Nonprofit Formation

Nonprofit organizations are set up with a variety of goals and activities in mind. Permissible nonprofit activities are listed under Section 501(c) of the Internal Revenue Code, and the most common one is 501(c)(3), which governs organizations existing for "religious, charitable, scientific, literary, or educational purposes." With any nonprofit formation, however, the goal is achieving a tax exempt status. In order to do this, the nonprofit organization must be set up and maintained properly.

Qualifying an Organization

To be clear upfront, a nonprofit is not designed for occasional charity work. It is also not designed for businesses that simply give a lot to charity, as that's what charitable tax deductions are for. Tax exempt status will only be granted if your organization is engaged full-time in one or more of the purposes that qualify it for tax exempt status under Section 501(c) of the Internal Revenue Code. We can discuss your situation with you if you are unsure whether your organization qualifies.

Does a Nonprofit Make Sense?

Even if your organization is planning on engaging exclusively in some form of charitable work, a nonprofit does not necessarily make sense in every situation. You must weigh whether there will be employees or whether enough funds will pass through the organization to justify setting it up in the first place. While perhaps a charitable endeavor, running a little league baseball team is not likely to be worth the cost of forming a nonprofit. However, if the organization will employ one or more persons full time, or if substantial funds will pass through it, a nonprofit can make a lot of sense.

The Formation Process

Following are some steps we take you through in determining whether a nonprofit organization makes sense in your situation, as well as what you can expect from the formation process.

1. Make Sure Organization Qualifies. This is the first step because if your organization does not qualify for tax-exempt status, you will have wasted a lot of time and money.
2. Choose an Organization Name. As with an S-Corp or an LLC, you must choose a unique name for your nonprofit organization that is not confusingly similar to an existing one.
3. Choose a Registered Agent. Anyone 18 years or older that resides in the state of formation may be the agent. Usually it is a director or a friend, but a separate service may be used.
4. Choose a Board of Directors. Usually a board of three individuals is sufficient, but you may choose more. They are not easy to change, so be careful with selection.
5. Decide Asset Dissolution Plan. If a nonprofit is dissolved, its assets must go to another nonprofit. We recommend naming a preferred organization with a similar purpose then a larger "backup" organization with an acceptable purpose, just in case.
6. Submit Articles of Organization. Sometimes called Articles of Incorporation or Articles of Formation, these must be submitted with state fees.
7. Develop Bylaws. This is kept internally, but is often needed when opening new accounts, and also dictates the addition or removal of directors and employees, including other decisions.
8. Apply for State Tax & IRS Tax Exemption. These applications should be filled out with care, as the state and IRS decide if your organization qualifies. These are submitted with state and federal fees, respectively.
9. Comply with Ongoing Requirements. While not a step to formation, once the nonprofit is formed, it is important to maintain it properly so that its status is preserved.

If this seems more involved than the process for forming a for-profit S-Corp or LLC, that's because it is! Nonprofit formation is more expensive in state and federal fees, and more time consuming from the legal point of view. However, the potential benefits to be reaped from creating a nonprofit organization are great, particularly if your nonprofit will be doing a lot of charitable or social good.

As with the Operating Agreement of an S-Corp or LLC, the development of Bylaws for a nonprofit is very crucial. Your Bylaws will govern any future disputes to the extent permitted under law, so must be drafted with care. Further, with a nonprofit, compliance with ongoing requirements for maintaining tax exempt status is critical. These requirements include not supporting political candidates and avoiding distribution of excess funds to individual members or directors, among others. After formation, we assist you in understanding your organization's ongoing requirements.