How to Avoid a 501 (c) (3) Corporation Denial

By Patrick Gleeson, Ph. D.,

The IRS has several specific requirements for 501(c)(3) nonprofit organizations. It will deny a nonprofit's application for 501(c)(3) status if it fails to comply with any one of them.

Two IRS Examples

The essential IRS requirements for a compliant charter or charitable trust have to do with the presence of specific bylaws in the organizing document you submit with your application. One good way of understanding these requirements is to look at two examples of compliant 501(c)(3) organizing documents that the IRS provides, one a charter, the other a charitable trust.

Charter Organizing Documents

The IRS's sample charter document is somewhat simpler, and contains most of the requirements a smaller organization is likely to find relevant. These are:

  • A majority of the members must be U.S. citizens
  • All charters must be corporations, unincorporated associations, community chests, funds or foundations. Individual ownership is not allowed.
  • The organization must be exclusively for charitable, religious, educational or scientific purposes.
  • Only incidental and nonessential activity for other purposes is allowed. An example of this would be a gift shop run by a museum, where all the proceeds went to fund the museum's expenses. 
  • The trustees are all identified in the charter document, which must also identify the charter itself by name and address. 
  • None of the earnings of the organization shall benefit any member, trustee, officer or private person except for reasonable compensation for services rendered.
  • When the organization is dissolved, all assets must be distributed to one or more 501(c)(3) organizations.

All of the above requirements must be spelled out in the charter's organizing document, as in the provided IRS example.

Charitable Trust Organizing Documents

The IRS's sample charitable trust document (technically a "Declaration of Trust), has several bylaws that reference the same requirements in the sample charter document. In addition, it requires the following:

  • The trustees may accept assets from any donor, but no bequest, gift or other transfer can carry with it any requirement contrary to the 501(c)(3) nonprofit's charitable purposes.
  • The charitable assets may be distributed only within the United States or its possessions.
  • The trust shall continue forever unless terminated by the trustees. If terminated, the assets must be distributed to one or more 501(c)(3) organizations.
  • No trustee shall authorize any conduct  by anyone associated with the trust that is contrary to the charitable purposes of  a 501(c)(3)
  • Several more bylaws in the sample document, six through nine, specify the rights and obligations of trustees in carrying out business on behalf of the trust. The underlying principal of each is that the trustees have a fiduciary duty to act in compliance with the charitable purposes of the trust. 

Other Nonprofit Requirements

The IRS sample documents do not fully describe the operation of nonprofits. They only specify those requirements for attaining 501(c)(3) status. In practice, a 501(c)(3) charter will probably have many more bylaws common to nonprofits generally, such as those cited by GrantSpace: the size and function of the board of directors, rules and duties of directors and officers, operating rules and procedures, conflict of interest policies and the details of grant money distributions.

Tip

Starting a 501(c)(3) also requires registering the organization with the state and, in some states, making a separate filing for state tax exemption.

About the Author

Patrick Gleeson received a doctorate in 18th century English literature at the University of Washington. He served as a professor of English at the University of Victoria and was head of freshman English at San Francisco State University. Gleeson is the director of technical publications for McClarie Group and manages an investment fund. He is a Registered Investment Advisor.

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