Forming a Nonprofit Corporation
In forming a nonprofit corporation, there is an extra step necessary that creating a regular corporation doesn’t need. Nonprofits are tax-exempt at both the federal and state level. Here are the basic steps needed to set up your nonprofit organization:
- Choose a business name which meets state requirements and fits your business well
- File your paperwork called articles of incorporation and pay your filing fee
- Apply to the IRS and state agencies for your federal and state tax exemptions
- Create operating rules called bylaws
- Hold and document a meeting of your board of directors
- Apply for licenses and permits required for your type of corporation if any
Applying for Tax-Exempt Status
Each kind of nonprofit requires a specific form filed with the IRS for tax exempt status.
- For a larger 501(c)3 nonprofit, submit Form 1023
- For a small 501(c)3 nonprofit with gross annual receipts of less than $50,000 and/or assets at under $250,000, use Form 1023-EZ
- For a 501(c)4 nonprofit, Form 1024-A is needed
It may take several months for the IRS to get back to you after you submit your tax exempt paperwork, and they may come back to you for more information, but soon you’ll receive the letter for which you were waiting. Then you can file for tax-exempt status in your state.
Types of Nonprofits and Tax-Deductible Contributions
Most nonprofits are 501(c)(3) charitable organizations, or public charities, such as animal welfare organizations, food banks, museums, and most private foundations. Donations to these organizations are tax-deductible for the donor. The nonprofit itself is exempt from paying income tax on donations that are used to fulfill their mission. Social welfare organizations are considered 501(c)(4) nonprofits and are created to promote the common good and general welfare of the community, for example, “by bringing about civic betterments and social improvements.”
The two biggest differences between 501(c)(3) public charities and 501(c)(4) social welfare organizations are whether donations are tax-deductible and which types are allowed to engage in political activities. Contributions to 501(c)(3)s can be tax-deductible, but donations to 501(c)(4)s are never deductible. Since both are nonprofits, they don’t pay income tax on money used in activities related to their mission; they would pay tax on income used for any other business activity.
Because contributions to Section 501(c)(3) organizations are tax-deductible, there are limits to their involvement in politics. They must not:
- Give money directly to any candidates or to a political party
- Endorse or oppose candidates publicly
- Mobilize supporters to help elect or defeat specific candidates
These restrictions apply to all political campaigns at all levels including federal, state, and local races, and even some elections in foreign countries. Any public charity violating these rules can lose its tax-exempt status.
In contrast, because contributions to a social welfare organization are not tax-deductible, these nonprofits do not have these restrictions. They may engage in politics, including unlimited lobbying, as long as it supports their social welfare purpose. For example, an organization created to help improve public health could spend its money lobbying Congress to provide more funding for public health clinics. As a result of a ruling by the United States Supreme Court, 501(c)(4) nonprofits can spend up to half of their general budget and any donations to them to support or oppose candidates for any election as long as doing so advances the organization’s social welfare purpose; they just cannot give the money directly to the candidate.
