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.
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.
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.
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.
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.