Nonprofit Business Setup – Legal Steps to Starting a 501c3 Charity
Having experts on your team who have successfully guided many nonprofits through these steps ensures that your nonprofit has a string legal foundation and helps you avoid any unnecessary delays.
Just the process of filling out the the forms required by the IRS can take you more than 100 hours if you are new to the process. Making even a small mistake in the paperwork can set your application back months.
We make sure that everything is done right the first time and help you get your nonprofit operational as quickly as possible.
There is more to starting a nonprofit than just filling out paperwork. Our team works with you on important strategic considerations as well. We offer advice about the best way to structure your board, who to select as directors, and the best policies and bylaws to make sure your nonprofit stays complaint and on mission.
When you hire Walsh Banks Law, you gain access to trusted, lawyers that have experience starting and operating nonprofit business organizations and charities. Give us a call and find out how we can help you. (407) 259-2426 or Schedule a Consultation
Starting a Nonprofit Organization 501c3 Charity
The process of starting a nonprofit is not designed to be simple. The IRS wants to make sure that anyone setting up a tax-exempt organization is not just trying to get out of paying taxes. They want to make sure you have a legitimate charitable purpose.
Just reading through all of the different requirements for forming a 501c3 nonprofit charity can be overwhelming. According to the IRS, on average, the process of completing the tax exempt status forms can take you more than 100 hours, if you are new to the process.
You want to make sure each step is completed correctly the first time. Making even a small mistake in the paperwork can set your application back months. Some organizations have found that having to make corrections to their IRS form 1023 has led to delays as long as 20 months.
Step 1 – Incorporate Non-profit Business Entity
The first few steps in starting a not-for-profit entity are very similar to forming a for-profit entity. The standard legal formalities apply to both types of organizations. The only difference between the two is; the paperwork is different, and language specific to nonprofits must be in the articles of incorporation. For brevity, we’ve summarized the formation process into a single step.
Choose Founding Directors – Florida law requires nonprofits to have a minimum of 3 directors. They will sign the initial incorporation documents, make up the governing body of the organization, pass bylaws, elect officers etc.
Name Your Nonprofit – You will need a formal name for your organization. Legally, your name needs to be distinct from the name of other businesses and organizations. You will want to make sure your proposed name is available and not subject to any trademark restrictions. At a bare minimum you will want to do a record search at the Florida Department of State Division of Corporations website ( Corporate Search by Name ) to make sure your desired name has not already been taken. To avoid potential future trademark issues you should also consider doing a more in-depth national name and trademark search.
Prepare and File Nonprofit Articles of Incorporation – Florida requires any organization that wants tax exempt status to file nonprofit articles of incorporation. The articles of incorporation must be signed by an incorporator. This is often one of the directors. It is the person who is taking responsibility for the accuracy of the information submitted to the Department of State. The registered agent will also need to sign the articles of incorporation, acknowledging they will act as the agent consent to act as agent for service of process.
The Florida Department of State does provide a generic non-profit articles of incorporation form (Form CR2E006: Florida Nonprofit Articles of Incorporation). But, it meets only the minimum requirements for incorporating a non-profit. It does not include any of the language required by the IRS.
For a strong legal foundation, you should have a nonprofit attorney draft customized articles of incorporation specific to your organization and to make sure they meet both IRS and Florida requirement.
Obtain Employer Identification Number (EIN) – Despite the name, every business entity whether they are for-profit or not-for-profit must have an EIN. Even if they don’t have employees. The EIN is a nine-digit number assigned by the IRS to identify the business. It will be used to file for 501c3 status, all other required IRS forms, and to open a bank account. IRS Form SS-4 is used to apply for an EIN.
Prepare Bylaws, Governing Documents, and Policies for Your Nonprofit Corporation – The articles of incorporation establish your nonprofit organization as a legal entity, the bylaws establish the internal structured and the processes and procedures for making decisions, changing leaders, and conducting business.
Florida law requires that your bylaws contain certain specific information such as the time and procedures of annual meetings and how officers and directors are elected. You will also want to establish key policies required by the IRS relating to conflicts of interest and dissolution of the nonprofit. While you will not be required to file your bylaws, or policies with the State of Florida, you will need to demonstrate to the IRS that the board has approved and adopted the bylaws, a conflict of interest policy and dissolution policy before you will be granted 501(c) status.
