In the last article, we discussed nonprofits generally and why you may want to form one to further your social impact endeavors. In this article, we’ll walk you through the basics of forming a nonprofit, discuss differences between nonprofit and 501(c)3 status, and pitch how we’re helping create the next generation of social impact.
A Primer on Incorporation
When we say “create” your own nonprofit, we’re referring to incorporating a legitimate business in your state that happens to be a nonprofit. Incorporation means you’ve filed the proper paperwork with your state to create a separate legal entity that happens to be a nonprofit.
Do you need to incorporate? No. Many unincorporated nonprofits exist, and they function as an association of different people trying to carry out activities that one would expect a nonprofit to engage in.
Should you incorporate? It’s a good idea! While skipping the paperwork may sound like a good idea, functioning as an unincorporated nonprofit means there’s no separate legal entity—the folks running the association, like you, may very well be personally on the hook for any debts and liabilities incurred by the unincorporated nonprofit. Incorporation creates a shield between you and the activities of your nonprofit. If an incorporated nonprofit is liable for debt (or something else), your personal wallet won’t take a hit. Exceptions exist, of course, but we won’t get into the weeds here.
You’ve decided you do want to incorporate, but what now?
First, you’ll have to do some research to determine whether your state allows you to file for incorporation electronically or whether you’ll have to file some paperwork physically.
Second, you’ll want to prepare some general information that you’ll reference when completing your forms, whether they be electronic on paper:
A name for your nonprofit.
Tip: Be sure to search if your name is already taken, as your state may reject your filing if it is. All states have the ability to search for existing businesses within the state online. An easy way to find this resource is by Googling “[Your State] entity search.”
Your nonprofit’s purpose. This can be broad or narrow, but the purpose must be something that nonprofits can legally do, such as to “function as a social welfare organization.”
Tip: Keep in mind that your purpose statement may be scrutinized when you file for 501(c)3 status, so if you do hope to file for that designation, be sure your purpose statement doesn’t run afoul of what a 501(c)3-designated nonprofit can do. More info on that here.
Your nonprofit’s registered agent. A registered agent is anyone over 18 (in most states), or an existing business within the same state in which you’re filing, that you designate as having the authority to receive tax and legal documents on behalf of your nonprofit. You’ll need to provide the name and address.
Tip: Many companies offer this service (and thus charge for it), but you can be your own nonprofit’s registered agent (for free!)
Your nonprofit’s management. In Texas, for example, a nonprofit can either have its members (similar to a church and its parishioners) control management of the nonprofit, or have a board of directors do so. For most nonprofits, you’ll want to choose the board route.
Tip: The minimum number of directors required varies by state (it’s three in Texas, for example), but you’ll want to name people you trust (and probably yourself). You’ll also need to provide an address for each director.
The bullets above are the key pieces of information you’ll need to file, but how to file varies by state, as well as the exact information needed.
After filing, you’ll also want to obtain an employee identification number (EIN), and you can find the steps for that here. The EIN functions like a social security number for businesses. While optional, you must have one to open bank accounts and file for 501(c)3 designation.
What’s a 501(c)3?
We’ve mentioned that term several times already, but what exactly is it?
Many people believe that once you have a nonprofit formed, any donations to that nonprofit are automatically tax-exempt and that the nonprofit does not have to pay tax on any purchase. That’s not true! As we discussed in our previous article, a nonprofit is a legal entity with a charitable purpose, but that alone doesn’t provide tax exemption. Taxation occurs at two levels: the state and the federal (nationwide). Every state has its own requirement to make a nonprofit eligible to tax-exempt status within that state (we recommend doing this regardless). But, if you want to accept tax-deductible donations and have nationwide tax-exempt status, you must file for 501(c)3 designation.
501(c)3 refers to a section of the tax code, and the IRS grants you that designation if you meet certain requirements (See Tip #2 above). Filing for 501(c)3 designations requires its own application and depending on the size, type, and expected future income of your nonprofit, you may be forced to file the “harder” way (Form 1023) or the “hard” way (Form 1023-EZ). Neither is fun, and neither is easy. But, if you expect to receive less than $50,000 in donations over the next three years, you should look into using Form 1023-EZ first. Regardless of which route you take, you must file within 27 months from the date you incorporated! If your application is approved, the 501(c)3 designation is made effective back to the start of your nonprofit.
There Must be an Easy Way…
A key takeaway from this post should be that the process to start a non-profit is hard and creates entry barriers for folks from trying to do good in their communities under the benefit of having a nonprofit or even a 501(c)3 nonprofit.
And that’s where we come in.
.NGO created technology where anyone can start accepting tax-deductible donations in minutes rather than months. With our product, you’ll be able to:
Accept tax-deductible donations
Automatically provide tax receipts
Store funds in an embedded bank account
Use an unlimited number of virtual debit cards to manage spending by your team.
For existing nonprofits, this means you don’t need to file for 501(c)3 status. If you don’t have any entity yet, we can even work with you personally.
Currently, we're in open beta. If you want to start using our product today, then visit https://dot.ngo/beta.