How to Form a Nonprofit
Starting a nonprofit is an important commitment that will require hard work, a concrete mission, inspiration, and the ability to get others involved. It is necessary to take several legal steps to form a nonprofit. A nonprofit can function as either an incorporated or an unincorporated organization. Incorporating will require a few additional steps, but both can qualify for tax-exempt status.
Decide Whether to Incorporate a Nonprofit
You don't have to incorporate to form a nonprofit. A nonprofit that does not incorporate is referred to as an unincorporated association. Unincorporated associations can run just as smoothly as an incorporated organization, but may not receive all of the benefits of an incorporated nonprofit. An unincorporated nonprofit will still receive tax-exempt status, but limited liability protection given to directors and officers may not apply, unless state law provides this protection.
If the activities the nonprofit will engage in will carry very little risk, it may not make sense to go through the trouble of incorporation. On the other hand, if financial or physical risks are involved, it may be best to incorporate.
How to Choose a Name for a Nonprofit
Like any other business, a nonprofit must have a name. A name should reflect the mission of the nonprofit, but it will also need to comply with applicable laws. A name must:
- Not conflict with the name of another business or nonprofit
- Not infringe on a trademark
- Not use certain words that imply an affiliation ("bank," "federal," or "insurance")
- If required by the state, use words like "corporation" to describe its business structure
A nonprofit can determine the availability of a name by checking with the appropriate state agency.
How to File Incorporation Paperwork with the State
To form an incorporated nonprofit it is necessary to file incorporation paperwork with the state and pay a fee. Usually the appropriate department is located in the office of the secretary of state or the department of state.
A nonprofit corporation will need to file "articles of incorporation" To its application. Some states also refer to this as "certificate of incorporation" or "certificate of formation." Many states provide fill-in-the-blank forms that request general information about the purpose of the corporation, the name, address, and a list of initial directors.
File for Federal and State Tax Exemptions
A nonprofit may qualify for tax-exempt status with federal and state governments. In addition to tax-exempt status, if a nonprofit is a 501(c)(3) organization, donors receive tax deductions for their contributions to the nonprofit. Not every nonprofit can qualify for this type of status. The nonprofit must have one of more of the following purposes:
- Educational, or
Tax exemption means that the nonprofit will not have to pay taxes on contributions or on gross receipts earned from a business activity substantially related to the exempt mission of the nonprofit. If the nonprofit generates gross receipts from income derived from activities not substantially related to the exempt purpose of the nonprofit, the nonprofit will have to pay taxes on that income.
In some circumstances, a nonprofit may choose not to apply for tax-exempt status if:
- The nonprofit will not generate taxable income.
- Income is taxable regardless of whether the nonprofit has tax-exempt status.
- Most donors do not care about claiming a deduction.
To claim federal tax-exempt status, it is necessary to complete IRS Form 8718 and Package 1023. In most states, a nonprofit that qualifies for federal tax-exemption automatically qualifies in the state. In other states, like California, North Carolina, Montana, and Pennsylvania, it is necessary to file an application with the state to receive tax-exempt status.
Create the Bylaws
A nonprofit must create bylaws. Bylaws govern how the organization will operate. State requirements vary, but most bylaws regulate how the nonprofit can elect directors and officers, how many directors it should have, the length of a director's term, quorum requirements, and how to hold meetings. Changing bylaws later will usually require approval by two-thirds of the directors.
The job of the board of directors is to guide the nonprofit in its mission. The board sets policies, oversees finances, hires the executive director, implements a strategy, and may participate in raising money for the nonprofit. Depending on state requirements, a board may consist of only one director or it may need at least three directors. Board members are uncompensated volunteers.
Hold the First Board of Directors Meeting
The first board of directors meeting will get the nonprofit up and running. The board will elect officers, adopt the bylaws, and pass resolutions to allow the nonprofit to open bank accounts and admit members. The nonprofit should prepare and keep the minutes of the initial meeting.
How a Lawyer Can Help Form a Nonprofit
If you are thinking about forming a nonprofit, speak to a legal expert about the specifics. A skilled business and commercial law attorney will be to assist you with selecting your organization's name, filing the articles of incorporation, and much more.