A group of people have a great idea. They want to start a nonprofit. Many have no idea how it works or have half-started the process and discover they are out of their element. This post is just a brief overview and should not be considered exhaustive (or even comprehensive), and this is definitely not legal advice. 🙂 So, all disclaimers aside, the three (3) steps to starting a nonprofit are, in short: 1.) incorporation, 2.) income tax exemption, and 3.) sales tax exemption.
Step 1: Incorporation. This step of the process takes place with the Secretary of State’s office. Every organization must draft Articles of Incorporation and Bylaws. The Articles are like your Declaration of Independence – it says who you are, what you do, what you can do, and what you can’t do. They are filed with the Secretary of State and create the nonprofit. The Bylaws are like your Constitution – it’s your rule book. They specify the duties and responsibilities of the Directors and Officers, set out the elections process, explain membership and members’ rights. When you have a governance question about your organization, the Bylaws are where you start for answers. This why it’s SOOOO important to have someone professional help you draft them – they should tell you everything and when they don’t you could get yourself in trouble. The Bylaws are not filed.
Step 2: Income tax exemption. The second step is asking the IRS for tax exemption. This is also called 501(c) tax exempt status, and, it’s actually exemption from paying tax on income (earned, from donations, or otherwise generated). See the happy, smiling lady in the picture above? She’s holding her IRS Determination Letter. When that document comes, it’s a happy day. According to the IRS, it takes the average person 80 hours to complete the Form 1023 application…and that’s assuming you do it right and don’t have to deal with 100 questions from the IRS after they read it. That’s two (2) forty (40)-hour work weeks – solid – of just working on the application. A pro can do it much faster, of course. You may even qualify to file the shorter, Form 1023EZ.
Step 3: Sales tax exemption. The third step is filing for sales tax exemption from the State Department of Revenue. This exemption means the organization can make tax free purchases of items that further the charitable mission (but administrative items). More about that here.
Obviously this is just the tip of the iceberg. Once all the paperwork is done there is so much more to do…the ongoing work of fundraising, setting up internal controls, management practices – all the good stuff Legal for Good loves to help people with. Contact us today!!