Forming a nonprofit company can be confusing. There are steps that must be taken on both the state and federal level — some of which require an expert’s understanding of incorporation forms. This is especially true when it comes to 501(c)(3) registration.
But before we get ahead of ourselves, let’s take a look at the basics of forming a nonprofit company, so we can glean a better understanding of the process …
What is a Nonprofit Company?
The name “nonprofit” is a tricky one. It often lends itself to visions of hard working philanthropists who get paid small salaries. And although this is sometimes the case, many nonprofits are huge, very profitable companies. The difference between for-profit and nonprofit companies comes down to one thing: how profits are distributed. In the for-profit world, profits can be legally redistributed to shareholders. Not so for nonprofit entities, which need to apply profits back into the organization.
How to Form a Nonprofit Company on the State Level
Although nonprofit companies adhere to state laws that are different than those of standard corporations (LLCs, S corps and C corps), the business formation process is very similar. Three things you’ll need to do are:
- File nonprofit Articles of Incorporation with the state, along with applicable state filing fees.
- Provide a detailed business purpose: In your Articles of Incorporation, you need to provide a detailed explanation of what the nonprofit is being created to do/provide. The IRS will consider this information as it reviews your application for tax-exempt status.
- Include specific tax-exempt language in your articles of incorporation. Typically, the IRS looks for this if you file for tax-exempt status.
How to Form a Nonprofit Company on the Federal Level
Speaking of tax-exempt status, there’s a misconception that creating a nonprofit corporation means the nonprofit is automatically tax-exempt. Not true. Once you’ve formed your nonprofit on a state level, you’ll need to file for tax-exempt status (if it’s something you’re seeking) with the IRS. This means filling out and submitting form 1023 with the IRS, who must approve your request. If your 1023 form is approved by the IRS, you will then have what is called 501(c)(3) status, making your company tax exempt.
Other things to keep in mind:
- The IRS requires filing fees. The standard filing fee is $750. A reduced filing fee of $350 is available to nonprofits who expect to have, or have had, gross revenue under $40,000 for the first four years combined
- Some states that also require a state-level tax-exempt status filing
- There are many additional IRS nonprofit classifications other than 501(c)(3). It’s important to make sure that you’re filing for a classification that suits the needs of your company.
- The IRS requires a plethora of financial information, which you may not have at the inception of your nonprofit corporation.
The Difficulties with Form 1023
When filing for tax-exempt status, we highly recommend utilizing an expert to complete form 1023. This form has the reputation of being the most difficult form created by the IRS, and if it’s not filled out correctly your tax-exempt status may never come to be. Form 1023 is approximately 30 pages long — without the schedules and attachments. The IRS estimates preparation time of over 100 hours for completion, and IRS approval can take anywhere from a couple months to around a year, depending on the number of written follow-up questions the IRS has and how quickly you provide answers.
It’s critical that you use a reputable company to complete this form, one that’s experienced with filing 1023s. We typically refer our customers to The Foundation Group.
What does tax-exempt status mean?
Being tax-exempt means that the net profits of the nonprofit organization are exempt from federal income taxes. Certain states allow state-level tax-exempt status, and in such cases, the net profit is also exempt from payment of state income taxes.
Tax-deductible Donations
Many companies that are approved for 501(c)(3) status, can accept donations and contributions from individuals and businesses. In turn, the persons or businesses that are contributing to the nonprofit corporation may claim their donation as tax-deductible* — which of course is a big selling point when seeking contributions. (*The IRS determines which types of 501(c)(3) entities are permitted to do this.)
Have Questions?
If you have questions, or would like assistance with forming a nonprofit company, feel free to give our customer service team a call between 8am and 7pm CST, at 800-981-7183. Or, send us an e-mail anytime. We’re always happy to help.
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