Online fundraising has opened the door for so many people to support their favorite causes and make an impact in their communities. Many of these passionate people find themselves interested in taking their support to the next level, forming their own organizations to pursue their mission as an official 501(c)(3) nonprofit.
So what’s standing in their way? There are plenty of logistical considerations one should make before committing to forming a nonprofit, but one of the greatest early hurdles that you might face is the dreaded Form 1023 application for nonprofit status.
There’s a widespread perception that the process of legally forming a nonprofit is extremely difficult and time-consuming. It does require time, careful attention, and plenty of groundwork, but it’s far from impossible.
Having the tax-exempt 501(c)(3) status is a big step to proof of credibility for your organization and even more so in online fundraising and crowdfunding. Donors will be more likely to trust your organization with their support. Having a verified nonprofit status can significantly boost your donations on public platforms like Facebook and GoFundMe.
Form 1023 and the 501(c)(3) process can be confusing, but they don’t have to keep you from your dream. We break them down into 6 core steps:
- File your Articles of Incorporation.
- Form a board of directors.
- Prepare your bylaws and other nonprofit documents.
- Apply for an Employer Identification Number.
- Complete the IRS Form 1023.
- Be proactive about state compliance.
First, let’s review a few important steps you should take before diving into the official documentation and taking your first steps into the world of nonprofit compliance.
Before You Apply for 501(c)(3) Status
Before beginning the process of forming a 501(c)(3), it’s important to thoroughly develop your ideas and mission. You’ll need to be able to clearly define the purpose of your organization, plus this will make it easier to bring others on board later.
To begin this process, ask yourself a few key questions:
- Why are you starting a nonprofit? Do you have a unique idea that needs support or see a specific issue that you can help combat?
- Are there other nonprofits in your area that focus on the same mission? Would it make more sense to get involved with them or to pursue your own angle?
- Do you have the time and resources to get a new nonprofit off the ground? Are you prepared to approach it like a business, with passion, strategy, and determination?
After you’ve really thought through the idea, including soliciting some constructive criticism from others, review Section 501 of the Internal Revenue Code. There are 28 chapters under the code that will qualify you for tax-exempt status, only one of which is for a charitable organization. Make sure your nonprofit cause is truly applicable for the 501(c)(3) designation and the Form 1023 application.
Filing Your Form 1023 to Start a Nonprofit
Step 1: File your Articles of Incorporation.
You first need to incorporate your charity organization in your home state by filing Nonprofit Articles of Incorporation.
The Department of Revenue requires that all charity organizations be incorporated as nonprofits before they can apply for tax-exempt status and become recognized 501(c)(3) nonprofits through Form 1023. Incorporating as a nonprofit isn’t about proving your nonprofit status but just providing the state with contact information and your intent to operate a charity.
The requirements for filing will be found on your state’s Secretary of State or Attorney General’s website. The process is similar for most states, involving simply choosing a name and address for the organization. Read through the requirements and ensure you provide everything the state office asks for.
Once you submit your information, you may be required to complete a few additional actions. For example, after receiving a certificate of acknowledgment for your nonprofit Articles of Incorporation in Iowa, you must hold an organizational meeting with the Board of Directors to adopt bylaws and elect officers. In many states you’ll also be required to name your registered agent in that state—this will typically be you or someone else who will always be available to serve as your organization’s legal contact.
Step 2: Form a board of directors.
A charity’s board of directors is a group of between four and twelve people that guide the nonprofit’s mission and act as an oversight on management. States have different requirements on how many people need to be on the board, so take the time to check with the state office through which you filed your Articles of Incorporation.
One of the most common reasons for the IRS to deny your 501c3 Form 1023 application is because your board is either too small or consists of too many people who are related.
While large boards can be difficult to manage at first, try finding at least seven people who are willing to devote a couple of hours each month to your organization.
Resist the temptation to fill the board with friends and family. First, they may not really have the passion necessary to be any help. You want the board to be a source of experience and guidance that will last for years, not just a rubber stamp for whatever you want to do, which can be a huge red flag for the IRS. Look for board members among volunteers of other charity organizations and professional organizations.
Step 3: Prepare your bylaws and other nonprofit documents.
Just as with any for-profit corporation, a legitimate nonprofit will need a stack of documents outlining everything it wants to do as well as the things it can’t do. Bylaws are the rules that the organization follows in its day-to-day management.
