Here’s how to form a nonprofit corporation and receive a 501(c)(3) tax exemption.
Forming a nonprofit corporation is much like creating a regular corporation, except that nonprofits have to take the extra steps of applying for tax-exempt status with the IRS and their state tax division. Here is what you need to do:
- Choose an available business name that meets the requirements of state law.
- File formal paperwork, usually called articles of incorporation, and pay a small filing fee (typically under $100).
- Apply for your federal and state tax exemptions.
- Create corporate bylaws, which set out the operating rules for your nonprofit corporation.
- Appoint the initial directors. (In some states you must choose your initial directors before you file your articles, because you must list their names in the document.)
- Hold the first meeting of the board of directors.
- Obtain licenses and permits that may be required for your corporation.
Choose a Business Name
Before you form your nonprofit corporation, you need to decide on a name that complies with the rules of your state’s corporate filing office. The information packet you receive from the filing office should contain your state’s rules, but the following guidelines commonly apply:
- The name of your nonprofit cannot be the same as the name of another corporation on file with the corporations division.
- The name must end with a corporate designator, such as Corporation, Incorporated, Limited, or Corp., Inc., or Ltd. (This is required in only about half of the states.)
- The name cannot contain certain words prohibited by the state, such as Bank, Cooperative, Federal, National, United States, or Reserve.
Your state’s corporations division can tell you how to find out whether your proposed name is available for your use. Often, for a small fee, you can reserve the name for a short period of time until you file your articles of incorporation.
In addition to confirming that another corporation in your state isn’t already using your proposed name, you must make sure your name won’t violate a trademark owned by another company (in your state or out of state). To do this, you’ll need to conduct a trademark search.
Once you’ve found a legal and available name, you aren’t usually required to file or reserve the name with your state — when you file your articles of incorporation, your nonprofit’s name will be automatically registered.
Prepare and File Your Articles of Incorporation
After you’ve decided on your business name, you must prepare and file articles of incorporation with the corporate filing office. This document goes by a different name in a handful of states; your state may instead use the term articles of organization, certificate of incorporation, certificate of formation, or charter.
Your state’s corporate filing office will usually provide you with nonprofit articles of incorporation — either a fill-in-the-blank form or a sample on which you can base your articles. Although preparing this document isn’t difficult, you do need to include specific language to ensure that you’ll receive tax-exempt status. Your state’s nonprofit formation packet, if available, may include the required information. If not, or if you need help understanding the requirements, consult a good legal self-help guide such as How to Form a Nonprofit Corporation, by Anthony Mancuso (Nolo), to make sure your articles comply with your state’s nonprofit law.
Apply for Your Federal 501(c)(3) Tax Exemption
After the corporate filing office returns a copy of your filed articles, you can submit your federal 501(c)(3) tax exemption application to the IRS. (The IRS requires you to submit a copy of your filed articles with your application.) This is a critical step in the formation of your nonprofit organization since most of the real benefits of being a nonprofit flow from 501(c)(3) tax-exempt status.