Unlike a for-profit corporation that can typically be formed under state law for any legal purpose, a nonprofit corporation must be formed for a charitable or other tax-exempt purpose as outlined by the state nonprofit incorporation statute. The statute qualifies a broad range of charitable activity for nonprofit purposes but for the nonprofit to also qualify as a 501(c)(3) entity under the tax code, it must fall under the tax code definition, which includes "religious, educational, charitable, scientific, literary, testing for public safety, to foster national or international amateur sports competition, or prevention of cruelty to children or animals organizations." The broadest classification is "charitable," which includes most nonprofit activity that benefits society.
A state nonprofit incorporation statute indicates the steps a new organization must take to incorporate in the state. In some states, the statute requires a nonprofit to choose a name that is distinguishable from other businesses operating in the state, recruit at least three initial board members and select a registered agent for service of process. Generally, at least one person must complete and sign the articles of incorporation for the nonprofit. The articles must be filed with the proper state government entity, along with the appropriate filing fee.
A state incorporation statute typically puts restrictions on certain types of nonprofit activity. Any nonprofit that wants to work in these restricted areas must obtain an approval from the regulating state agency before the state will accept the organization's articles of incorporation. For example, many states would require a nonprofit organization that wants to provide drug counseling to first register its qualifications with the health department. Another example is a nonprofit that wants to provide childcare for children under 5 years old. States typically would require the organization to first obtain clearances from the state child welfare agency.
Requirements for Federal Tax Exemption
A nonprofit's state incorporation must also conform to the requirements of the federal tax code to qualify it for tax-exempt status under 501(c)(3). Many state incorporation statutes do not require some of the provisions that the tax code requires in the nonprofit's articles of incorporation. For example, the tax code requires a nonprofit to explicitly state in its articles that the income generated by the organization will not benefit any individual person. The tax code also requires a nonprofit to include in its articles a statement that it will distribute its assets to another tax-exempt entity if the nonprofit closes down, as well as a statement that it will not engage in lobbying activities. If a nonprofit did not include this information when it originally filed its articles of incorporation with the state, it will have to amend its filing before applying for tax-exempt status with the IRS.