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Posted December 22, 2022

What Is 501(c)(3) Status and How Do You Obtain It?

Have you always dreamed of starting a nonprofit organization so you can give back to your community? Maybe you have a charity that’s close to your heart, such as research for autism or helping the homeless, and you’ve always wanted to have the same kind of impact through your own nonprofit.

Whatever your vision, making your nonprofit organization a success starts the same way as any other business—by staying in compliance with government regulations. Your nonprofit organization is accountable to state and federal agencies, including the IRS, which is where 501(c)(3) (also referred to as a 501c3) status comes into play.

What is a 501(c)(3)?  

Section 501(c) of the United States Internal Revenue Code sets forth 27 different types of nonprofit organizations, the most common being a 501(c)(3) designation. This status not only exempts the organization from federal taxes but also allows it to collect tax-deductible donations from individuals and get grants from government agencies and foundations.

A 501(c)(3) organization usually exists for charitable, educational, religious, literary or scientific purposes, testing for public safety, fostering national or international amateur sports competitions, or preventing cruelty to children or animals. As the “nonprofit” name implies, it cannot be organized or operated for any private interests (more on that later).

More than 1.54 million nonprofit organizations are registered in the U.S., according to data from the National Center for Charitable Statistics (NCCS). The nonprofit sector also contributed an estimated $1.047.2 trillion to the US economy in 2016, composing 5.6 percent of the country’s gross domestic product (GDP).

Getting Started With Your Nonprofit

Before you apply for 501(c)(3) status, however, you need to begin at the beginning. Like all businesses, starting a nonprofit begins with a name. After you’ve brainstormed ideas with your friends, family, and peers, check with your Secretary of State’s office to make sure no one else has claimed the name you want. You can easily check availability by doing a free corporate name search through CorpNet for the state or county in which you plan to operate your business.

It’s also a good idea to do a trademark search to see if the name is available in all 50 states. (The search will show you if anyone else has registered for, received, or abandoned a trademark for your proposed name). Once you’ve found a name that’s available and works well for your nonprofit, you’ll need to register and pay the filing fee in your state.

1. Set Up Your Corporation

The IRS requires a 501(c)(3) organization to be organized as a trust, a corporation, or an association. In general, most are incorporated. Your next step, then, should be incorporating as a nonprofit organization.

A nonprofit must file the same initial paperwork as any corporation, with one difference: nonprofits have a mission statement that clearly defines the organization. Deviating from the mission or going beyond the scope of the mission can mean the loss of your nonprofit/tax-exempt status.

Once you’ve created your mission statement, do some research to determine the best place to incorporate your nonprofit. The cost, tax regulations, and laws affecting nonprofit corporations vary from state to state. You don’t have to incorporate in your home state, but you must register the corporation in the state where the organization will conduct the most business.

Once you’ve decided where you want to incorporate, file formation documents with the Secretary of State called the Articles of Incorporation or Certificate of Incorporation. If you’re forming a Limited Liability Company (LLC), the document is called Articles of Organization or Certificate of Organization.

2. Apply for Tax-Exempt Status

In order to be recognized as tax-exempt by the IRS, your corporation must submit a completed, signed, and dated Form 1023-series application with the appropriate fee enclosed.

In some states, you need to complete a separate application to get a state tax exemption. In general, though, as long as you file nonprofit articles of incorporation and obtain your federal 501(c)(3) tax-exempt status, your state tax exemption will be granted automatically.

There is a lot of information required on the Form 1023 and it can be a bit confusing. The IRS website does offer a great list of FAQs for you to read through and a full set of instructions for completing the form.

3. Appoint a Board of Directors

As a corporation, you’re required to appoint a board of directors. A board of directors is a body of members who supervise the activities of the nonprofit organization according to the nonprofit’s bylaws. The responsibilities of the board include calling and organizing the annual corporate meeting, making sure that the board minutes are recorded properly, and generally overseeing the activities of the organization.

If you want to keep your nonprofit/tax-exempt status:

  • You cannot pay dividends.
  • You must comply with complex filing requirements at both the state and federal level in order to establish and maintain tax-exempt status.
  • You are prohibited from engaging in certain activities, such as directly or indirectly participating in any political campaign on behalf of (or in opposition to) any candidate for elective public office.

Although you are forbidden to organize your nonprofit for the benefit of private interests, you are allowed to pay a staff, corporate officers, and yourself a reasonable salary to run the organization.

Public Charity vs. Private Foundation

There are two types of 501(c)(3) organizations: public charities and private foundations. When you receive your approval letter from the IRS, you will see a Foundation Status Classification at the top of your letter that specifies whether your organization is a public charity or a private foundation. What’s the difference between the two?

  • Public charities must get at least 33% of their funding from small donors, the government, or other public charities. Public charities have higher tax-deductible giving limits for individual donors, which makes it easier to raise money. In addition to fundraising, a public charity’s purpose also includes volunteer work.
  • Private foundations don’t do volunteer work. Their purpose is to raise funds to support the work of public charities. Private foundations are more likely to be funded by large gifts from a few corporate or wealthy donors, as opposed to public charities. Private foundations are sometimes formed when the organization cannot be approved as a public charity.

To ensure that you maintain your 501(c)(3) status and stay on the right side of the tax laws, the IRS has created StayExempt.irs.gov to streamline the process and guide you along the way. The site also explains common mistakes made on nonprofit applications so you can avoid them.

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CorpNet can save you precious time and money by completing and submitting the IRS 501(c)(3) and state forms for you! We have extensive experience helping nonprofits in all 50 states incorporate their organizations and apply for tax-exempt status.

<a href="https://www.corpnet.com/blog/author/nellieakalp/" target="_self">Nellie Akalp</a>

Nellie Akalp

Nellie Akalp is an entrepreneur, small business expert, speaker, and mother of four amazing kids. As CEO of CorpNet.com, she has helped more than half a million entrepreneurs launch their businesses. Akalp is nationally recognized as one of the most prominent experts on small business legal matters, contributing frequently to outlets like Entrepreneur, Forbes, Huffington Post, Mashable, and Fox Small Business. A passionate entrepreneur herself, Akalp is committed to helping others take the reigns and dive into small business ownership. Through her public speaking, media appearances, and frequent blogging, she has developed a strong following within the small business community and has been honored as a Small Business Influencer Champion three years in a row.

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