A non-profit entity is a legal means for a group of people to conduct religious, charitable, educational, literary, scientific, or other publicly beneficial work. Non-profit entities can charge for services and pay their employees and staff; however, they do not generate a profit beyond these expenses. Non-profit entities may have members, but they do not have shareholders. If a non-profit entity meets certain qualifications and applies for U.S. Internal Revenue Service recognition, then it may become tax-exempt, and the income it generates will not be subject to income taxation. In many instances, donations to an IRS-recognized tax-exempt organization is a tax-deductible contribution for the donor, which enhances the non-profit entity's ability to raise funds to carry out its public mission.
Establish Firm Groundwork for Your Non-Profit Entity's Success
Create a clear statement of what you want your entity to accomplish. Focus on specific, measurable actions. Instead of "help the poor around Bay Street," write, "serve 500 hot meals per week and provide safe overnight shelter for 100 families in the 10-block area around Bay Street." This statement will help direct the formation of your non-profit entity, and will serve as a draft for your mission statement.
Communicate with others involved with similar issues. Talk to people who are active in your field to find out how their non-profit entities have been successful. Meet with others in your region to determine if another entity is already engaged in the work you hope to accomplish and to connect with people willing to serve as board members and officers.
Determine whether a non-profit or for-profit business entity is right for your purposes. Non-profit entities have many advantages, including tax-exempt status and, under certain circumstances, qualification for grant funding and accepting tax-deductible donations. Restrictions apply to non-profit entities' activities, however, and not all things that will benefit the public necessarily have to be organized in a non-profit manner.
Determine which non-profit entity is right for your purposes. Non-profit entities can take the form of an unincorporated association, a corporation, or a trust. Entities seeking federal tax-exempt status usually incorporate. Neighborhood groups that come together around one temporary project--to build a playground or fight a development proposal--often remain unincorporated associations. Consult a local corporate attorney or your state secretary of state's corporations division for advice on the differences between these entities.
Decide whether you will organize to meet IRS tax-exempt requirements. IRS tax-exempt status has many advantages but also places restrictions on the activities in which an organization can engage. There are also filing fees and annual information returns to be prepared for IRS tax-exempt status. Many entities start out as state non-profit corporations and then apply for their IRS tax-exemption recognition later on; however, if you are planning on doing this, be sure to include in your mission statement and incorporation documents the appropriate language to qualify for a tax exemption.
Get Your Non-Profit Entity Off the Ground
Select a name and reserve it through your state secretary of state's corporations division. Some states charge a small fee to reserve a corporate name; others only charge when you actually register the name with your incorporation documents. Be sure your entity's name is not so similar to other organizations or business corporations as to cause confusion.
Gather your board of initial organizers and hold an organizing session. Keep minutes of this meeting. Sharpen your entity's purposes, bring to light any hurdles in getting started, and determine who will contribute or raise the funds for initial filing fees and setup costs.
Create your corporate bylaws and adopt a formal mission statement. The Foundation Center (http://www.foundationcenter.org) has a free online tutorial on forming a non-profit organization that includes advice on drafting bylaws and incorporation documents. Click&Inc (http://www.clickandinc.com) offers online bylaw and incorporation document drafting services for a modest fee, as do a number of other firms. Designate a legal representative, also called an agent for process or agent for service.
Determine a location, mailing address, and telephone and email contact designations for your non-profit entity. Save money while you are getting started by sharing space temporarily with another non-profit organization. Give your start-up non-profit entity a solid presence by renting a mail delivery address from a private mail service like the UPS Store (http://www.theupsstore.com) and getting a Tracfone (http://www.tracfone.com), Skype, or inexpensive Internet phone service number.
Obtain your federal Employer Identification Number application, IRS Form SS-4, online from the IRS. Apply for your EIN before you register your state incorporation documents. You may also apply for a state-issued tax or entity identification number.
Gain Legal Tax-Exempt Status for Your Non-Profit Entity
Prepare and submit your articles of incorporation and application for a state tax identification number to your state secretary of state's corporations division, along with the necessary filing fees. Most states now allow you to file your incorporation applications online, or at least print out the necessary forms from their websites and mail them in with the registration fees.
Complete either IRS Form 1023 for a tax-exempt organization that qualifies under Section 501(c)(3) of the Internal Revenue Code, or an IRS Form 1024 for all other tax-exempt organizations. Carefully read the instructions for each to determine which is appropriate for your entity. Submit the appropriate form with IRS Form 8718, User Fee for Exempt Organization Determination Letter Request, and the appropriate fee.
Respond promptly to any additional requests for information from the IRS. The IRS can reject an application for tax-exemption outright, but this rarely happens; usually additional documentation is required to support some portion of your application. You might also simply receive an acceptance and tax-exempt designation on your first submission, without additional information being required.
Maintain the entity's legal status by filing necessary annual reports with your state government agencies and information returns with the IRS. You may also need to periodically refresh your trade name filing with the state. Be sure to update any changes in address or in the names of officers and directors when you make your annual filings.
Grow the entity by letting people know the advantages working with a non-profit entity can bring. Include a statement of your non-profit and tax-exempt status on your correspondence, informational documentation, and fund-raising materials to make the most of your non-profit entity.
- IRS regulations place limits on the activities in which non-profit entities can engage and still maintain their tax-exempt status. Lobbying and political activities, as well as fund-raising through methods not related to your tax-exempt purpose, are strictly curtailed. Check with a tax professional regularly to ensure your entity's activities are not jeopardizing your tax-exempt status.
- Gather an assortment of sample articles of incorporation and bylaws before you begin; non-profit entities vary widely in their structure and this will give you a good idea of what will work for you. Volunteer with a similar non-profit entity before you start your own; you'll be doing good and learning the ropes at the same time.