How to Run Your Own 501(c)(3)

By Wayne Thomas

Running a 501(c)(3) tax exempt nonprofit requires you to adhere to both state and federal law. Tax exempt status is obtained through the Internal Revenue Service (IRS) and limited to only those nonprofits that further a specific charitable, scientific, educational or religious purpose. Although 501(c)(3) organizations enjoy relief from federal income taxes, your tax exempt status depends on whether your nonprofit follows specific reporting and record keeping requirements. Understanding how state and federal law affects the running of your 501(c)(3) organization will help ensure that your organization operates effectively.

Incorporation

The first step to running a 501(c)(3) organization is to incorporate as a nonprofit under state law. This typically involves selecting a unique business name, and recruiting directors to serve on the board. The directors you select will be in charge of making strategic and financial decisions for the organization, and are responsible for ensuring your nonprofit complies with all applicable laws. Some states, including California, require only one director, while other states require more, such as three in New York. The next step is for you to draft articles of incorporation. The articles operate like a constitution for your organization, providing both formation information and specifying your charitable purpose. You then file your articles at the local level, usually with the secretary of state.

Bylaws

Once the articles are filed, you hold your first organizational meeting with the directors. You will adopt corporate bylaws at this time. Bylaws set forth the internal rules and procedures for how your nonprofit will operate. There is no set format for bylaws, but typical issues addressed by these documents include how the board should function, how meetings are to be called, and how grant money is to be distributed. The composition of the board is important at these initial stages, as the managerial decisions made in accordance with the bylaws will set the tone for how your nonprofit functions. The bylaws lay the groundwork for effective operations going forward, and they should be kept on file with your nonprofit for easy reference.

Ready to form a nonprofit? Get Started Now

Tax-Exempt Status

Once your nonprofit is formed, you may pursue 501(c)(3) status. This is accomplished by filing Form 1023 with the IRS. The form requires you to explain the charitable purpose of your organization and include additional information regarding corporate assets and salaries. You are also required to indicate that, upon dissolution, your assets will go to another tax-exempt organization. Once approved by the IRS, you will receive a confirmation letter. Keep this letter on file at your nonprofit.

Reporting Requirements

While you are running your nonprofit, you must adhere to certain state and federal reporting requirements. Failure to follow these laws could result in loss of exempt status and revocation of your certificate of incorporation. Some states require the filing of annual or biennial reports, and if your organization does more than $50,000 in gross receipts, you must file a report with the IRS. Other state requirements might include at least one board meeting per year, and the taking and recording of minutes at board meetings. If your organization will be doing any fundraising, additional registration and reporting requirements may be required.

Regulatory Compliance

As part of running your 501(c)(3) nonprofit, you must ensure that no directors or staff members let personal financial gain influence corporate decisions. An example might be if your organization were interested in a obtaining a building to serve as the head office, and a director votes in favor of the nonprofit purchasing a building from his private real estate company. To avoid the appearance of impropriety, the IRS recommends that all nonprofits draft a policy requiring disclosure of any potential conflicts of interest, as well as a procedure for how conflicts are to be addressed, such as requiring the director to abstain from voting in this example. In addition, as an exempt organization, you are expressly prohibited from conducting any political lobbying efforts and can lose your status if this rule is ignored. For this reason, it is important to communicate all legal requirements to your directors and employees.

Ready to form a nonprofit? Get Started Now
The Requirements to Start a Non-Profit Business in South Carolina

References

Related articles

Tax-Exempt Status in Massachusetts

Massachusetts exempts certain nonprofits from having to pay corporate income, property and sales taxes. In order to qualify, your nonprofit must be formed under the state incorporation statute and must obtain federal tax-exempt status from the IRS. After the nonprofit is designated as exempt by the IRS, Massachusetts requires additional filings for each type of tax in which you seek a state exemption.

Conflict of Interest Policy for 501(c)(3)

Tax exempt nonprofits serve to promote a particular public good. Sometimes, however, individuals involved with the organization may choose to use their position of authority to gain personal benefits at the expense of the nonprofit. This is referred to as a conflict of interest, and having a policy in place to properly handle a conflict when it occurs can help your organization maintain compliance with the Internal Revenue Service.

How to Incorporate & Establish a Club as a Non-Profit 501(c)(3)

To qualify for tax exemption under Section 501(c)(3) of the Internal Revenue Code, your club must have an "exempt purpose". If your club meets one of the required purposes, you may apply to be recognized as a non-profit, tax-exempt organization. To apply for this recognition, additional filings above and beyond initial incorporation filings may be required at the state level, and will be required with the IRS.

Doing the right thing has never been easier.

Related articles

What Happens When I Dissolve a Non-Profit?

When you dissolve a nonprofit organization, the steps you will need to take are similar to those for dissolving a ...

Non-Profit Bylaws

The bylaws of a non-profit organization guide its directors, officers, and employees on how to conduct themselves and ...

How to Apply for Nonprofit Status in New York State

For an organization to be exempt from New York state taxes, it must incorporate as a nonprofit corporation by filing ...

How to Incorporate a Ministry in Texas

Donations often serve a vital role in ensuring the survival of a ministry. While it is not uncommon for these religious ...

Browse by category
Ready to Begin? GET STARTED