These documents will become the operating manual for your nonprofit. You shouldn’t simply adopt something you find on the internet. Your bylaws and policies will have a profound influence on the way your organization is run. You will want to have a qualified nonprofit lawyer prepare governing documents and policies customized to your vision and mission.
File to Pay Florida Corporate Income Tax – All Florida corporations are required to file with the Florida Department of Revenue (Form DR-1: Florida Business Tax Application). Even if you will later seek tax exempt status, you will still need to apply for a Florida State Tax Identification Number.
Step 2 — Hold Initial Board of Directors Meeting
Once you have drafted your bylaws you need to hold your first board of directors meeting in compliance with the bylaws. This meeting is often referred to as the organizational meeting of the board.
This initial board meeting has four main objectives:
- Approve the bylaws and order their adoption
- Appoint officers in compliance with the bylaws
- Select an accounting period and tax year
- Approve any initial business transactions, including opening a corporate account
One other legal requirement for this meeting is that minutes of the meeting are created and stored according to the record keeping requirements in the bylaws.
Step 3 — Apply for 501(c) Tax Exempt Status
One of the biggest advantages of creating a nonprofit corporation is being eligible for federal tax-exempt status. The IRS estimates that it will take a novice over 100 hours to complete the required forms and gather all of the necessary paperwork. Often, tax exempt status applications are more than 100 pages long. In addition to the form itself, nonprofits must submit a variety of different support documents to prove that they meet all the legal requirements for tax exempt status.
Having an expert handle this process for you will help shorten the time it takes to get your application submitted and it will ensure that everything is done correctly. There are several different types of nonprofit businesses. The most common nonprofits receive tax exempt status under IRS code section 501(c)(3). This includes most charities and foundations. These businesses must use IRS Form 1023 or 1023 EZ to apply for tax exempt status. Other nonprofits, like religious organizations, that want to qualify for tax exempt status under IRS code sections 501(c)(4) or 501(c)(6) must use IRS Form 1024.
IRS Form 1023 – If you want to become a 501(c)(3) tax-exempt nonprofit you must file either Form 1023 or 1023 EZ. Form 1023 is the standard form and must be used by nonprofits with gross receipts in excess of $50,000 in any of the past three years, projected gross receipts exceeding $50,000 in the next three years, or assets totaling more than $250,000.
Form 1023 requires a detailed narrative describing the organization and its activities. It also requires detailed information about the board of directors. You will be required to provide details of past, current, and project financial statements. The nonprofit will also need to submit copies of the articles of incorporation, bylaws, and conflicts of interest policy.
IRS Form 1023 EZ – Form 1023 EZ is a streamlined version that was created by the IRS in 2014. It is intended to make it easier, and less expensive, for smaller nonprofits to obtain 501(c)(3) status.
However, many organizations will not be able to use Form 1023 EZ. In addition to the requirements dealing with gross receipts and assets detailed above, the following organizations cannot use Form 1023 EZ: Churches, Hospitals, Schools, Charitable risk pools, HMOs. This form requires fewer details about the operations of the nonprofit and has fewer documentation requirements.
IRS Form 1024 – This form is for nonprofits seeking tax exempt-status under a code section other than 501(c)(3). If your organization files Form 1023 by mistake, it will be rejected and you will be required to complete Form 1024.
You will need to explain in detail what your organization is and does. You will also need to submit supporting documents relating to activities, articles of incorporation, bylaws, and its finances.
Step 4 — Apply for State Tax Exemption
After your organization has filed for 501c tax-exempt status, it will also need to apply for tax exempt status from the State of Florida. If your organization fails to take this step, you will only be exempt from federal income tax, and will still be subject to a variety of Florida taxes.
The Florida Department of Revenue requires nonprofits to complete form DR-5 (Form DR-5: Florida Application for Consumer’s Certificate of Exemption) to apply for tax exemption. You will want to wait until you have received your letter of decision from the IRS about your federal tax status before filing with Florida.
Depending on the sources of income for your nonprofit and its activities, your nonprofit may be eligible for exemptions from income, property, sales, and other taxes.
Step 5 — Register for Charitable Solicitation (Fundraising)
The last step will be to register for charitable solicitation. Certain nonprofits must register with the Florida Department of Agriculture and Consumer Services for solicitation of contributions before engaging in most types of fundraising.
Failure to register can result in substantial penalties. Your nonprofit must re-register every year.