How to Become Tax Exempt in Ohio

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Tax-exempt status means that an organization need not pay either federal or state income taxes. Naturally, getting that status requires jumping through both state and federal tax law hoops.

If the business is to operate in Ohio, it pays to start with an overview of state rules for becoming a charitable organization, then move on to understand 501(c)3 or tax-exempt designation.

What Is a Nonprofit Organization?

Although many people use the terms "nonprofit" and "charitable" as synonyms when it comes to organizations, this is a fallacy. An organization can be organized for charitable purposes without being a nonprofit. It can also be a nonprofit and formed for one of various purposes.

While a charitable purpose is one of them, nonprofits in Ohio can also be formed for educational, religious, scientific, community development, or other socially beneficial purposes.

Choosing a Type of Business Entity

Most nonprofit organizations are formed as corporations, but they can also be unincorporated organizations or even trusts. The choice of business entity is influenced by many factors, including:

  • How long the endeavor is to last.
  • Activities the organization intends to undertake.
  • Whether the organization wants to own or lease facilities.
  • Whether the organization will hire staff.
  • Whether personal liability protection is required.

Personal liability protection is a very important issue. It means that if a nonprofit is sued, its owners are not personally on the hook for any damages if the association is incorporated. They may be on the hook if it is not. It's wise to consult an experienced attorney to assist in determining the best business status in a particular situation.

Are All Ohio Nonprofits Tax-exempt?

Ohio nonprofits are not automatically exempted from state and federal taxes. In order to acquire nonexempt status, a nonprofit corporation must file an application with the Internal Revenue Service (IRS).

The IRS has very specific requirements for the language that must be used in the purpose clause of the Articles of Incorporation of a nonprofit for it to be granted tax-exempt status. Charitable organizations seeking exempt status under section 501(c)(3) of the Internal Revenue Code must include certain specific provisions in their articles of incorporation.

IRS Requirements for Federal Tax Exemption Status

There are two basic requirements:

  • The organizing document must limit the organization's purposes to the exempt purposes set forth in section 501(c)(3). This can be done by reference to that section. The document must not allow primary activities.
  • The organization's assets must be permanently dedicated to an exempt purpose, including on dissolution.

If the requisite language was omitted when the initial filing was made to the Ohio Secretary of State, the nonprofit must first file an amendment to their state documents before filing with the IRS for tax-exempt status.

Forming a Tax-exempt Ohio Corporation

One of the early steps to take when forming a tax-exempt corporation under Ohio law is the selection of a name. The name cannot be a duplicate of the name of any other business in the state of Ohio.

Therefore, once a name is selected, check with the Ohio Secretary of State (SOS) to be sure the name is not in use. Then register the name with the Ohio SOS to prevent another association from using the name.

Business Name Registration Options

There are two options for registering a name:

  • Form 534 application gives the association a "permanent" right to the name, subject to renewal every five years.
  • Form 544 application gives the association the right to exclusive use of the name for three months.

Other Registration Filing Requirements

At this early point, it is a good idea to request an Employment Identification Number, or EIN, from the IRS. The number, equivalent to a social security number for an individual, is a unique, 9-digit identification number and costs nothing to obtain. Obtain one for the association by phone or by mailing Form SS-4.

It is also a good idea to prepare the nonprofit's bylaws or an operating agreement, addressing the group's purpose, structure, members, rules and meetings. This document provides structure and rules for the organization, but it is not required by the Ohio Secretary of State.

Articles of Incorporation for the Corporation

Two legal documents are required in order to register a nonprofit corporation in Ohio, Initial Articles of Incorporation and the Appointment of Statutory Agent. These are filed with the Ohio Secretary of State using one form, Form 532B. The filing fee is about $99.

The Initial Articles of Incorporation are regulated by Ohio statutes. The document must be signed by the person creating the corporation, and must include:

  • Name of corporation.
  • Town in Ohio where the principal office of the corporation will be located.
  • Purpose for which the corporation is being formed.

Statement of Purpose

Note that the required statement of purpose in the Articles will be the only purpose for which the corporation will be allowed to operate. Therefore, it must be carefully drafted, ideally by an attorney. This purpose clause will help the IRS determine whether the corporation qualifies to be tax-exempt.

Other Required Information

Additional information may be provided in the Articles, such as:

  • Identifying the initial directors.
  • Identifying the initial members.
  • Setting out any qualification of membership.
  • Setting out any provision to define or limit the exercise of authority of the corporation, the incorporators, the directors, the officers, the members or any class of members.
  • Specifying the period of existence of the corporation if it is to be other than perpetual.

Appointment of Statutory Agent for the Corporation

At the same time the Articles are filed, a nonprofit corporation must appoint a statutory agent. This is accomplished in the same Ohio State form in the original Appointment of Statutory Agent section of the Initial Articles of Incorporation.

This agent agrees to accept service of process on behalf of the corporation. Note that if the corporation does not fill in this section to appoint a statutory agent when the Articles are filed, the Ohio Secretary of State must reject the Articles.

A statutory agent can be either a person who resides in Ohio or a domestic or foreign corporation, nonprofit corporation, limited liability company, partnership, limited partnership, limited liability partnership, limited partnership association, professional association, business trust, or unincorporated nonprofit association that has a business address in this state.

Signing the Statutory Agent Form

The person incorporating the nonprofit must sign the Original Appointment of Statutory Agent form. If there are more than one incorporator, a majority of the incorporators must sign the Original Appointment of Statutory Agent. The agent must also sign to indicate their acceptance of the appointment.

IRS Exemption Application

Once the business has been registered in Ohio, it is time to ask the IRS for tax-exempt status. Applications for recognition of exemption must be submitted electronically online at www.pay.gov. There are three categories of nonprofit organizations:

  • Charitable, Religious and Educational organizations [501(c)(3)].
  • Social Welfare Organizations [501(c)(4)].
  • Other Tax-Exempt Organizations [501(a)].

For the first category, submit Form 1023 or 1023-EZ. For the second category, use Form 8976 and Form 1024-A. For the third category, use form 1024.