Starting a Non-Profit in Any State: File a 501c3 Non-profit Corporation

How do I form a non-profit?

The information required for Filing Articles of Corporation or a Certificate of Corporation varies by state and type of business. If you incorporate through SunDoc Filings, simply complete our on-line order form or place an order by phone, and we prepare and file your Articles of Corporation. You must also pay filing fees and any applicable initial franchise taxes or other fees.

What is a 501(c)(3) public charity?

A 501(c)(3) public charity is an organization that (1) has been organized under state law, (2) is operated for a 501(c)(3) purpose, (3) benefits an unidentified charitable class of people, (4) engages in activities that are non-political in nature, and (5) derives at least one-third of its support from the general public. A 501(c)(3) purpose includes, but is not limited to educational, religious, scientific, medical and charitable endeavors.

Is it difficult to set up a 501(c)(3) public charity, private foundation or other type of tax exempt organization?

No. Most people forming non-profit organizations prefer to set up a 501(c)(3) public charity because the opportunities for public donations are far greater. Private donors to a 501(c)(3) "public charity" may donate up to 50% of their adjusted gross income. Donors to a "private foundation" can only donate up to 30% of their adjusted gross income.

Ultimately, the IRS will look at an organization's primary source of financial support to determine if it qualifies as a public charity or a private foundation. In general, if an organization derives its support from a relatively few number of people, the IRS will classify the organization as a private foundation. If the organization's source of support is large and varied enough, the IRS will usually classify the foundation as a public charity.

Do I need an attorney to incorporate?

No. You can prepare and file the Articles of Corporation yourself, but you should understand the requirements of your intended state of incorporation. If you are unsure if forming a legal entity will benefit your business, or what business type you should form, you should consult an attorney or accountant.

Is my organization tax exempt once I file my non-profit articles of incorporation?

No. While non-profit status is granted by your state, tax exempt status is granted at the federal level by the IRS. You must complete a separate IRS application to be granted tax exempt status.

How many board members and directors does my non-profit organization need?

Initially, the founders and/or persons who oversee the operation of your non-profit serve as its board members. In most states, one person may serve as the sole director for incorporation purposes. However, when submitting a 501(c)(3) application or other type of tax exempt application, the IRS almost always requires at least three distinct individuals to serve on the board of directors.

In general, the IRS prefers directors who are volunteers. Don't worry if you initially only have one director. You'll have the chance to add more directors later.

Three directors are required who are unrelated by blood or marriage. Keep in mind that officers may be "reasonably" compensated. For example, if an organization receives $100,000 in its first year, and an officer receives a $50,000 salary, the IRS would probably consider this an "unreasonable" amount. Also, a non-profit corporation must report its payroll just as any other organization would be required to do. Generally, the board of directors elects officers to run the day-to-day operations. The IRS though, prefers you name at least three individuals to serve as officers. It is perfectly acceptable, however, to elect company officers who also serve as members of your board. For example, you can have a director/president, a director/vice president and a director/treasurer.

Do we need to prepare a mission statement and operating budget?

No, but you may find it helpful for your internal operations to have a mission statement.   However, you must have an operating budget. This is required and will be reviewed in advance by the IRS. Each organization must submit a budget when applying for 501(c)(3) exemption. This budget must include a statement of the organizations revenue and expenses and a balance sheet that details the first three years of operation.

How much does it cost to submit my tax exempt status application to the IRS?

The IRS charges a one time fee to review and approve your application. The filing fee is based on your projected budget. If you expect annual revenues of $10,000 or less in your non-profit's first three years, the filing fee will be $300. For revenues exceeding $10,000 per year, the filing fee will be $750.

How long will the IRS take to respond to my tax exempt status application?

The IRS response to a 501(c)3 application takes 3-6 months. While expedited service is available on a limited basis, it is not guaranteed.

Does the IRS require salary information for tax exempt status applications?

Yes. The IRS wants to know what percentage of the overall budget is devoted to salaries. If salaries are large, the IRS may determine the non-profit is actually benefiting the salaried directors, not the non-profit's programs.

In addition, the IRS wants to see how much each board member is paid. Non-profit applications must justify the amount these directors are being paid. If the amount is too high, the IRS will probably ask you to provide justification for the salaries or ask you to revise the numbers downward.

People who are being paid by the non-profit are also considered "interested" persons. In other words, it is in their interest to approve pay increases for themselves, especially if they are directors. If a majority of the board members are compensated, the IRS perceives a risk of pay increases spiraling out of control.

Can I still be a non-profit if I don't apply for tax exempt status?

Yes, you are a non-profit corporation once you are filed with the state. However, your corporation will still be liable for income taxes. Donations made to your non-profit will not be tax deductible without tax exempt status. Further, it may also be difficult to obtain grants if you are not a 501(c)(3) organization.

Can I start a non-profit for the benefit of one person?

No. Non-profits must benefit the public. To create a legal entity to help out one individual, seek the advice of an attorney to start a trust.