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Understanding the Process

In this section:
The Road to 501(c)(3) Status | Maintaining Charitable Exemption | State Registrations

 

The Road to 501(c)(3) Status

  1. Define the charity's mission.
    What is the purpose(s) of your organization? What service will it provide to the community? Once you've figured out your mission, write it out in a formal mission statement.
  2. Create and file with the secretary of state articles of incorporation for your nonprofit.
    Articles of incorporation list the purpose, name, duration of operation, type, structure, and other basics of the organization, and are filed in whichever state you choose as your state of incorporation. The IRS requires some very specific language to be included in this document.
  3. Write the bylaws of the organization.
    Bylaws are the rules that govern a charity. A set of bylaws will define how decisions are made, who makes the decisions, what type of governing structure will direct the charity, and how the organization will be set up. The IRS requires some very specific language to be included in this document.
  4. Get a Federal Employer Identification Number (EIN).
    The EIN is the number the IRS uses to identify an organization for tax purposes. You can obtain an EIN by phone, mail, fax, and online at the IRS website.
  5. Set up a registered agent.
    The registered agent is a person (or company) that resides in the state of incorporation. The registered agent is responsible for receiving official documentation on behalf of a corporation from the state or federal government.
  6. File with the IRS for recognition as a charitable organization (IRS Form 1023).
    The application asks you to submit information regarding what your organization will do, who it will benefit, how it will be administered, and who it will serve. It is important to note that you must first complete articles of incorporation and have them accepted by the secretary of state prior to applying for federal charitable status. It is also important to prepare a proposed budget for the charity in advance of completing the IRS application.
  7. IRS determination process.
    Upon receipt, applications are initially separated into four categories by the IRS: (1) those that can be approved immediately based on the information submitted, (2) those that need minor additional information to be resolved, (3) those that are submitted on outdated forms or do not include the items requested in the application, and (4) those that require further development. If your application falls within one of the first three categories, you will receive either your determination letter or a request for additional information, via phone, fax, or letter, within approximately 90 days from the date the application was submitted. If your application falls within the fourth category, you will be contacted once the application is assigned to an exempt organization agent for further development.

 

Maintaining Charitable Exemption

After obtaining 501(c)(3) status from the IRS, an organization must be sure to do the following in order to maintain tax exempt status:

  1. File required returns
  2. Maintain organized records
  3. Comply with federal and state laws and regulations
  4. Provide donor substantiation
  5. Obey disclosure laws
  6. Generate public support
  7. Avoid "Excess Benefits" for insiders
  8. Avoid "Excess Unrelated Business Activities"
  9. Stay away from political activity
  10. Limit legislative activity

 

State Registrations

Charities that seek charitable contributions nationally must register in 39 states and the District of Columbia before starting to solicit funds in those states. Furthermore, for-profit fundraisers are also required to register and file their contracts and other documentation with many states. In most states, it is illegal for a charity to hire an unlicensed professional fundraiser. Many states are increasing their enforcement efforts to ensure that charities and fundraisers are complying with initial and annual registration requirements. It is important that charities and fundraisers abide by these state specific statutes. Noncompliance can result in significant fines and penalties.

The National Association of State Charity Officials and the National Association of Attorneys General have created a standard form of registration, "The Unified Registration Statement," which presently is accepted by the District of Columbia and 36 of those states that require charities to register. This form can simplify the process considerably.

 

 

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