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Guide to Setting Up Nonprofits with 501(c)(3) Status

Many nonprofit organizations within the United States of America are registered with the IRS as a 501(c)(3) organization. If you are planning on setting up your own nonprofit organization, the question regarding whether you should or shouldn’t acquire a 501(c)(3) status might have been circling your mind, and it should, due to the plethora of benefits that come with it.

Any and every organization that is a nonprofit, i.e. charities, churches, etc., is eligible to apply and register as a 501(c)(3) organization. This means that the organization must be operated in a way that does not generate revenue for the organization or for any of the individuals running it. Unlike churches, nonprofit organizations need to submit a registration form to the IRS in order to acquire the status.

Once registered, the organization will face exemption from all taxations that are imposed onto companies by the federal government. The said organization must be functioning solely for charitable causes or religious, literary, scientific or educational causes.

Benefits

There are numerous benefits that an organization acquires under IRC Code 501(c)(3). The first and most obvious benefit is that the organization faces exemption from federal income taxes which is the utmost benefit for nonprofit organizations. Tax-deductible donations or contributions are also offered once the organization acquires the 501(c)(3) status. Other benefits include exemption from federal unemployment, state income, employment and sales taxes, abridged postal rates and tax-exempt financing.

Restrictions

Upon completion of registration for 501(c)(3) status, the organization is not only exempt from taxation, but their rights to intervene in political campaigns either in favor or against candidates, as well as the organization’s efforts to influence or manipulate legislation is also limited. The net income or the profits of the organization must not, in any way, be used to nourish the private or selfish benefits of the founder, the family of the founder, any of the shareholders, or any other individuals that have been employed to run the organization. The revenue generated must only be used for the cause that the organization has been set up for.

Setting Up a Nonprofit

Patience is your best friend when you go to register your nonprofit organization as a 501(c)(3). There is a lot of lengthy and extensive paperwork, and the applications are bound to take a lot of time to complete. Keeping the state filings aside, you can expect to put in at least 105 hours just to complete the Form 1023 application.

Once the application is filled out and submitted to the government, the time for reviewing it comes into action. During this time, the slightest mistake, if any, can cause a delay of twelve to twenty months just to get the final approval. Thus, it is crucial to ensure that there are absolutely no mistakes in the initial application.

The Procedure:

Setting-Up a Nonprofit

  1. Apply for the Name: Just like you must apply for the name for any other business, you need to do the same for your nonprofit organization. After confirming that the name you want is not taken by any other organization, you can carry on the procedure and register the business with your state.  
  2. Legal Entity: Due to the regulations set by the IRS, nonprofit organizations must not be partnerships or sole proprietorships. Foundations, corporations, funds, and articles of associations are all acceptable legal entities.
  3. Mission Statement: If you do not know how to create a mission statement, you can seek advice from other charities and nonprofit organizations. The mission statement must be direct and precise as to who you serve and what the purpose of the corporation is.
  4. Seek Help: Hire a company, preferably one who specializes in nonprofit organizations. This is imperative because you want your forms and other details to be filed precisely.
  5. File the Application: According to the law of your state, file your nonprofit’s incorporation papers in proper order.

Tax-Exempt Status

Once you have completed the necessary steps to set up your nonprofit organization, you will need to apply for the 501(c)(3) separately. There are various application materials that must be submitted, in order to meet the criteria required for the tax-exempt status.

  1. After your organization is legally recognized and you have completed all the paperwork for it, you will need to apply for the Employer Identification Number through the SS-4 Form. However, if you attempt to register for the EIN when your organization is not legally formed, you may face complications.
  2. The next step would be to gather all current financial statements and also financial plans for the next two years. Once you have all documentation, you can apply for the tax-exempt status under 501(c)(3) through Form 1023. You may need additional help to complete this one, and a filing fee will also be charged.

With the assistance of the help you’ve already sought out, you’ll be sure that these are the only documents that you need to fill out. If not, then fill out any other documentation and ensure that all the steps have been completed. Your state and the IRS are in total charge of whether or not your organization is eligible for tax-exempt status. You just have to make sure that the motives of the organization are absolutely clear and there isn’t any documentation that you’re leaving behind. Also, stick to the regulations of the IRS 501(c)(3), because going against any of these may cause mayhem for you.

CharityNet USA

Serving as a one-stop-shop, nonprofit resource center, CharityNet USA offers nonprofit consulting services helping entrepreneurs, start-ups, and established nonprofit organizations start or grow, with over 30 expert business solutions. Whether you want to know how to start a nonprofit organization or need help for your existing organization, CharityNet USA can help. We also help nonprofit organizations in acquiring a tax-exempt status. You can contact us at 407-857-9002 to talk to a customer service representative or visit our website for more information.