Like starting any other business, when forming a non-profit organization, you need a plan and prepare a mission statement. For small non-profits organizations the IRS offers an expedite program that grants 501(c)3 exempt status in approximately 90 days.
In addition to the standard requirements involved in starting any business, to form a nonprofit you need to:
- Get an Employer Identification Number (EIN).
- Form a Board of Directors.
- File Your Founding Documents.
- Apply for 501(c)3 tax exemption with the IRS.
There are three basic types of nonprofit organizations:
- Informal Non-profit Organizations
- Incorporated Non-profit
- Tax-Exempt Organization
Informal Non-profit Organizations
You can form an informal non-profit, simply by getting together with other people to provide support or services to benefit others. There are no special benefits in being an informal non-profit, other than personal satisfaction in helping others, but there may be certain legal liabilities as you conduct charity activities without incorporating and the members’ or donors’ contributions are not tax deductible. This type of non-profit organization is not obligated to file tax returns.
Incorporated Non-profit Organizations
This type of nonprofit is formed by incorporating in a particular state to form and be recognized as corporation. A corporation takes the place of individual ownership. The corporation owns itself, and therefore, can own its own property, have its own bank account, take out its own loan, and can continue on its own even if the founder leaves the organization. One of the major benefits of incorporation is that the corporation takes on legal liability and financial risks so that founders, officers, and board members have little or no liability and with the exception illegal acts, or gross fiscal misconduct. Members’ or donors’ contributions are not tax deductible and the non-profit organization must keep a detailed records of the use of contributions received in case the IRS chooses it for an audit. This type of non-profit organization is not obligated to file tax returns.
Nonprofit corporations may be formed to benefit members of an organization, a club, a mutual benefit society or for some public purpose such as a disaster relief, social assistance programs, or youth development programs and can be classified in many ways, including as a public benefits corporation, public charity, or educational foundation.
Nonprofit corporations must file with the IRS as a separate step in order to receive tax exempt status. An organization cannot receive tax exemption unless it was first formed as a corporation with an accepted charitable structure and purpose. This type of non-profit organization is obligated to file tax returns if donations are over $50K per year also need to and include a detail of each donor to validate it with the IRS. Members’ or donors’ contributions are tax deductible and the non-profit organization must keep a detailed records of the use of contributions received in case the IRS chooses it for an audit.
The deadline for tax filing is May 15. The time frame for the approval of the exempt application with the IRS is 90 days if all requirements are met. Not all nonprofit organizations are eligible for tax exempt status. Good news is, our experienced team can give you advice and help you with completing the right application forms, which will be most time and cost-effective.
The IRS charges $400 for the application if planned donations are limited to $40K per year and $750 if they are over $40K per year.
To start the filing process you need a non-profit company established in your state:
- Articles of Incorporation
- Employer Identification Number
- By-laws of the Organization
- Minutes of Board Meetings
- Names, Addresses, and Resumes of Board Members
- Names and addresses of all Active Members
- Inventory of Assets
- Inventory of Liabilities
- Rent/Lease Agreements and Contracts
- Revenue and Expense Statements
- Written Reason for Formation and History
- Organization Mission Statement
- Organization Activities, Operations and Programs Documentation
- Financial Support Documentation
- Fund Raising Program Descriptions
Tax-exempt corporations are required to operate their business in certain ways in order to keep their exemption status. For example, they need to file form 990 annually if donations are over $50K and meet other IRS requirements, such as keep their books open for public inspection. Some states, like California, provide with additional requirements for tax-exempt entities.
At FAS CPA & Consultants we have helped both religious and lay organizations to receive their 501(c)3 exemption status. For a clarification on all requirements and procedures give us a call and we will help you to choose the most convenient nonprofit structure according to your plan and objectives.
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