At a minimum, they will usually spell out the process for electing directors, how meetings are conducted, the roles of employees, and how committees are formed. Not only are bylaws required for state and federal filings, but they also help to solve conflicts that might come up and will help guide the nonprofit’s operations and growth over time.
Within your bylaws, the Conflict of Interest policy may be the single most important document for getting your Form 1023 tax-exempt application approved.
The policy includes things that will help avoid corruption and conflicts in the charity as well as how conflicts will be resolved when they come up. Appendix A of the IRS instructions for Form 1023 offers a sample Conflict of Interest policy with special notes that apply to different states in which the charity is incorporated. Draft your policy closely to the sample if you want to get your Form 1023 application for 501(c)(3) status approved.
Besides these required documents for your charity organization, go ahead and create a complete business plan, sometimes referred to as your strategic plan. You won’t need it for your Form 1023 application, but it will help you manage the organization and will serve as a living, easily updated roadmap.
Step 4: Apply for an Employer Identification Number (EIN).
An Employer Identification Number (EIN) is like a social security number for a corporation, whether you have employees or not.
You can apply online or over the phone by filling out Form SS-4. It’s a quick process and not something you should worry about getting approved. Like incorporating in your state, its main purpose is recording the contact information for your 501(c)(3) organization.
Step 5: Complete the IRS Form 1023.
You’re finally ready to file Form 1023 for tax-exempt 501(c)(3) status as a charitable organization! The IRS has streamlined the process with Form 1023EZ, but only some nonprofit organizations will be able to use this form.
To use Form 1023EZ, you must:
- Have annual gross receipts in the last three years under $50,000 and expect annual gross receipts in the next three years to be less than $50,000.
- Have total corporate assets under $250,000.
- Be formed under the laws of the United States or its territories and have a U.S. mailing address.
- Not be owned or controlled by an organization previously suspended from its 501(c)(3) status.
- Not be formed as an LLC.
- Not be a church, school, hospital service organization, or a supporting organization.
The IRS offers an eligibility worksheet at the end of the 1023EZ instructions to double-check if this form is an option for your organization. If you qualify under these questions, completing the form is fairly easy.
If you’ve completed all the steps above, most of the information needed for your Form 1023 or Form 1023EZ application will already be contained in your documentation. You will have to pay a $400 user fee and must file within 27 months after the end of the month in which your charity was legally incorporated.
Once you’re finished filing Form 1023, the IRS will take a few months to process your application and issue an official Letter of Determination. You can note your status as a 501(c)(3) application pending while you wait.
Step 6: Be proactive about state compliance.
Receiving 501(c)(3) status will officially designate your organization as a tax-exempt charity, but maintaining that status and protecting all of your hard work is just beginning!
It’s important to understand that nonprofit compliance operates at two levels: federal and state. Receiving your IRS Letter of Determination and filing your annual Form 990 will cover most of your compliance requirements at the federal level. However, the majority of your ongoing compliance tasks will be carried out at the state level.
Understanding your state’s nonprofit compliance requirements is essential, most importantly the charitable solicitation registration process.
This process registers your nonprofit with the state government so that you can legally solicit donations from its residents (even online, like via crowdfunding). It’s a way for states to protect consumers from potentially fraudulent charities by double-checking their good standing.
The Labyrinth guide to state solicitation registration covers all of the essentials you’ll need to understand as you begin registering in your home state and any others where you plan to fundraise.
Remember, you can begin actively fundraising before your Form 1023 is approved. Once approved, your 501(c)(3) is considered valid retroactive to either your date of legal formation or your first program launch, whichever came first.
However, to be fully compliant and ensure to not jeopardize your organization from the start, you need to be registered to fundraise in your home state.
The registration process varies greatly between states (explore this directory to learn more), but you’ll generally need a range of documents, including the ones mentioned throughout this guide. The state registration process may be prolonged without a fully approved 501(c)(3) status and Letter of Determination, so take the time to understand your state’s requirements before you begin fundraising.
For expert support, seek out nonprofit compliance experts and/or nonprofit attorneys to walk you through the process of getting started as a brand new organization. Compliance is essential for your nonprofit’s long-term success, so having the right partners on your side will help ensure you can grow and develop your mission for years to come.
Want to learn more about getting started as a new nonprofit organization? Keep exploring with these additional resources: