Starting a non profit corporation is a great way for a company with a charitable purpose to raise money though individual donations and grants. Once a non profit attains 501(c)(3) status through the federal government, the income they receive from donations and grants are tax exempt. This means that the corporation doesn’t have to pay taxes to the IRS. Also, donations made by individuals are tax deductible. This means that the donor can reduce the portion of their income that is subject to federal taxes and thereby lower their overall tax liability. There are two major steps to starting a non profit corporation.
Once your company has a name and a valid purpose, the first step in starting a non profit is to file an Articles of Organization with the Department of State (also called the Secretary of State in some jurisdictions) where the company’s office is located. The Articles of Organization filing has to include the name of the company, the county where the office is located, the type of non profit being formed (there are usually four different types), the names and addresses of the officers and directors, the designation of the secretary of state as an agent for the service of process, and a statement from the registered agent, if the company has one, that they are an agent of the non-profit along with their name and address.
Before the company files their Articles of Organization, they must draft By Laws that are in compliance with their state’s Not for Profit Corporation law. By Laws are the internal governing document of the organization. They typically detail when meetings will be held, the procedures for electing officers and directors, and the instructions for how corporate formalities will be addressed.
To enact By Laws, the company must hold a meeting of the board of directors. The first meeting of the board is commonly refereed to as the organizational meeting of the board. Typical agenda items for this meeting include approving By Laws, officers, and the initial transactions of the corporation like opening the company’s bank account. At the conclusion of the meeting, minutes should be drafted. These and future meeting minutes should be kept in a corporate records binder that archives these and future corporate memoranda of the company.
The second major step of forming a Non Profit Corporation is to apply for 501(c)(3) tax exempt status from the federal government. To file for tax exempt status a company must complete form 1023 with the IRS. Filling out this form can be a long and tedious process. The company has to include information on the application including its organizational structure, history, finances, operations, activities, and internal policies. In addition, three items that must be included in the application for tax exempt status are (1) the company’s valid tax exempt purpose, (2) a statement from the company that they won’t engage in certain political and legislative activities, and (3) a statement from the company that if they dissolve they will dedicate their assets to another 501(c)(3) organization. More information about filing for federal tax exempt status can be found in IRS Publication 557.
Once the federal tax exemption process is complete, the company should then work toward obtaining their state tax exemptions. In New York this information can be found on the New York State Department of Taxation and Finance website.
In addition to obtaining state tax exemption, the company should also address some state reporting and registration requirements. In New York, information regarding these rules and requirements can be found on the attorney general’s website.
Forming a non profit corporation is a process that can take months, but is a worthwhile endeavor for the cause your organization will take on. The end goal is one that ensures the maximization of resources to address the variety of worthwhile activities and causes that exist in our communities. This article is a synopsis of the process that is not meant to substitute the advise and counsel of an attorney that can assist your company when the inevitable roadblocks occur.