
Most nonprofit organizations will need to file annual tax-exempt filings, a statement of information, and registration. Certain organizations will also need to file unrelated business income forms. Of course, nonprofit compliance requirements vary by state. Alaska, Iowa, Nebraska, and a few others only require a tax filing every two years. Other states, including Delaware, Nevada, and Washington, require an additional business license that must be renewed based on local regulations.
Other continuing compliance requirements for nonprofits include maintaining their tax-exempt mission and keeping detailed records, such as meeting minutes.
Any prior agreement, such as a pre-nuptial agreement, will always trump common property law. This was famously seen in the 2010 McCourt divorce. Jamie McCourt signed a post-nuptial agreement and later a settlement, stating that the Los Angeles Dodgers belonged to her husband Frank. She attempted to fight the agreement, citing community property laws and that the value of the property changed since she signed the agreements. The judge ruled in Frank’s favor, marking a monumental common property decision.
Legal compliance is critical to ensuring nonprofits can obtain and then preserve their 501(c) status. The penalties for noncompliance are steep and may lead to revocation of the 501(c) license. Consult with an experienced attorney to ensure you comply with your state’s nonprofit requirements – and thrive.